Price D, Pollock AM.
Public risk for private gain? The public audit implications of risk transfer and private finance.
London: UNISON 07 July 2004.
The key claim by government that private finance deals in the public sector are value for money has still not been evaluated, according to a report published today by public sector union UNISON.
The report shows that although 563 private finance initiative (PFI) deals worth £35.5 billion had been signed by April 2004, the National Audit Office (NAO) has carried out only one inquiry into the profits earned by private financiers. This inquiry found that shareholder profits were 61% higher than agreed in the PFI contract and that the increase had not been earned.
Private finance is much more expensive than traditional public finance. In the London Underground PFI, private finance has added £450 million to the investment bill faced by fare-payers and council taxpayers. The extra costs of private finance have resulted in service cuts across the NHS and education as public budgets are switched to pay shareholders and venture capitalists.
According to the government, the higher cost of using private finance is justified because the private sector assumes risks for project failure or default. But the UNISON study shows that in a number of high profile PFI project failures there have been no systematic efforts to identify whether risk transfer took place and at what cost to the public purse.
The report’s authors reviewed a series of NAO investigations into operational PFIs, to show the way in which the private sector passes risks and costs back to the public purse when problems arise and the projects fails.
For example, when computer company ICL underestimated software development costs in a £184 million PFI deal with the Lord Chancellor’s Department, the government agreed to put in extra money and guarantee shareholders’ profits. Similarly, Siemens’ shareholders were protected when the Passport Agency PFI went disastrously wrong. In this case, an extra £12.6 million had to be spent by the Agency to protect the service to the public.
This study lends support to the Public Accounts Select Committee complaint that Parliament has not been given the facts about the cost of private finance.
Prof Allyson Pollock, co-author of the report, said: ‘It is extraordinary that a policy which has run for 12 years and created £35 billion of new debt still remains unevaluated and that the cost to the public purse is still unknown.
‘The failure by government watchdogs to examine the government’s central justification for PFI is crucial because it means we do not know the purposes for which public money is being spent.’
PFI was established in 1992 by the Conservative government of John Major as part of their privatisation policy. It has steadily increased in importance from £667 million a year in 1995 to £7.6 billion in 2003. Most PFI deals have been signed since New Labour came took office in 1997.