Partnerships and the role of the Big Four accountancy
firms: private control over public policy?
Jean Shaoul, Anne Stafford and Pamela Stapleton
Paper presented at PRESOM seminar
Greenwich University
June 2006
This is a draft: please do not quote without the authors’ permission
The authors gratefully acknowledge research support by the University of
Manchester’s Research Centre for Socio-Cultural Change (CRESC) which bought out
Jean Shaoul’s time in 2006 for her to work on this project, and research assistance
from Peter Macdonald.
Address for correspondence
Professor Jean Shaoul
Manchester Business School
University of Manchester
Manchester M13 9PL
[email protected]
Tel no 0161 275 4027
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Partnerships and the role of the Big Four accountancy firms: private control over
public policy?
Abstract
This paper shows how the use of private sector advisors to develop and manage the
Private Finance Initiative and Public Private Partnerships (PFI/PPP) has led to the
privatisation of policy formulation. The UK government has brought members of the
Big Four accounting firms in on secondment or loan to develop policy and procedures
for PFI/PPP, appraise PFI/PPP projects, prepare evaluative reports on the same policies
on which they are also advising both public and private sector clients. In some cases,
the firms also have an equity stake in the private sector partner and/or are key
subcontractors. All this creates a conflict of interests, and raises a number of doubts,
firstly about the independence of their work and who benefits from it, but more
importantly about who is controlling both national and international government policy
on partnership and privatisation, and the implications for democracy.
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Partnerships and the role of the Big Four accountancy firms: private control over
public policy?
“Everyone noticed the privatisation of the large-scale industries and utilities,
but few people have noticed that policy formulation itself was privatised.”
(Madsen Pirie, Economic Affairs, April 1993)
Introduction
One of the defining characteristics of public policy in the last decades of the twentieth
century, not just in Britain but internationally, has been the turn to neoliberal policies
such as the privatisation of many of the activities of the state. In 1992, with its
programme of privatising the state owned enterprises largely complete, the government
introduced the Private Finance Initiative (PFI), later re-branded as Public Private
Partnerships (PPP). Partnerships, an umbrella term, include a range of hybrid forms of
funding and financing public services that involve the public sector procuring services
and their underlying assets from the private sector. Partnerships have become the
means by which education, health, roads, prisons, roads and other public services,
which could not be privatised outright for both political and financial reasons, are being
opened up to the private sector.
Partnerships may take a variety of forms. Firstly, a contractual relationship under the
Private Finance Initiative (PFI), whereby the private sector designs, builds, finances
and operates assets such as schools, hospitals, roads or prisons and provides the
ancillary services in return for an annual fee that covers both the capital cost of the
asset and the services. In most cases, but not all, the public agency will assume or
resume ownership of the underlying assets at the end of the contract, typically
30years. Secondly, a joint venture between the public and private sector where there
is joint ownership of the entity owning the assets and providing the services, usually
designated as a public private partnerships (PPP). The private sector ‘partner’ is
usually a consortium known as a special purpose vehicle (SPV), typically comprised
of a financial institution and construction, facilities and property management
companies. The SPV typically operates through a complex web of companies and
subcontracting to the subsidiaries of its parent companies, making it difficult of not
impossible to scrutinise costs or hold the myriad of subcontractors to account.
As with many public policies, the rationale for PFI/PPP has changed so much over
time that even its proponents have described it as 'an ideological morass' (IPPR 2001).
It was originally justified as providing the capital investment that the public sector
could not afford. Later, the government claimed that PFI would deliver greater value
for money (VFM) over the life of the projects because the private sector is firstly
more efficient than the public sector and secondly assumes some of the financial risks
(and costs) that the public sector would otherwise carry. More recently, the
government has justified PFI on the basis that it delivers assets to time and budget
(Treasury 2003a). The assumptions were very clear. As the private sector, incentivised
by the profit motive, is more efficient, the private provision of public services would
lead to increased efficiency and wealth from which all would benefit.
To this end, the government has increasingly turned to financial advisors, the major
accountancy firms, to design and implement its PPP/PFI policy, with the aim of
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importing private sector financial management techniques, experience and values into
the public sector. The accounting firms in Britain are dominated by the Big Four
(formerly the Big Five before the demise of Arthur Andersen, and the Big Eight in the
1980s, due to mergers): PwC, Deloitte and Touche, KPMG, and Ernst and Young, with
PwC the market leader (Table 1). Together they audit all the top 100 and most of the
top 350 companies. Their fee income accounts for one third of the total market for
accounting services (Keynote 2005). The gulf between the mid-tier and the Big Four is
large, with the next two largest firms having only one quarter of the fees of the fourth
largest accounting firm. Trailing behind are a large number of smaller firms. The Big
Four UK firms are an integral part of the Big Four global firms. They employ about
450,000 people and generate more than $70bn in revenue worldwide. Their UK
operating profits in the UK alone were £1.4bn in 2005. They are therefore enormously
powerful global firms.
Table 1 here
While they owe their origins and power to their state licensed monopoly of and
requirement for the external annual audit of company accounts, the firms, or at least the
larger ones, offer a wide range of financial services that overlap with management
consultancy and the legal profession. These include: auditing, accounting, tax, corporate
finance and business recovery, management consultancy, recruitment, risk assessments,
etc., that they cross sell to their audit clients and other clients in both the public and the
private sector. By 2005, such services had grown to more than half of the Big Four’s
revenues (Keynote 2005). Such cross selling of services has long been recognised as
representing a dangerous conflict of interest (Mitchell et al, 1994; Sikka and Willmott,
1995; Arnold and Sikka, 2001)
All this raises important questions as to who then determines public policy, how, and in
whose interests. This paper therefore examines the degree to which the partnerships
policy is controlled and directed by financial advisors in general and the Big Four
accountancy firms in particular. It reviews the origin and development of the policy
and the role played by the Big Four accountancy firms, and considers some of the
broader implications when such a key public policy is controlled and directed by the
same private sector entities that have a commercial interest in its expansion.
The study uses as its evidence base a range of primary and secondary documentary
sources, including general business and financial commentaries, relating to the work
of the accountancy firms. Such sources are inevitably fragmented and diffuse given
the ‘commercial sensitivity’ that surrounds the private sector in general and the lack
of disclosure by the accountancy firms in particular, which have only recently become
limited liability partnerships. While some of this has been the subject of research and
reported in the media, this paper seeks to synthesise the material and draw out the
wider implications for the control of public policy, an issue that has not as yet been
widely discussed. Although this is reviewed within the British context, as Partnerships
are now, like privatisation, being exported, this analysis has international
implications.
The paper is structured in several sections. It starts by describing the origins and
development of the policy. The second summarises the increasing work carried out by
the accountancy firms and management consultants for the public sector. The third
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explains the various elements of the Big Four accountancy’s involvement in PFI,
while the fourth shows the international reach of both the policy and the advisory
industry. The final section considers some of the broader implications for public
policy and contextualises it within the debates about neo-liberalism.
The origin and development of the policy
While Norman Lamont, Chancellor of the Exchequer, launched the Private Finance
Initiative, in his 1992 budget statement, the initial take up from the private sector was
far from enthusiastic. A year later, Kenneth Clarke, the Chancellor, was forced to admit
that progress had been ‘disappointingly slow’. He therefore set up, in 1993, a Private
Finance Office within the Treasury, with a Private Finance Panel, headed by Sir
Alastair Morton, Chairman of Eurotunnel, the first private finance project, to advise on
how to promote the policy and increase the number of projects, and a Private Finance
Panel Executive, both of which were to be staffed by secondees from the City,
accountancy and consultancy firms. In addition, he set up Private Finance Units in the
key capital spending departments.
These moves represented a major shift in Treasury policy in a number of inter-related
ways. Firstly, by bringing in outside staff that had a vested interest in seeing it succeed,
the Treasury sought to override any opposition to the policy from within the civil
service and ensure that this new policy would be adopted. The Treasury’s staff on
secondment from the private sector, not its pre-existing civil servants, played a key role
not only in driving the policy, controlling some of the activities of other departments
and of the Treasury itself, but also in changing the nexus of relationships surrounding
government itself. They began to actively promote the policy, organising conferences to
sell the PFI to future private partners. Secondly, although departments initiated projects,
the Treasury took an active part in lining up projects, and through its Private Finance
Unit, making them suitable for PFI.
Thirdly, while it had been expected that private finance projects would come on top of
publicly funded ones, that PFI would provide ‘additionality’, the Treasury made it quite
clear that private finance would not be a substitute for public money. It would be
private finance or nothing. Every public body commissioning capital investment would
have to pursue the private finance option. The Chancellor said,
“We need to take the private finance message to the heart of all decision making
in government… in future the Treasury will not approve any capital projects
unless private finance options have been explored.” (Clarke, Treasury Press
Notice, January 1994)
But this meant that only those projects would go ahead that were or could be
remodelled to become attractive to the private sector. In the case of roads to be built
under DBFO, while the government had originally intended to introduce direct tolls, its
financial advisors devised a system of shadow tolls because the private sector believed
that user charges would be unpopular and endanger the policy of creating a private
road-operating industry (Glaister et al 1997). Small schemes were not attractive to the
private sector. This led, in the case of hospitals to two £30m refurbishment schemes for
Swindon and Marlborough Hospital Trusts and Walsgrave Hospital Trust becoming
multi-million pound new builds to replace 30year old hospitals, and in the case of
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schools, bundled schemes consisting of 20 or more schools per PFI project. These
examples illustrate how PFI has the potential to distort the prioritisation of investment
projects, both within and between sectors, with all the consequent implications for
equity and access, in turn limiting the government’s ability to shape coherent strategies
and changing the nature of the relationship between government and its citizens.
But despite the Conservative government’s best endeavours, PFI proved difficult to get
off the ground as the small number of projects listed in Table 2 shows. This was due to
the complexities involved, the lack of experience on the part of the public authorities,
legal difficulties, as well as a broader political resistance. While several road and prison
projects were concluded by 1997, it proved difficult if not impossible to close deals in
the more sensitive public services such as health and education.
Table 2 here
It was the incoming Labour government that was to get the policy up and running and
extend it throughout the public sector. While Labour had during its years in opposition
been hostile to privatisation, as the 1997 general election approached, the attitude of key
players in the party towards the use of private finance and the PFI, shifted perceptibly.
In the late 1980s and early 1990s, the Labour Finance and Industry Group (LFIG)
cultivated links with business and industry that had not existed before, laying the
groundwork for the Labour party’s 1992 prawn cocktail offensive (Osler 2002). It
undertook policy reviews in key business areas for the Labour party, carrying out much
of the research underpinning the Labour party’s adoption of the PFI,
“The Group did much of the preparatory work for PFI, and was responsible
for much of the work which went into developing systems for using private
sector funding to deliver public sector capital projects and service provision.
Its working procedures included private seminars and dinners for open
exchanges of views between shadow ministers and Group members and
conferences
to
provide
platforms
for
controlled
publicity.”
(http://www.lfig.org/history.htm, accessed 15/05/06)
Indeed, Labour’s conversion to PFI was inaugurated at an LFIG event in 1994 when
Brown, Prescott and Cook launched their “groundbreaking” document, Financing
Investment: promoting a partnership between public and private finance.
Labour in opposition also had close links to Arthur Andersen, then one of the Big Five
accountancy firms, and its consultancy arm Andersen Consulting later to become
Accenture, via Patricia Hewitt who had been head of Andersen Research, and
businessman MP Geoffrey Robinson who paid for Andersen’s staff to develop Labour’s
economic and fiscal policies (Craig 2006).
By the time of the 1997 election, the Labour party’s chief criticism of PFI was that it
was too slow and unwieldy. Its election manifesto contained a promise to
“reinvigorate the Private Finance Initiative” with a specific commitment for private
finance in health (Labour party manifesto 1997). It rebranded PFI as public private
partnerships, with Tony Blair claiming that:
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“Labour pioneered the idea of public/private partnerships. It is Labour local
authorities which have done most to create these partnerships at local level.”
(Labour party manifesto 1997)
Once in office, the new government took immediate action. It appointed a number of
Andersen personnel as political advisors, settled – for a trifling sum - the long running
legal action against Andersens as auditors to the De Lorean company that had
defrauded the government in 1982, and allowed Andersens to bid for government
contracts again. Business man Geoffrey Robinson was appointed Paymaster General
with special responsibility to get PFI, rebranded by New Labour as Public Private
Partnerships, off the ground. He immediately announced a review of PFI, under the
chairmanship of Sir Malcolm Bates, director of the global services company AMP, and
chairman of AMP’s key UK financial services that include London Life and Pearl
Insurance, Virgin Direct and Virgin Money.Com.
Within six weeks, Bates had recommended that the use of private finance should
increase and that the best way to achieve this was by creating a high level Treasury
Task Force (TTF) reporting to the Paymaster General. Staffed by former private sector
personnel and secondees from the Big Five (as they then were) accountancy firms,
some provided free of charge, it would train civil servants. His 29 recommendations
included the appointment of Adrian Montague, head of Global Project Finance at the
Dresdner Kleinwort Benson Bank, to run the TTF with a private sector rate of pay. Its
Policy arm would direct and streamline the policy, developing rules and best practice
guidelines to standardise procurement. Its Projects arm would manage the PFI process
for individual projects, and ensure that the projects were PFIable. The Task Force
would be the focal point for all PFI activities and liaise with Departmental PFI units.
Montague explained the role of the Task Force in the following way,
“This is really a strong team of young Turks; they have the qualifications, the
experience in PFI deals and above all the feel for what the private sector wants
from the PFI to be a really effective bridge between the public and private
sectors (Treasury press statement 1997, cited in Craig 2006, emphasis added).
In other words, the role of the Task Force would be to make PFI as attractive as
possible to the big corporations, but also provide the momentum within the civil service
that had previously been lacking to force through the policy (Greenaw, Salter and Hirst
(2004). But this in turn meant a reversal of the Treasury’s past practice of controlling
public expenditure in favour of expanding it via its championing of PFI/PPP, and the
increasing centralisation of the policy under the Treasury.
The rebranding of PFI as Public Private Partnerships was more than simply a name
change designed to downplay PFI’s role as creeping privatisation or make it conform to
New Labour’s ‘third way’ discourse. It extended PFI to include concessions and
franchises, and the policy as a whole to embrace joint ventures with the private sector
using a range of ownership structures, and later the Wider Markets Initiative, whereby
“private sector expertise and finance would be used to exploit the potential of
government assets” (Treasury 2003). It made PFI/PPP central to its agenda.
In the case of the National Health Service, where the Conservative government had
been unable to reach financial close on any new hospital builds, the Labour government
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moved swiftly to pass legislation that assured the capital markets that the hospital Trusts
did indeed have the legal power to enter into PFI deals. While the government did not
guarantee the hospital Trusts’ payments to their private sector partners, it did offer
‘letters of comfort’ to their financial backers, which “together with the high level of
political commitment to the policy” gave the credit ratings agency, Standard and Poors,
confidence (2003).
Furthermore, the government actively promoted PFI by only making funding available
for capital investment under PFI or giving “PFI credits” in the case of local authority
and education schemes to defray the capital cost of PFI, for the first 17 years. While PFI
became known as “the only game in town”, reliance on PFI as a means of
commissioning much needed investment varied between departments. For example, in
the case of hospitals, capital schemes costing more than £10m financed under the PFI
accounted for 84% of schemes that were given the go ahead to proceed between May
1997 and December 2003. In roads, in contrast, the eight DBFO schemes signed in
1996 accounted for about 35% of all new construction projects between 1996 and 2001.
In the autumn of 1998, as the Treasury Task Force approached the end of its two year
lifespan, the government again turned to Bates, by this time ennobled for his earlier
endeavours, for a second ‘independent’ review of PFI. On his recommendation, the
government reconstituted its Projects arm as Partnerships UK (PUK), and in 2000, sold
51% of its shares to the private sector for £45m, in order to increase the financial
expertise needed to manage the policy. Thus PUK is itself a joint venture or public
private partnership whose current owners, active players in the PFI industry, are:
Uberior Infrastructure Investments (8.8%), Prudential Assurance Company (8.8%),
Abbey National (6.7%), Sun Life Assurance Society (6.7%), Barclays Industrial
Investments (6.1%), the Royal Bank of Scotland (6.1%), Serco (3.3%), Global
Solutions (2.2%), the British Land Company (2.2%), the Scottish Executive (4.4%) and
the Treasury (44.6%).
PUK’s mission is to “accelerate the development, procurement and implementation of
public private partnerships”, develop new forms of PPPs, and promote PPPs on the
world market. PUK’s launch was backed by the European Union’s European
Investment Bank, which aims to promote PPPs, particularly in infrastructure projects, in
the EU. PUK, which has the monopoly on managing the PFI/PPP procurement process
for all such projects, derives its income from fees from the Treasury for each signed
deal or by an equity stake in PFI contracts or PPP arrangements. To date, it has an
equity stake in the Local Improvement Finance Trust (LIFT) in health and Partnerships
for Schools programmes, two programmes aimed at introducing private finance into
primary care and education. According to PUK’s annual report and accounts, its
revenues in 2005 from such deals were £12m and profits before interest and tax £2.8m.
Its directors were drawn from the private sector and the Treasury, although even these
were former private sector personnel, such as Richard Abadie, head of PFI policy at the
Treasury, a former PwC partner specialising in PFI.
In other words, the government transferred the management of the PFI/PPP
procurement process – a task formerly carried out by civil servants, albeit on
secondment from the private sector - to a company owned by the very corporations that
are closely involved as owners, financiers and subcontractors in such projects.
Legislation was amended to give PUK the authority to do so. This represents a major
8
and largely undocumented change in the process of government, which is increasingly
able to avoid scrutiny. Furthermore, as a profit making entity that exists to promote
PFI/PPP, it institutionalises the potential for conflicts of interest with the private sector
vetting the business case for and procurement of a PFI project. Indeed, the possibility of
conflicts of interest was so great that the chair of PUK’s advisory council, the former
head of the civil service Sir Andrew Turnbull (yet another illustration of the revolving
doors), required PUK to devise a second and clearer code of conduct to identify and
manage conflicts of interest.
At the same time, the government transferred the Task Force’s Policy arm to the Office
of Government Commerce (OGC), an ‘independent office of the Treasury’ set up in
2000 following the recommendations of the Gershon Review (1999). Its aim is to be a
one stop shop that works with government to improve procurement and make the
‘government marketplace’ more attractive to business. That is, the Policy unit was
integrated into the arm of government that sought to outsource as much of the public
sector as possible. While policy and management were split between the OGC and
PUK, the interaction between the two was very close (Greenaway, Salter and Hart
(2004). Later the government brought the unit back into the Treasury in 2003, when
OGC’s role changed to focus on achieving best value for money in government’s
commercial activities.
At the level of both policy and projects, PFI/PPP is directed by people whose social
networks reflect have a vested interest in its expansion: Bates who carried out the
reviews, Montague who headed the TTF, and Higgs, who chaired PUK. Bates gave up
his post as a non-executive director at BICC, the parent company of Balfour Beatty that
was a member of a consortium bidding for the largest PFI type contract, the London
Underground PPP, to become chairman of London Transport, and push through the
PPP. Before he handed over his post to the incoming appointee of the Mayor of
London, who was opposed to the PPP, Bates rushed through the selection of the
preferred bidders after a consultation period of just 10 days, in order to prevent the
incoming chairman stalling the deal (Carey 2001). One of the two consortia, Metronet
BCV, included Balfour Beatty. The other preferred bidder included Jarvis plc, then one
of the shareholders of PUK.
Montague, after completing his stint as head of the TTF, became an advisor to the
Minister of Transport (at £30,000 a year for one day a week), to drive through the
London Underground PPP. This was at the same time as being a senior advisor for
Societe Generale (SocGen), a French bank involved as advisor or a member of
consortia bidding for PFI contracts with the UK public sector.
The man chosen to be chairman of PUK was Sir Derek Higgs, who was a director of the
Prudential plc (the insurance company), chairman of its fund management business,
deputy chairman of British Land plc, both of which bid for some of PUK’s shares, nonexecutive director of numerous other companies, including London Regional Transport,
forerunner of Transport for London that operates the London Underground, and sits on
a number of government advisory boards. Higgs, as a director of Coventry City
Football Club, had personal business dealings with Geoffrey Robinson, who prior to be
becoming Paymaster General, was a director and shareholder of the club.
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All this was heavily criticised by Labour’s strongest supporters, the trade unions such as
Unison and the GMB, and later the TUC. The 2002 Labour party conference passed a
resolution opposing PFI and calling for an independent review of whether PFI was
value for money, which the Labour leadership ignored. In the context of health, a sector
particularly affected by the policy, it was opposed by the British Medical Association at
its annual conferences, as well as by the editor of the British Medical Journal (Smith
1999), to cite but a few examples. Opposition also came from another source, the First
Division Association, which represents senior civil servants. It was critical of the
introduction of ‘zealots’ who were personally committed to a particular policy into
departments, arguing that it compromised any notion of having an independent
bureaucracy that could provide ministers with impartial and unbiased advice on policy
matters (Public Finance 04/03/2004).
The government placed great emphasis on the calculative techniques of financial
appraisal, to legitimise the turn to private finance. Such techniques, borrowed from the
private sector, purport to measure the intuitively plausible but value-laden term, ‘value
for money’ (VFM), to be derived from using the private sector to deliver public
services. Key elements of VFM, measured by comparing the anticipated costs over the
30year life of the project, are the inclusion of the costs of the risks to be transferred to
the private sector in the cost of the (hypothetical) public procurement option, and the
discounting at 6% (later reduced to 3.5% but counterbalanced by other adjustments
which are explained later) that serve to privilege the private finance option.
Conceptually and methodologically flawed, as the research evidence demonstrated
(Gaffney et al 1999a,b,c, Pollock et al 1999), such valuations encapsulated in VFM and
set out in the projects’ business cases are not generally, other than in health and
education, in the public domain, for reasons of ‘commercial confidentiality’. Those
business cases that are in the public domain show that the VFM, resting upon uncertain
projections of costs far into the future, relies overwhelmingly upon estimates of the cost
of ‘risk transfer’ to the private sector, and is at best marginal (Pollock, Shaoul and
Vickers 2002). In effect, the government created an in-built bias in favour of PFI,
raising questions as to the degree to which the public agencies can and do reliably
demonstrate value for money as the National Audit Office acknowledged (NAO 2000,
Financial Times 5/6/02). However, the government’s response to critical research
evidence was to pollute or dismiss the scientific evidence, discredit and intimidate
critics, and ultimately ignore it (Pollock 2005).
Labour’s measures were indeed successful in getting PFI off the ground. The number of
signed deals rose dramatically after Labour took office, up from £1.7bn in 1996, to
£7.7bn in 2002 and £14.9bn in 2003, when the three largest projects for London
Underground worth £15bn over 15years, were finally signed (Table 2). Since then, the
value of signed deals has fallen to £3.6bn in 2005. By far the largest users of PFI are the
Department of Transport with signed projects valued at £22bn, the Department of
Health at £6.6bn, the Ministry of Defence at £4.6bn, and the Department for Education
at £4.1bn (Table 3). By March 2006, there were 747 signed deals with a capital value of
£48bn (Treasury 2006).
Table 3 here
The accountancy firms and the public sector
10
In addition to auditing the big corporations, the large accountancy firms, particularly the
Big Four, also audit public bodies such as the hospital Trusts, carry out audit work on
behalf of the National Audit Office and Audit Commission and sell their management
consultancy services to government departments, local authorities and other public
agencies. They do not however publish their fee income derived from public sector
audit and consulting. While it is well known that the government has become
increasingly reliant on the consultancy services provided by the private sector, it is
extraordinarily difficult to get up to date and accurate information on this activity as
Leys (1999) noted in his study of management consultants and the National Health
Service. A further difficulty is that the term management consultancy covers a wide
range of services, including human resources, financial, legal, and general management
consultancy.
According to the NAO (2001), the growth in public private partnerships and
commercialisation were the main reasons for purchasing such services, along with more
electronic service delivery, the introduction of resource accounting and the Modernising
Government programme. Central government departments spent some £610m in 19992000, a 7% increase in real terms on 1993-94. The NAO was very critical of the fact
that government departments could not explain what the money had been spent on
because although they had spent £231m on management consultancy, £67m on legal
services and £28m on financial, they were unable to categorise the rest. In part, this was
because there was a lack of a consistent classification of services. The leading
consultants included the then Big Five accountancy firms who between them accounted
for £133.5m of the £610m, 22% of the total. PwC was by far the largest advisor, with
fees double that of its nearest rival, Ernst and Young (Table 4). The NAO found that of
the 468 contracts they were aware of only 50% were awarded following full
competition. 32% were awarded on the basis of a single tender or informal tender, while
the remaining 18% were carried out by in house teams or part of framework
agreements. NAO was very critical of these arrangements, the lack of detailed
information about departmental expenditure, fee rates and quality of service, analysis of
requirements, etc., casting doubt as to the degree to which they obtained value for
money.
Table 4 here
More recent evidence derived from a report by the Management Consultants
Association, which covers only half the sector, estimates that public sector consulting
grew by 46% in 2004 while private sector business grew by only 4% (Economist
10/9/05). 22% or £1.9bn of its fee income came from central government, its largest
single market in 2004. The Economist notes that 40% of the British consulting
business of Deloitte and Touche is now in the public sector. Much of the consulting
relates to policies, programmes and projects connected to public sector restructuring
and increasingly PFI/PPP (Gosling 2003, Craig 2006). In short, despite being forced
to divest their consultancy arms as a result of adverse publicity about conflicts of
interest, the Big Four have once again expanded their consultancy services and more
than half of their income comes from management consultancy (Keynote 2005).
The Big Four accountancy firms’ involvement in PFI
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The Big Four’s involvement in PFI takes several forms. We provide illustrative
examples of each of these in turn.
Policy advice to government
They play a crucial role in the development of both the policy and its application in
different sectors by acting as paid external advisors and consultants. Firstly, they
structure the deals. For example, it was the government’s financial advisors, Price
Waterhouse, who devised the system of shadow tolls for the first eight design build
finance and operate DBFO road projects, whereby the government pays on the basis of
vehicle usage, despite the fact that the Conservative government’s Green Paper
(Department of Transport 1989) had explicitly ruled out shadow tolls. This was because
the private sector was unwilling to accept the risk and opprobrium of direct tolls, which
- apart from a few estuary crossings - did not exist in Britain and for which the public
had not been prepared.
Second, they were commissioned to write key reports that purport to show the benefits
of PFI. Arthur Andersen’s often cited report (2000) claims that PFI had ‘saved’ 17% on
the cost of conventionally procured projects. However, this is based on a sample of 29
projects (out of a possible 400 projects), whose selection is not explained. Its evidence
base is the business cases used to support a PFI deal over conventional procurement,
rather than any independent analysis. But even more importantly, most of the savings
come from just a few schemes as a result of the risk transfer to the private sector.
Furthermore, about 80% of these savings came from just one project, the disastrous
NIRS2 project for the Benefits Agency run by Andersen’s sister company, Accenture.
In other words, the study was based upon anticipated not actual savings and upon a
project that has become a byword for failure. Despite this, the government has never
repudiated the report, which it continues to cite. Another report, commissioned from
PwC (2001), fails to provide even the most basic information that would enable the
reader to assess the methodology and the value of the findings. It is based on anecdotal
material from senior managers responsible for commissioning 27 PFI schemes, not
users, staff or project managers. While the report does not explain the sample choice or
even provide any evidence about the nature or sector of the schemes, PwC largely
selected projects with which PwC had been involved as advisor to either the public or
private sector, excluded IT projects and included the first eight DBFO road schemes1.
The report does not contain any supporting financial or other empirical data on service
or volume levels.
Third, the government commissioned two reports from consultants heavily involved in
PFI/PPP to help it revise the methodology used to appraise the advantages of private
finance based upon, following considerable criticism of its methodology from both
academics and the National Audit Office. While both the reports produced
recommendations that maintained the inbuilt bias in favour of PFI, their
recommendations, incorporated into the revised appraisal procedures, were seriously
flawed. The first, from KPMG, reported on the tax adjustments that needed to be
including when comparing the costs of privately and publicly financed options. Its
recommendation, crucial to privileging private finance, that there should be an
assumption that PFI would yield a 22% return to the Treasury, in contrast with previous
1
Personal communication
12
assumptions of one percentage point or less, is based upon a sample and data that is
neither explained, justified or in the public domain. One of the accountancy bodies, the
ACCA, argued that such a tax yield implied profit rates in excess of 60% (ACCA
2002). KPMG chose to ignore the various means that enable companies to minimise
their tax obligations and the reality that many PFI consortia pay very little tax (Edwards
et al 2004).
The second report was the optimism bias study commissioned from Mott Macdonald,
the engineering consultants who similarly frequently serve as technical advisor to both
the government and the private sector on major PFI deals. The report (Mott Macdonald
2002), based upon a sample of PFI and conventionally procured projects, purported to
show that persistent cost and time overruns in conventional public procurement
warranted an adjustment of 28% to correct for the inevitable ‘optimism bias’ in project
estimates. But the study contains flaws in the design and methodology that lead to
sample and measurement biases that render the study data uninterpretable (ACCA
2002, Pollock, Price and Player 2005).
Fourth, Tim Stone, the head of KPMG’s PFI unit, chairs a government advisory group
on PFI and was the Ministry of Defence’s advisor on its then largest PFI project. But he
is also chair of a PPP working group at International Financial Services London (IFSL),
a private sector lobby group which boasts on its website that with its close links with
government departments, it provides “an effective interface between the private sector
and government on a wide range of business, regulatory and market access issues”. Its
mission is to promote London’s financial services, including PPPs, not just in Britain
but internationally.
Fifth, the accountancy firms have also provided policy advice indirectly to the
government via their funding of other pro-privatisation and PFI pressure groups and
think tanks such as the New Local Government Network, the PPP Forum and the New
Health Network, organisations that promote the creeping privatisation of public
services. For example, KPMG sponsored the generally favourable investigation into
PPPs by the Institute of Public Policy Research, a think tank close to the government
(IPPR 2001).
Project advice to the public and private sectors
When PFI became the only way to renew their decaying infrastructure, the public
authorities turned to an array of advisors, financial, legal and technical to help them
navigate the process, structure the deals, evaluate the bids and secure Treasury
approval. As Table 5 shows, they usually turned for financial advice to one of the Big
Four, particularly PwC which took by far the largest share of the PFI advisory market in
terms of both the number and size of the projects. None of the mid-tier firms were
involved in more than a handful of deals. In some cases, the Big Four also acted as
technical as well as financial advisors.
Table 5 here
A study of the schemes where the then Big Five acted as financial advisors to public
bodies found 45cases where the advisor to the public sector was also the auditor to at
least one of the consortium members (Unison 2002). In the case of the controversial
13
London Underground PPP, PwC which appraised the deal, and Ernst & Young which
carried out the value for money assessment were auditors to five of the eight private
bidders for the contracts. Such overlaps and potential conflicts of interest are inevitable
given the dominant position of the large firms over the audit business and the
government’s reliance on the same firms, or their consulting arms, for advice. Thus
while the government may get the advice it wants, this hardly guarantees that the wider
public interest will be served, as the following examples illustrate.
A number of the business cases in the public domain, particularly those in health,
education and London Underground, prepared by these advisors have been subject to an
extensive critique. A recurring theme was a lack of evidence to support their claims,
business plans and conclusions in relation to the value for money case, affordability and
the operational feasibility of the schemes. In many cases the claims were contradicted
by the facts (see for example Pollock et al 1997, Pollock et al 1998a and b, Gaffney and
Pollock 1999, Froud and Shaoul 2001). Despite this, the Treasury and host department
rarely turned down any PFI scheme, although some schemes went through several
iterations.
Within a short time, the financial implications have become manifest. In the case of the
London Underground PPP, despite the government increasing its grant to
unprecedented levels, London Underground has been in deficit and sharply increased its
fares. In the case of hospitals, many of the early PFI hospitals have been plagued with
deficits (Edwards et al 2004), and in December 2005 the first PFI hospital announced
that it was technically insolvent due to the cost of PFI.
One of the most egregious examples of the conflict of interests, the resultant poor
financial advice and the cost to the public purse, is provided by the case of the
National Air Traffic Services (NATS) PPP, which required a government bailout
within three months of financial close in 2001, following the downturn in transatlantic
flights after the terrorist bombings of the World Trade Centre. The Department of
Transport had paid its advisors, one of whose tasks it was to evaluate and manage the
risks to NATS' business, some £44m - £17m more than expected – and at 5.5% of the
proceeds, among the highest of all the trade sales examined by the NAO (2002). But
CSFB, the lead financial advisors, had failed to evaluate the PPP correctly. It had
ignored evidence and advice that did not fit with the government’s and its own desired
outcome: a signed deal. CSFB told the NAO that their prime motivation was to gain
valuable experience of PPPs in order to win future contracts in this new and
expanding market.
There is far less systematic information about the advisors to the private sector in the
public domain. PUK’s database contains information on this for only 127 projects
worth £8.26bn, a fraction of the total, making it difficult to place much reliance upon it.
It would appear from Table 6 that the private sector PFI advisory market is less
concentrated than the public sector market, albeit with the big accounting firms once
again playing a major role. In other words, they are able to take advantage of the
experience gained with the public sector, to advise the private sector.
While there is no publicly available breakdown of fees, an early study of the first 15 PFI
hospitals showed that they generated £45m in fees for all their advisors, 4% of the
capital value of the deals (http://www.unison.org.uk/pfi/caseagainst.asp). Extrapolated
14
across all signed deals worth nearly £50bn by March 2006, then the advisors may have
earned £4bn in fees from both the public and private sector on signed deals, of which
the financial advisors, the Big Four took a major share.
Table 6 here
Prime contractor and equity stakeholder in PFI
The accountancy firms’ consultancy arms are involved in a number of PFI contracts as
the private sector partner, particularly in IT contracts where just three companies,
including Accenture, the consulting arm of the erstwhile Arthur Andersen, have a
monopoly of government contracts, many of which have become a byword for failure at
the public’s expense. They are also key subcontractors or ‘lead service provider’ to the
private sector consortia. For example, PwC is the prime contractor for the Accounting
Systems Integrator and Affinity consortia (on Ministry of Defence and Work and
Pensions PFI contracts), and a subcontractor to Fujitsu in the Sirius consortium (Home
Office). It is a partner in a joint venture servicing the BBC.
Revolving doors
The constant flow of personnel between the higher echelons of the public sector and the
private sector, known as revolving doors, that started in the 1980s in defence has now
become commonplace throughout the civil service. In the context of PFI, the flow is
between the public sector and the consultancy industry, particularly the Big Four
accountancy firms. By no means a one way traffic, the period required before civil
servants can take up a well paid commercial position where they can put their inside
knowledge to good use has become ever shorter.
The government has generally tried to avoid releasing information about secondments
to Whitehall, claiming “commercial confidentiality” and “employer confidentiality”,
and that it would breach the Data Protection Act. But following an official challenge by
The Observer and the Campaign for Freedom of Information, and an Observer
investigation revealing that companies that had donated staff free to government
departments had won lucrative contracts and benefited from crucial policy changes, the
government agreed in 2001 to publish the names of all its 112 secondees and publish a
register every year, starting in 2002. Table 7 shows only some of the most well known
people to move from the accountancy and consultancy firms to illustrate this. In 2002,
37% of the Treasury’s new entrants were seconded or on loan (Treasury 2005, p34).
PwC provided its technical director for local government to the Strategic Partnership
Task Force, to encourage greater use of PFI by local government, while parliamentary
questions have revealed a string of other secondments by the firms into a range of
government departments (Gosling 2003). The reason for this was, as one financial
consultant to the Treasury boasted,
“I did work on policy issues and got amazing access…. It is now much easier
for me to ring up Treasury officials and get information I need.” (Observer
26/6/00 “Staff for favours”)
Table 7 here
15
Table 8 shows the movement of senior civil servants out to the private sector. For
example, Sir Steve Robson, a senior Treasury official in charge of rail privatisation and
later the London Underground PPP, became advisor to KPMG, among other big
business appointments, while Lewis Atter and Simon Leary went to KPMG and PwC
respectively.
But the Big Four seconded their staff not only to the government but also the Labour
party. The Guardian (May 16/2003) reported that the Labour party had accepted free
accounting services from KPMG, which was involved in more than £12bn of
government contracts, including a number of PFI contracts. KPMG were paying the
wages of a member of their staff, Stephen Uttley, who was on secondment to the
Labour party where he was responsible for overseeing its accounts and fundraising. The
Labour party defended its practice against charges of conflict of interest, saying that
Uttley’s predecessor as finance director was also provided by KPMG. KPMG not only
confirmed this but said that it provided similar services to the Liberal Democrats and
was about to place another staffer with the Conservative party.
Table 8 here
Policy with an international agenda
While the UK turned somewhat earlier than other European countries to the use of
PPPs, the US, Canada, Australia, Spain and other European countries have started to
involve the private sector in the finance and provision of infrastructure services. In
many cases, particularly Australia and Canada, the technical procedures and guidance
for public authorities have been imported directly from the UK. Indeed, Partnership
UK’s web site is aimed at the international advisory market in PPPs. PUK claims to
have provided ‘high level’ support for the design and structure of PPP programmes
being designed by other governments as well as the development of institutional
capacity, e.g., to South Africa, Mexico and the Czech Republic.
Privately financed infrastructure projects are an integral part of the structural
adjustment programs imposed by the International Monetary Fund (IMF) and World
Bank and a prerequisite for loans for developing countries. Both institutions promote
the use of “markets in infrastructure provision” (World Bank 1994). Transport,
energy, telecoms and water roads have become by far the largest recipient of private
finance. PPPs mark a change in the practice of the World Bank/IMF since under
PPPs, they are lending to the private sector not to governments, which de facto if not
de iure guarantee their payments.
The World Bank and IMF’s normal practice is to require applicants for loans to obtain
consultancy advice, usually from the Big Four, on the operation of their infrastructure
industries in relation to both policy and projects. At the policy level, such consultants
are important firstly in securing political support for the private sector, because unless
PPP is seen to offer continuing business opportunities, firms will be reluctant to
develop the necessary resource that is required to bid for contracts. Secondly, PPP
projects need to be underpinned by enabling legislation firmly embedded in the legal
structure of the host country. A key aspect of this enabling legislation is the existence
of a concession law that can be readily applied to projects. Thirdly, both the public
and private sectors must have the necessary expertise to deal with the PPP process. In
16
practice, this means further work for the financial advisors. At the project level, such
advice typically includes the requirement to invite tenders for a short term contract to
manage the enterprise and restructure it in readiness for some kind of PPP if full
privatisation via an asset sale cannot be achieved.
By way of an illustration of these practices, the UK’s Department for International
Development (DfID) made aid to Ghana dependent upon some form of a PPP for
urban water. Indeed, according to Simms (2002), DfID spent £16.5m of UK aid
money on services from the Big Four. While DfID claims that this was to improve the
quality of its advice to developing countries, it was however unable to quantify the
financial value of the savings made (Hansard, House of Commons Debates,
12/09/2005, col 2231)
The European Union’s policy has been to encourage the use of PPPs in general (EC
1997) and roads in particular, especially in the context of the trans-European
Network, using government to set them up. To cite but one example, by the end of
2005, the 25 countries that now make up the EU have signed 160 PPP type
arrangements for road and tunnel projects, by far the largest sector by value. Again,
the Big Four accountancy firms, particularly PwC, actively promote the policy via a
host of British and international lobby groups, such as the UK’s International Finance
and Services Ltd (IFSL) and International Project Finance Association (IPFA), which
have close links with government departments, in particular the Treasury, British
Trade International, the Department of Trade and Industry, the Department for
International Development and the Foreign and Commonwealth Office. They act as
advisors on many overseas projects to one or other of the parties. Thus via their
control of UK public policy and web of interests, they play a crucial role in exporting
and controlling PPPs internationally.
Conclusion
Privatisation in its various forms was neither the result of a widespread movement
among the public at large, nor was it popular. Governments of all political shades
introduced it at the behest of big business, not the public. The creeping privatisation of
public services via PFI/PPP is if anything even less popular and often justified by
reluctant public authorities charged with its implementation in terms of ‘there is no
alternative’. The policy formulation process is driven by private sector staff on
secondment or loan to the Treasury. The procurement process is lengthy and opaque,
due to ‘commercial confidentiality’, and brokered and administered not by the civil
service or local government officers, but by ‘financial advisors’, particularly the Big
Four accountancy firms, both at Treasury/Department and public agency levels.
The accountancy industry, increasingly concentrated and itself now part of the wider
international business services industry, gave the Big Four ever greater financial clout
and influence over both the formulation and implementation of the policy. There were
recurring dangers of conflicts of interests when they advised and later staffed, in some
cases free of charge, government departments. While the policy of bringing in
‘advisors’ began under the Thatcher government in the 1980s, this increased markedly
under New Labour, particularly as it aggressively promoted PFI/PPP and changed the
relationship between the higher echelons of the public sector and business. There is now
a constant merry go round. Senior civil servants leave to take up lucrative posts in the
17
private sector where they can put their knowledge of and contacts in government to
good use. The Big Four accountants enter the civil service in general and the Treasury
in particular. While they may be more altruistic than their peers in that they accept pay
cuts (Gosling 2005), they believe that private sector financial management is ‘better’
and has much to teach the public sector. The significant numbers entering the Treasury
is important since it has become under New Labour by far the most powerful
government department.
The Big Four have been able to consolidate their grip on a policy which they have a
commercial interest in expanding, via their presence and positions of influence in
Whitehall and PUK, and their social networks. One of the key ways that they have been
able to formulate and promote the policy is by their reports that frame the
methodologies to be used for appraising projects (ensuring that PFI is the preferred
option and is suitably profitable to the financial institutions at least) and evaluate the
outcomes. They have been able to ensure its implementation by their role as financial
advisors to public agencies considering procurement via PFI.
This has several inter-related implications. First, active championship of PFI/PPP by the
Treasury and government departments raises issues about conflicts of interest if the
same public bodies both promote and control these projects (Freedland 1998),
particularly where there is a lack of public finance for conventional procurement.
Second, this conflict is further exacerbated when such bodies themselves reflect or are
owned or controlled by vested interests, thereby jeopardising any possibility of
regulating and scrutinising it in the broader interest of the citizenry.
Thirdly, the Partnerships policy itself blurs the boundaries between the public and
private sector at a number of levels, making responsibility more and more confused and
difficult to pin down. At the policy level, the Treasury and civil service have become
ever more closely intertwined with business. Hampered by Freedom of Information
rules that enable government to avoid disclosure where it relates to policy formation,
the general public and its representatives are unable to scrutinise decision making
effectively. At the project procurement level, ‘commercial confidentiality’ means that
the business cases used to justify private finance are rarely released, except in the case
of hospitals, even after financial close. At the delivery level, it becomes ever more
difficult to track and control public expenditure, which is increasingly channelled
through the private sector, as others have shown (Edwards et al 2004). All this renders
the traditional mechanisms of accountability for public expenditure and control of the
executive obsolete.
Fourthly, it was not just union leaders such as Unison’s general secretary who termed
the relationship between the government and its financial advisors “a web of deceit
bordering on corruption”. Sampson (2005) found that senior accountants “were also
shocked that the government could allow such an obvious conflict of interest”. He
believed that the Big Four were becoming a serious threat to democracy as their
networks penetrated Whitehall. This is particularly important when the government
excludes oppositional voices. While large corporations have always been able to exert
power and influence, the last 10years have seen a huge intensification of this process
in which PFI/PPP has played a major role.
18
Fifthly, the increasing privatisation of policy formation by those with very different
interests to those of the public at large has in turn reinforced their political and
financial position, not just at the national but the international level. The opening up
of public services to the private sector is part of an ongoing process whereby the
social and public services pass into the private sector through buyouts, subcontracting,
sale and lease back operations such as the PFI. Increasingly such services, like all the
former nationalised industries, are then integrated into the wider international
economy as they are taken over by the transnational corporations. In other words, the
social welfare functions of the nation state are being integrated into the world
economy, but for the benefit of capital not labour or the population at large.
How is all this to be explained? Privatisation, of which partnerships is but an example,
is part of an ongoing process whereby the social and public services pass into the
private sector through buyouts, subcontracting and sale and lease back operations such
as the Private Finance Initiative. Increasingly such services, like all the former
nationalised industries, are then integrated into the wider international economy as they
are taken over by the transnational corporations. In other words the social welfare
functions of the nation state are being integrated into the world economy, but for the
benefit of capital, not labour or the population at large. The broader significance of
these neo-liberal policies is that they provide the ideology and mechanisms to
accomplish an international market for transport.
While there have been many reviews of neo-liberal policies, there have been few
attempts to explain its source and development within the workings of the economic
system itself. These policies and attacks on public services, of which public transport
is but one, are widely viewed as the outcome of the ‘free market’ ideology rather than
as an expression of the crisis of the profit system as a whole.
The ideological sea change, known as the New Right Agenda, that took place in the
mid1970s was and is presented as simply a policy shift that occurred during the 1970s
(and could therefore be reversed by another policy change). But in fact, it reflected the
response of business leaders and their governments to the objective changes that had
taken place in the world economy. The downturn in the rate of return on capital
employed in the 1960s and 1970s was the driving force for several inter-related
processes: the globalisation of production in order to lower costs, and the
development and application of new technologies of production: computers and
telecommunications. Changes in technology enabled ever fewer productive units to
supply a world market. Together these processes have been responsible for a
transformation of the structure of the capitalist economy. The resulting global
mobility of capital spelt the end of the program of Keynesian national regulation that
formed the basis of the post-war welfare state, and the state owned enterprises and
services.
At the same time the enormous technological innovations in the production process,
based on the computer chip enormously intensified the crisis of the profit system. The
mission of a capitalist enterprise is to make not simply an absolute level of profit but a
level of profit proportional not to sales but the amount of capital employed. This is
typically 10-15%, and must always be higher than the prevailing interest rate, since
this represents the basic return that is available to the providers of finance. As the
amount of capital employed in an enterprise increases, so must the profit.
19
The cash surplus or surplus value - the basis of profit - represents in the final analysis
the surplus labour extracted from the workforce. But the essence of new technology
and cost cutting is the replacement of value creating labour by capital equipment in
the production process. Consequently, rather than alleviating the tendency of the rate
of profit to fall, it has worked to exacerbate it, as Armstrong et al’s analysis shows
(1984). While this was and is largely invisible in the public debates, it was this that
lay at the heart of the policy shift and the New Right Agenda. It is this falling rate of
profit relative to the amount of capital employed (even though the absolute amount of
profit may be rising in particular industries or companies) that lies behind the
successive waves of mergers and cross- border mergers in the 1980s and 1990s:
corporations sought to cut costs and sell off surplus assets, thereby reducing the
amount of capital employed.
Under conditions where the overall mass of surplus value was expanding, as in the first
twenty-five years after WWII, capital was able to tolerate the welfare state and even
welcome the nationalisation of basic industries. Such policies provided a means of
containing and regulating the class struggle since the government as owner was able to
pay higher wages and improve working conditions as in the mines and railways in
Britain while the welfare state meant that employers did not have to make extensive
provision for health insurance and retirement for its workforce as employers in the US
did in the period of the long boom. They shifted the cost of investment in capitalintensive industries onto the taxpayers while enabling their former owners to reinvest
the proceeds from compensation in more profitable ventures. At the same time the
nationalised industries and services could be run in ways that constituted a subsidy to
industry. Indeed, the nationalisations in the 1940s were justified with claims of the
increased efficiency that would flow from the restructuring and increased investment
that only government could provide (Millward 1999).
But under conditions where the tendency is for the mass of available surplus value to
decline, deductions in the form of corporate taxation to finance social welfare became
increasingly intolerable. One of the responses of the ruling elites everywhere was to
attempt to claw back a portion of the surplus value previously appropriated by the state
in the form of social welfare provision to the working class. Furthermore the 40% or so
of GDP that did not directly yield a profit must now be opened up via privatisation, PFI,
‘partnerships’, outsourcing, and all the rest, to private profit. The past 30 years have
been characterised by an on-going assault on the social position of the working class as
capital seeks to overcome the pressures on the rate of profit. But all these measures
have failed to establish a new equilibrium based on the expansion of the mass of surplus
value. Hence the continuous rounds of privatisations and cost cutting. No sooner is one
round of cuts completed than another begins.
The driving force behind these developments is the requirement for new sources of
profit and a reduction in restrictions imposed upon the TNCs’ activities by national
governments as they undertake the production of and investment in goods and
services on an international scale. The TNCs seek to extend and deepen their global
reach at the expense of the universal right to water, sanitation, transport, energy,
health care and education and basic democratic rights. But the creeping privatisation
espoused by all governments, the international financial institutions, the European
Union, and the TNCs, also express more fundamental processes - the inherent drive of
20
the productive forces to break free of the constraints of the outmoded nation state
system.
This analysis has attributed the neo-liberal policies that are so detrimental to public
services such as transport to the economic system itself not simply to an ideological
sea change that has occurred in isolation from the changes in the structure of the
international economy. It therefore raises important questions about the character of
any oppositional movement against such control by the giant corporations. While
there has been widespread opposition to the policies of the international financial
institutions of global capitalism, the opposition has largely taken the form of
opposition to globalisation as opposed to global capitalism. Furthermore, it was
unclear on what basis they were opposing global capital or globalisation, whether they
agreed with each other and crucially, to whom or to which social layers they were
speaking: international institutions, governments, trade and labour leaders, or the
broad mass of the world’s population.
In other words, there has been a basic confusion that has identified “globalisation”
with “global capitalism”. While globalisation, the increasingly global character of the
production and exchange of goods and services, is in itself a progressive development,
the destructive consequences flow not from globalisation as such but from the
subordination of all economic life to the anarchic pursuit of profit, based upon
national forms of political organisation. Thus the real question is not how to return to
some mythical golden age of national economic life but who will control the global
economy and in whose interests will it be run.
It is impossible to succeed against the restructuring of public services in the era of
neo-liberalism, isolated from any wider social and political struggle in the working
class. An examination of the past century shows that whatever gains were made were
by-products of major political and social struggles of the working class, struggles that
were led by socialists against the existing opportunist leaderships. As Rosa
Luxembourg pointed out 100 years ago,
“Work for reform does not contain its own force, independent from revolution.
During every historic period, work for reforms is carried on only in the
direction given to it by the impetus of the last revolution, and continues as
long as the impulsion of the last revolution continues to make itself felt.”
(Luxembourg 1988, p 49)
Just consider the origins of the nationalised railways. The nationalised railways were
the product of a big movement in the working class. The British ruling class, acutely
conscious of the Russian Revolution in 1917 and the revolutionary upheavals in
Europe that followed the Russian Revolution and World War I, grudgingly allowed a
reformist Labour government to nationalise coal, rail and other basic industries and
grant welfare reforms in the period following World War II. It was acting in response
to the threat of revolution posed by the sustained upsurge of the working class and the
oppressed masses internationally in the mid to late 1940s and the need to restabilise
and restructure bankrupt British capitalism. The nationalisations of basic industries
were bound up with the need for coordination and planning to better serve the needs
of industry.
21
Conversely, the privatisation of the state owned enterprise in general and rail in
particular was bound up with the decline of the nationally regulated economy. The
decline in mass industrial manufacturing, the disappearance of the nationally based
coal industry and the transfer of freight to road transport meant that industry no longer
had a significant stake in the railways: nationalisation had lost its raison d’etre. Rail
thus became a target for privatisation. The subsidies that had once been given to the
public monopolies were now to be given to private sector corporations, marking a
new stage in the decline of British capitalism and the on-going assault on the working
class.
But there was also another significant factor. The erosion of the Welfare State and the
sale of the nationalised industries not just in Britain but all over the world in the last
twenty-five years have been directly bound up with the absence of any politically
conscious movement in the working class. The socialist conceptions that animated
large sections of workers in the aftermath of the Russian Revolution came under
sustained attack from Stalinism, labour reformism and trade unionism, which together
attacked genuine socialism and above all, internationalism.
In short, the defence of public services entails the conscious recognition that
capitalism, not the increasingly global character of modern society, is the real enemy.
Global capitalism – i.e., the subordination of humanity to the profit interests of a few
hundred giant transnational corporations – cannot be fought by seeking to return to a
historically outmoded system of relatively isolated and unintegrated national
economies. The point is not is not to reject the advances of science and technology or
to retain to local, small scale production, but to wrest control of the enormous
productive forces created by human labour from the TNCs and nation states, and
place them under the common ownership of all humanity, with their development
subordinated, in a rational and planned way, to human needs. It requires the
development of a conscious political movement of the working class, capable of
challenging the very basis of the profit system itself. Such a movement must be armed
with a scientific socialist perspective and firmly grounded in the strategic experiences
of the twentieth century. It implies a very definite social orientation and program – that
of revolutionary scientific socialism as opposed to the dominant, politically liberal,
program of national reformism - which is why the traditional organisations of the
working class and intellectuals have been unable to mount any effective opposition to
or critique of the neo-liberal agenda.
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25
Table 1: Fee income and size of the big accounting firms
Firm
PwC
Deloitte
and
Touche
KPMG
Ernst and
Young
Stoy
Hayward
Grant
Thornton
World
wide fees
($m)
19,000
18,200
UK fees
(£m)
1,780
1,355
UK operating
profit
(£m)
469
433
Number of
partners
worldwide
8,019
N/A
Number of
UK
partners
755
592
Number of
staff world
wide
122,184
121,300
Number
of UK
staff
13,754
8,567
15,690
16,900
1,281
945
305
225
6,667
N/A
560
392
97,954
106,650
8,936
7,294
3,329
220
62
2,220
201
25,608
1,999
2,092
244
57
2,026
234
18,460
2,690
Source: Annual report and accounts 2005
Table 2: Signed PFI projects by year
Year
1987
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
Grand Total
Number of projects
1
2
2
5
1
2
11
38
59
89
87
105
86
71
57
74
51
6
747
Total capital value (£m)
180
336
6
519
2
11
667
1,699
2,474
2,769
2,538
3,898
2,237
7,733
14,872
4,021
3,567
34
47,561
Source: Treasury: PFI statistics
http://www.hmtreasury.gov.uk/documents/public_private_partnerships/ppp_pfi_stats.cfm
(accessed 15/05/2006)
26
Table 3: Signed deals as at March 2006
Department
Transport
Health
Education
Defence
Others
Total
Number of signed deals
Total capital value (£m)
54
(7%)
22,239 (46%)
149 (20%)
6,422 (13%)
143 (19%)
4,241
(9%)
55
(7%)
5,043 (10%)
346 (47%)
10,055 (21%)
747 (100%)
47,940 (100%)
Source: Partnerships UK projects database
Table 4: Departments’ expenditure by supplier in 1999-2000
Departments’
expenditure on
professional services by
supplier (£m)
69.8
30.6
19.2
13.5
12.8
8.3
7.9
162.1
610.0
PwC
Ernst and Young
KPMG
PA Consulting
WS Atkins
AEA Technology
Accenture
Total
Total consultancy
expenditure
Source: NAO (2001)
27
Table 5: Financial advisors to the public sector
Name
PwC
Deloitte & Touche
KPMG
Ernst & Young
Grant Thornton
Societe Generale
Capital Consulting – financial
Abros
Sum of capital values
(£m)
26,249
4,168
3,145
1,343
813
3
4
11
Number of projects
37,381
88%
77%
298
80%
40%
Total
% for which there is data in PUK database
% of total signed projects
160
40
35
28
17
703
607
575
Source: Partnerships UK projects database as at May 2006
Note: As Partnerships UK had information for 374 out 747 projects (£42bn out of £48bn signed deals),
it had information on 88% by value but 50% by number
Table 6: Financial advisors to the private sector
Name
Sum of capital values
(£m)
Number of projects
Investec
Macquarie Bank
PWC
CIBC
1,201
789
565
490
15
6
10
1
Total
% for which there is data in PUK database
% of total signed projects
3,045
7%
6%
32
25%
4%
Source: Partnerships UK projects database as at May 2006
127 projects worth £8.26bn
28
Table 7: Movement of accountants and consultants into the public sector
Former accountant
Richard Abadie
David Goldstone
Simon Leary
Nick Prior
Benn Prynn
Tim Stone
Tony Whitehead
Former consultant
Stephen Dance
Matthew Elson
Position and firm
Partner at PwC
Public sector position
Head of PFI Policy,
Treasury
Consultant at PwC
Member of Treasury Task
Force, Finance director of
PUK, acting chief
executive of Partnerships
for Schools (joint venture
with PUK and responsible
for schools PFI)
Consultant at PwC
Head of Dept of Health’s
Strategy Unit
Director in project finance, Head of PFI unit at
PwC
Ministry of Defence
Consultant at PwC
Member of Treasury Task
Force
Chairman of PFI advisory Member of several
services at KPMG
advisory panels
Consultant at Coopers and Member of Treasury Task
Lybrand
Force
Position and firm
Director at property
consultancy firm DTZ
Consultant at McKinsey
Patricia Hewitt
Director of research at
Andersen Consulting
Adrian Masters
Consultant at IBM and
PwC
29
Public sector position
Director of PUK
Transport advisor in PM’s
policy unit
Cabinet Minister, now
Secretary of State for
Health
Director of health in PM’s
delivery unit and later
head of strategy at Monitor
Table 8: Movement of public sector personnel to the accountancy and
consultancy firms
Public servant
Lewis Atter
Sir Michael Barber
Matthew Elson
Public sector position
Head of transport team,
Treasury
Head of PM’s delivery
unit
Transport advisor, PM’s
policy unit
Lady Margaret Jay
Health Minster
Simon Leary
Head of Department of
Health’s strategy unit
PM’s economic advisor
Cabinet Secretary
Derek Scott
Sir Andrew Turnbull
30
Position and firm
Director of corporate
finance at KPMG
McKinsey
Director for transport,
Atkins Management
Consultants (advisor and
bidder re PFI)
Political advisor to Currie
and Brown, construction
consultants in PFI
Advisory board of PwC
Chief economist at KPMG
Advisor at Booz Allen and
Hamilton