Private contractors rip off public services

GORDON BROWN’S pre-budget speech ignored many important problems, not
least about the funding of vital public services such as the NHS.

Roger Shrives

Even some capitalist newspapers – though not many – are forced to
admit that the Private Finance Initiative (PFI) has been a huge waste of
money and resources. Services could have improved immeasurably more if
so much of our money ploughed in by New Labour hadn’t been labelled
"for PFI fat cats only".

Between 2000 and 2003, 26% of the increase in NHS income went towards
paying PFI charges for new hospitals. The government has paid up to 30%
more in construction costs for hospitals built under PFI, says a report
by the Association of Chartered Certified Accountants (ACCA).

PFI is such an expensive way of financing, that six of the 13 PFI
hospitals are in the red. ACCA called it redistribution of income from
the public to the private sector.

Private sector consortia – usually including building contractors,
maintenance firms and finance specialists – get PFI contracts to build
hospitals, schools, road and rail projects, prisons etc.

But relying on profit to operate and maintain public services creates
many problems. For a start, many PFI schemes are designed to be
expensive and high profit. Walsgrave Hospital in Coventry could have
been refurbished for £30 million but it was knocked down at a cost of
£330 million leaving fewer hospital beds in the city as a whole.

Consortium members invest in the construction, usually supplying
about 10% of the funding according to the Financial Times. There is a
slight risk that construction might run late or cost too much to build
or operate. So many companies charge a ‘risk premium’ of about 30% to
make sure this doesn’t happen!

Once the building is complete, the government pays the consortium a
fee for use of the building and management. After paying debts,
operating costs etc, it’s all profit. If things go well for these fat
cats, the level of risk diminishes steadily and their contract lasts for
some 30 years.

To quote the Financial Times, hardly a socialist paper: "Members
of the consortia can sit tight and collect their share of the fees over
the life of the contract."

The ACCA report looked at the first eight privately financed roads,
where the government paid the consortia according to how many cars and
lorries used them.

In just three years, the Highways Agency paid them £618 million –
considerably more than the entire £590 million capital cost of the
roads. The government could have paid for all eight schemes itself.
Under PFI, however, the consortia will get £6 billion over their
30-year contracts.