City of Stoke On Trent Branch - What's Hot PFI
This page provides a useful guide to Private Finance Initiative/Public Private Partnerships
Do
PFI Projects only save money by Crushing Staff Pay and Conditions?
Big Breakthrough on PFI
|
UNISON has identified seven main reasons for rejecting PFI |
|
|
UNISON believes that there are unacceptably high financial, employment and democratic costs to using this method of financing public services. |
||
|
The Branch Contact for PFI is Barry Russell, who can be contacted on 01782 236750 or by email to [email protected]. |
||
|
||
Introduction -What is PPP/PFI?
Public Private Partnerships (PPP) is the umbrella name given to a range of initiatives which involve the private sector in the operation of public services. The Private Finance Initiative (PFI) is the most frequently used initiative and has specific Treasury rules which have to be followed. The key difference between PFI and conventional capital procurement is that the public does not own the asset. The authority makes an annual payment to the private company who provides the building and associated services.
A typical PFI project will be owned by a company set up specially to run the scheme. These companies are usually a consortia including a building firm, a bank and a facilities management company. Whilst PFI projects can be structured in different ways, there are usually four key elements: Design, Finance, Build and Operate.
(12/7/04) UNISON today welcomed the announcement of significant breakthroughs in the private finance initiative (PFI), following lengthy discussions with the Treasury.
The Treasury has scrapped financial incentives that in practice compelled local authorities to adopt PFI funding methods over traditional procurement methods.
UNISON has consistently opposed the principle of PFI but at the same time has pursued a twin-track approach to deal with some of the problems arising from PFI schemes.
"The Treasury announcement is a welcome breakthrough and will have a significant effect on the way that PFI is implemented in the future," said UNISON’s general secretary, Dave Prentis. "It will go a long way to introducing a level playing field, allowing local authorities and health trusts to pursue alternative means of financing."
The Treasury has also guaranteed that staff who work for hospitals and schools built under PFI will not have their pay and conditions cut.
Importantly, this includes not only staff transferred from the public sector but also those newly recruited to private projects.
"The government has agreed that PFI should not be at the expense of the workforce and that soft services do not have to be included in PFI schemes," said Prentis.
"In future they will not allow any proposals to cut the pay and conditions of either transferred staff or new joiners to be taken into account in the key value for money assessment needed before a PFI scheme can go ahead. This will come as an enormous relief to our members who have consistently lost out when it comes to PFI schemes."
To date public authorities have in effect been coerced into using PFI. The worst example of this has been the way in which local authorities receive larger credits for their PFI payments than for other kinds of capital investment, which provides a strong incentive to use PFI.
"The government’s plans will also change the PFI credit arrangements to ensure that similar subsidies will be provided for other forms of local authority capital investment as for PFI, which will go a long way to creating a level playing field," Prentis added.
"For central government PFI the Treasury has agreed a new approach to ensure that departments make choices, with alternative funding available to use other forms of procurement if PFI is not good value."
UNISON is still involved with the government on further discussions on PFI policy and on employment related issues.
|
Do PFI Projects only save money buy Crushing Staff Pay and Conditions? |
| The cost savings promised by privatising public services
are at the expense of workers’ terms and conditions of the staff and not
through any real managerial innovation.
This is the conclusion of a new wide-ranging study -from left-wing think tank Catalyst - of how private finance initiative (PFI) and public private partnerships (PPPs) operate in the public sector. The research focuses on the reality of conditions in the prison service, hailed by the government as a model for public private partnerships and specifically as an area where, in the words of Chancellor Gordon Brown we can show that the use of private contractors need not be at the expense of terms and conditions of employees". The reality, according to Catalyst, is that in 2002-03:
In the prison service staff costs account for about 80% of running costs —meaning that any savings come mainly from paying staff less and working them harder. The report’s author - Sanjiv Sachdev, principal lecturer in Human Resources Management at Kingston Business School - says the government has repeatedly stated that cost savings achieved through such schemes should not be delivered "at the expense of the pay and conditions of the staff employed in these schemes". But he argues that the government has been "unaccountably reluctant" to commission research or even release data that would allow such claims to be evaluated. UNISON has long been campaigning against PFI, arguing it’s not a cost effective way of delivering services. The Union’s general secretary, Dave Prentis, welcomed the research. "Here is yet another report which adds to the growing body of evidence that these PPPs make savings by cutting the pay and conditions of the workforce," he said. "It’s way beyond time that the government took notice of the evidence, and delivered on its pledge to end the two-tier workforce in our public services. It cannot be the Labour way to allow such practices to continue." Catalyst warns that a "crude and unthinking" drive for cost savings without regard for the impact upon staff may conflict with other government objectives such as tackling low pay, advancing family friendly employment practices, and averting a crisis of inadequate pension coverage. "[There’s] mounting evidence of official agencies that much, if not most, of the cost advantage of private contractors is at the expense of terms and conditions rather than due to innovation," says the study. "For weaker groups in the labour market, PFI/PPPs seem on the available evidence to reinforce downward pressures on their wages and pensions." |
|
Schools PFI is a Design and Build New Schools and maintain existing Schools. This has been achieved without the need to transfer any existing staff. The Contract started in 2000 by Balfour Beatty |
Street Lighting PFI is a Replace and Maintain for 25 years contract. The PFI is currently at Best and Final Offer stage. No UNISON members will transfer to private sector but one Council employee will transfer. |
|
Bentilee Village PFI is a multi agency PFI with Council, Hospital and Private Landlords. This is at shortlisting stage but indications that several departments of the Council may be affected and possibility of staff transferring although we have been told that staff will be found alternative jobs if necessary. |
North Staffs Hospital PFI will have a knock on effect on Social Services as patients are returned to their homes earlier.
|
|
UNISON believes there are seven main reasons for rejecting PFI: |
|
| Reason 1. The public service ethos Public services are not like other commodities. They exist to support the social, economic and environmental well being of communities and where a community decides that the market alone cannot provide a particular activity. The state then assumes some degree of responsibility for the service: by funding the service or by regulating for its quality and delivery. In a post election Mori poll for UNISON 91% of Scots rejected the use of private companies to run public services. The equivalent figure for England was 78%. The Public Administration Select Committee says that it "may be put under strain by the profit motive". The public service ethos is often best defined by example and there are many examples of where the private sector is found wanting. For example, companies can and do abandon contracts. In September, after almost a year of negotiations, UNITE pulled out of a 30-year deal for student accommodation with Sheffield University. The public sector cannot allow services to fail. In other cases, the private sector has made huge, windfall profits by refinancing PFI projects, money that the public sector would have ploughed back into the service.UNISON also has concerns about conflicts of interest for accountancy firms in PFI deals. A recent study found 45 cases where the same firms acted as advisers to the public authority, despite the fact that their audit clients were either bidding or won the contract. |
Reason 2: PPPs are driven by Public Finances not Public Services. The most common PPP is the PFI, that was conceived by a government that had lost control of public borrowing. The government's desire to keep borrowing off the public sector balance sheet remains the main driver for PPPs. Public authorities know that PPPs are the only way to get finance, which partly explains the unspent millions in the public coffers. There is now a general acceptance that PFI does not lever in extra investment and that the government could comfortably pay for the entire PFI and PPP programme without breaching the fiscal rules it has set itself. There are concerns about the way the government uses off-balance sheet accounting for PFI, because that was how Enron and others concealed their true financial position. In one example, a PFI prison in Scotland was neither recorded in the accounts of theScottish Prison Service, which is using the asset, nor Kilmarnock Prison Services, the private sector operator who built it. UNISON has long argued for alternative procurement options and for the ability of public authorities to be able to borrow to invest. |
| Reason 3: PPPs cost more . PFI schemes cost much more than conventionally funded projects. The private sector borrows at higher rates than the public sector since governments can borrow at much lower rates. They have high set up costs, due to lengthy negotiations involving expensive city lawyers and consultants employed by both sides. The private sector demands high returns and despite very low risks, profits from PFI are extremely high, 18% for the Skye Bridge. The City firm Chantry Vellacott have calculated that PFI schemes cost the public purse £50m per year for every £1bn of capital value. There is a growing body of evidence that PFI projects escalate both in scale and cost. These are not simple cases of costs going up for a project but reflect the very nature of PFI itself. The higher costs inevitably lead to an affordability gap for the procuring authority that is often met by reductions in services and capacity, subsidies from other parts of public authority budgets and pressures on labour costs. Furthermore as PFI schemes get underway there is evidence that the running costs may rise substantially too |
Reason 4: PPPs "profit from people". UNISON has conducted research into the impact of contracting out in local government on the terms and conditions of the workforce. UNISON's survey found evidence of a two-tier workforce something commented on by both the Treasury and Health committees of the House of Commons. Over 90% of those contacted said pay levels for new employees were worse that for transferred staff. 1 in 5 of contracts showed a difference in the standard working week Pensions are a high value item for employees and a high cost item for contractors and public authorities. There is inevitably a gender impact with women increasingly bearing the brunt of these new privatisation. PFI contracts are at least 25 years long. As the first tier gradually disappears and only those staff on private sector terms and conditions are left, there will be a whole class of women workers providing public services who will have no occupational pensions and who will be working on inferior terms and conditions. |
| Reason 5: PPPS go wrong There have been many claims that the private sector is more efficient than the public sector but there is no evidence offered to support this. Now that PFI schemes are coming on stream there is growing evidence that they are not producing the anticipated improvements in delivery to time or cost nor are they meeting the quality standards expected. PFI has not produced the step change in quality and performance that the government still claims for it. The evidence shows: time and cost overruns; projects bailed out by the government; poor design and quality and the total failure where PFI has been used for large scale government IT projects. |
Reason 6: PPPs do not give `value for money ` The principal justification for using PFI is that it gives value for money, But the methodology has been thoroughly discredited with even Jeremy Colman of the National Audit Office saying that value for money exercises were "pseudo-scientific mumbo- jumbo where the financial modelling takes over from thinking". The Treasury is proposing changes, some of which will make it harder to prove value for money but there is a suspicion that more subjective appraisal techniques might also be adopted. What are needed, are alternative routes to procurement for public authorities, such as borrowing against future income streams. |
|
Reason 7: Private companies make unacceptable profits |
|
|
UNISON believes that there are unacceptably high financial, employment and democratic costs to using this method of financing public services. |
||
|
The current rationale for PFI emphasises value for money to the exclusion of other issues. This is assessed by using a notional Public Sector Comparator (PSC). As all schemes have to demonstrate that they are better value than the PSC it is claimed that PFI represents value for money. However, the methodology for assessing value for money is complex and does not always constitute a fair comparison. We cover some of the main reasons below. |
The discounting of future cash flows places a higher value on expenditure in earlier years and a lower value on expenditure in later years. This has a disproportionate effect on the PSC as PFI options are spread over the entire period of the contract, meaning that the total Net Present Cost (NPC) is shown as lower than the PSC. In cash terms, without discounting, PFI options are almost always more expensive. |
|
|
This is the most common method of justifying PFI schemes. In the Glasgow schools scheme the PSC was £35m cheaper than the PFI option. However, with virtually no justification £70m was added for the notional value of risk transfer. Despite the council underwriting the loan and other risk factors. Lenders are not in the business of taking risks. If they did there would be a premium. |
There is evidence from a number of schemes analysed by UNISON that the PSC is refined after bids are received from the private sector. A variety of methods are used most of which are highly subjective but all have the effect of either increasing the PSC or reducing the PFI estimate. |
|
|
One of the most bizarre provisions of PFI schemes are that if a contractor defaults it is the public authority which has to compensate the lenders. This is justified by the Treasury on the basis that the authority could make windfall gains through contract termination. However, it impacts on the value for
money comparison as lenders can provide funding to the PFI company knowing that their money is safe. Authorities on the other hand would have to make high compensation payments and therefore are very unlikely to terminate a PFI contract, even if the contractor blatantly fails to meet its obligations. |
||
|
In local authority schemes it is often claimed that schemes are revenue neutral. This means that the cost is made up of PFI credits from the government for the capital element with existing revenue budgets funding the services. We do know that in a number of schemes the health trust or local authority have had to either fund the difference out of other resources or reduce the services to be provided. In hospital schemes this is usually done by reducing beds (on average by 31%) and in schools by cutting back facilities. You may well ask why do public authorities and their officers approve PFI schemes given the above? The main reason is that the choice is between PFI and no investment in services which are urgently needed. However, that is not a reason for using PFI and approval would not be forthcoming on the grounds that public sector capital was not available. Therefore authorities desperately contort the figures as we have shown above in order to demonstrate that PFI is the best way to deliver a service. These figures are then used by the UK government to show that PFI delivers value for money. This bizarre feedback loop was the basis for the claimed 17% savings in the Treasury sponsored report from Arthur Anderson (Accountants to
Enron). PPP/PFI would not be necessary if a different approach was taken to borrowing, which recognised the long term nature of investment. In the last financial year General Government Net borrowing was -£11,400m as against PFI investment of £2,971m. This excess means that all PFI investment could be financed through the Exchequer. |
||
|
After the taxpayer (who finances the extra cost of PFI) it is usually low paid women workers who suffer the main consequences of PFI when they are transferred or are subsequently employed by PFI companies. Following recent government policy changes staff transfer should only take place where it represents
value for money. This contrasts with the previous position where there was an assumption that all workers classified as `non-core' would automatically be transferred. This is known as `PFI without People'. Whilst much has been made of the provisions of TUPE and the current review of the regulations it is clear that this is insufficient to protect staff in PFI transfers. Many issues including adequate consultation, pensions and new starters are not covered by TUPE. UNISON opposes PPP/PFI because of the threat to public services and to our members. We believe there are unacceptably high financial, employment and democratic costs to using this method of financing public services.
|
||
| Hairmyres Hospital
Has run into a series of problems in only its first few weeks of operation. Patient records lost, Patients prepared for operations and then sent home, Lack of beds, Outpatient clinics held in corridors, Unsuitable doors. |
PFI contract for the Newcastle Estate of the DSS. Cost £51 million more than remaining in the existing accommodation. The expected efficiency savings were overstated. The deal provides much less space than before, but staff numbers are expected to rise beyond the capacity of the building. The cost of the procurement to the DSS rose eleven-fold, from £0.4m to £4.4million. |
||
|
Dartford & Gravesham: a brand new, £177 million, state of the art hospital PFI hospital that opened June 2000 and immediately had to cancel all routine surgery because of a catalogue of failures. Doctors couldn't scrub up because theatre taps only ran at a trickle, sterilised equipment was not available and porters couldn't transfer patients without getting permission from their new, private sector managers. First NHS project in red costing an extra £4m per year to run, half of which would otherwise have been spent on other health services in the area. Dartford & Gravesham Hospital over estimates savings it. Dartford & Gravesham, was heralded as a flagship PFI project. In April 2000 the Commons Public Accounts committee reported that the scheme had failed to make the expected savings. Instead of 9% savings of £17 million over the PSC, the project had only realised 3% or £5 million. The Trust failed to detect significant errors in the public sector comparator and the Trust now expects to achieve some £12 million less in savings. |
Cumberland Infirmary, Carlisle Two ceilings collapsed because of cheap plastic joints in piping and other plumbing faults - one joint narrowly missed patients in the maternity unit. The sewerage system could not cope with the number of users and filth flooded an operating theatre. Clerical and laundry staff could not work in their offices because they were too small. Expensive bespoke trolleys had to be commissioned because those supplied did not fit the spaces between beds. The transparent roof meant that on sunny days the temperature inside Cumberland Infirmary reached over 33C - the hospital has no air conditioning. Two windows blew out of their frames, one showering a consultant and a nurse with glass. In August 2000, when hospitals are usually quiet, there were 'bed jams' at the 444-bed Cumberland, which is currently at full capacity. Backlog of 3,000 unreported X-rays amassed between opening in April 2000 and September. The Trust said the x-ray department had been placed under "additional pressure" by the merger of four x- ray departments under the PFI scheme. |
||
|
National Insurance Recording System The flagship computerisation by Andersen Consulting was so delayed that the DSS paid pensions providers more than £35 million compensation for late posting of records. |
Inland Revenue
The amount to be paid to EDS, the US computer company, has doubled to £2 billion whilst Inland Revenue Staff are reported to be unhappy with the service they are getting. |
||
|
Fiasco at the Passport Agency 1999, when the brand new state of the art computer system did not materialise and people were queuing for passports. The company Siemens, failed to develop the new computer system on time and when they did get it running it processed fewer passports than the system being replaced. That was a PFI scheme that was not delivered on time. Siemens, is paying just £2 of the £13 million bill. The public will pay for the rest with a 75% increase in passport charges.
|
|||
|
National Air Traffic Service (NATS) - £30m bail out. The Government has picked up the bill for another failed private finance project. They will put £30m into the part-privatised National Air Traffic Services. NATS was partprivatised in 2001 to bring private money in for investment. The Airline Group led by British Airways and Virgin Atlantic bought a 46 per cent stake and management control. The government retained 49 per cent with 5 per cent held by staff. The privatisation has left NATS heavily in debt and the situation has been made worse by a fall in traffic. The 10-year capital spending programme is threatened and investment in a new air traffic control centre at Prestwick has been suspended. NATS now wants to raise its charges and to cut the workforce by 180 and a further 100 jobs later. |
| Malmesbury School - Lessons Drowned Out .Teachers and pupils at a PFI school say the roof and walls are so thin that lessons cannot be heard when it rains. Malmesbury School in Wiltshire was one of three schools built in the county by Bilfinger and Berger at a cost £60million. A-level practice papers had to be halted and a pupil moved because the rain was so loud. Headteacher Malcolm Trobe said, "Noise also carries through because there is a lack of soundproofing between classrooms." | Calderdale Royal Hospital. A Catalogue of design problems has occurred Calderdale Royal Hospital in Halifax, West Yorkshire. Glass panels fell from an overhead canopy and there were soaring temperatures in some of the wards. The glass panels in the canopy near the accident & emergency ward had to be removed and replaced with aluminium sheeting. The PFI consortium, Catalyst, has commissioned a report by Pilkington Glass to ascertain the cause of the failure. Staff have also had difficulty navigating their way round the hospital because of a lack of signs. |
Bodmin hospital still unfinished. Four months after its official opening by Prince Charles in May 2002, patients at Bodmin's new hospital are still suffering because it is not completed and staff are angry that promised equipment has not yet been installed and requests for features made during pre-build consultations have been ignored.
| 17/7/03. The
Government has decided that information technology projects mounted under
the private finance initiative (PFI) don't offer good value for money.
Recent Government sponsored IT projects that have used private contractors
have run into serious problems.
Examples include recently admitted difficulties with the Child Support Agency System, the Criminal Records Bureau, and a number of air traffic control and passport application processing systems. PFI will be replaced by "procurement models better able to deliver" and no government PFI funded IT projects of up to £20m will be approved. In a just-published report by the Treasury, civil servants acknowledge problems with getting PFI IT projects to work. The main reason, it says, is the high rate of change in a big computer systems project, where requirements can change on a regular basis. When this happens the contract must be renegotiated - almost always to the supplier's benefit, admits the Treasury. "IT PFI projects were moderately successful" says the study "but the majority of more successful projects renegotiated their contracts after signature to achieve on going flexibility, moving away from the mainstream PFI focus on contractually defining outputs", it said. Critics such as Unison continue to claim that PFI is also a bad idea for all large-scale infrastructure projects such as new hospitals, schools, housing and defence projects as they tend to cost the taxpayer more over the long term and often result in inferior finished results. |