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 Ł30 million but it was knocked down at a cost of Ł330 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 Ł618 million - considerably more than the entire Ł590 million capital cost of the roads. The government could have paid for all eight schemes itself. Under PFI, however, the consortia will get Ł6 billion over their 30-year contracts.

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In The Socialist 11 December 2004:

Bring the troops home