28. PFI locks the public sector into inflexible contractual arrangements for up to 30 years, with little room for variation. This can be seen in the case of Balmoral High School in Belfast which was built in 2002. Demographic changes meant that by 2007 school was no longer needed, but because it was built under PFI, the council is committed to paying £9.2 million in maintenance every year for the life of the contract.
29. Making day-to-day changes in PFI buildings can be extremely difficult and expensive. A National Audit Office report published in 2008 found that £180 million a year is paid out to PFI contractors for contractual amendments. It reported major variations in charges for what was often routine maintenance work, which had failed to be specified in the original contract. While one school had to pay £320 to fit a new electric socket, elsewhere the charge was £30.81. It is the unique contractual position of PFI contractors that means that small changes can involve large adaptations to contracts as well as virtual monopoly pricing.
Question 4. Is there significant risk transfer to the private sector or is it more apparent than real?
30. The underlying principle of PFI and PPP is that risk is transferred from the public to private sectors and yet there is no comprehensive evaluation or independent research on the actual risks of PFI contracts. UNISON's report "Public risk for private gain?" (July 2004) illustrated the often illusory nature of risk transfer of PFI and PPP schemes.
31. Failed PFI contracts, on too many occasions, have had to be rescued by the public sector meeting additional costs. The failed Metronet PPP went into administration just four years into its £17 billionn contract to modernise two thirds of the London Underground and the failure has cost the taxpayer £410 million.
32. The current economic climate is leading to huge pressures on contracts and pressures on PFI companies leading to the collapse of a number of PFI schemes. Companies that got into serious problems in the past include Jarvis, Ballast, Melville Dundas and Metronet. Recent projects facing severe problems include the Defence Animal Centre, a project for 29 Cornwall schools and the collapse of William Verry a facilities management contractor for Hackney Council's secondary schools. In theory, the special purpose vehicle should replace a failing company and there should be reasonable continuity for the public authority. In practice they face higher charges as in Tower Hamlets and Cornwall, where the financier and investor, Abbey and Innisfree, both withdrew, leaving the councils to pick up the pieces.
33. The public sector generally retains demand risk-the number of patients or prisoners or pupils-with the result that if demand changes, the public sector again picks up the bill. A number of PFI schools have had to close due to falling pupil numbers, leaving public bodies with huge financial liabilities. When the newly built Comart and Media Arts School closed in Brighton after pupil numbers halved, Brighton Council had to pay PFI contractors £4.5 million for terminating the PFI deal. And, NHS Wandsworth is faced with costs upwards of £350 million for the Roehampton PFI Queen Mary's hospital which cost £73 million to rebuild, due to the hospital using more services than planned. The high level of repayment is likely to impact on future health services. Without PFI, the long term costs of adapting to significant changes in demand would be much more manageable.
34. In refinancing deals, the public sector can end up with more risk, without commensurate reductions in their charges. At the Norfolk and Norwich University Hospital Trust the PFI consortium made a windfall profit of £115m and increased their annual rate of return to investors from 19% to 60%. The new deal left the hospital with a longer contract and greater potential liabilities of up to £273 million, if the contract was terminated early. The deal was described by the Commons' public accounts committee as "the unacceptable face of capitalism."
Question 7: Would public sector investment in the last decade have been lower without Private Finance? If so, by how much?
35. No. The decision to use private finance is a political decision and the credit crisis has amply demonstrated that when a government decides to borrow very large sums, it is well able to do so. Governments have chosen to use the private sector as an intermediary for their borrowing for infrastructure projects and to bundle in services rather than provide much cheaper funding through public borrowing.
Questions 8 and 9 together:
Question 8. How much impact has the financial crisis had on launching new Private Finance projects? Is the crisis likely to have a permanent effect on the Private Finance market?
Question 9: Are there realistic alternative roles for private finance than the current PFI-type private finance models? Should the UK be aiming for more diversity in private finance models? Would a national infrastructure bank (such as the proposed Dodd-Hagel NIB in the US) add any value in the UK? Should the public sector have a more hands-on role in financing and/or delivery?
36. UNISON's report Reclaiming the Initiative: Putting the Public Back into PFI (2009) shows how the reliance on private finance for public sector projects has exposed them to greater hazards and weaknesses as the financial crisis has deepened. The report proposes a move towards a publicly funded, design and build
programme which will ensure a more efficient and more flexible and ultimately more cost effective way of building public infrastructure. The key elements are to:
- by-pass the market restrictions currently holding up projects, by using direct investment, with publicly funded design and build schemes;
- remove soft services-such as cleaning and catering from existing PFI deals. This would be in line with an increasing body of evidence that they do not represent good value for money. In 2006, the Treasury toughened the criteria for including soft services, though it did not ban it outright. Then, in 2007, an NAO report found there was no evidence that including services within PFI contracts was better value than keeping them in public hands; and
- gradually bring existing operational PFI contracts into public ownership and halt further waves of PFI schemes.