╨╧рб▒с>■  ■                                                                                                                                                                                                                                                                                                                                                                                                                                                   ▄еhcр eА3є%$$─$──$─$─$─$─$╪$╪$╪$╪$╪$ ф$ ю$ ╪$%1°$№$%%%%%%%%%%%%%E%XЭ%V%─$%%%%%%%─$─$%°$%%%%─$%─$%%░═.a¤%╚╪$╪$─$─$─$─$%%%%PFI: The Need for an Urgent Enquiry Jim Cuthbert Margaret Cuthbert September 2007 The Private Finance Initiative, (commonly known as PFI), is huge, can be very profitable for the private companies involved, and is controversial. There is nothing new in these statements. However, recent research we have undertaken identifies specific errors in the way PFI has been set up and operated throughout the UK: these errors have resulted in large unearned windfall profits for PFI operators - while at the same time enabling the true extent of these profits to be concealed. We argue here that there is now an urgent need for an enquiry into PFI: and Scotland is ideally placed to set the ball rolling. The PFI concept was introduced by the last Conservative administration: but it was then enthusiastically taken on by Labour. It involves private sector suppliers building, maintaining and operating major items of public sector infrastructure like schools, hospitals and roads. Instead of borrowing money to pay for the capital expenditure itself, the public sector pays an annual unitary charge for the use of the facility over its lifetime. All of the individual costs like depreciation and interest charges, maintenance, service provision, and supplier profit are bundled up into the single unitary charge. As we mentioned in the introduction, PFI is huge. In Scotland alone, PFI deals in operation or signed cover capital expenditure of г5.1 billion, almost all under Labour. A further г1.7 billion future deals are in preparation. These sums refer to the cost of buildings: they do not include fees, VAT, or, in some cases, equipment. The theory of PFI was that it would bring the benefits of competition and private sector expertise to the provision of public infrastructure and services. The private sector would also take over from the public sector those risks which the private sector was better equipped to handle. All in all, the public sector was meant to get better services cheaper. In practice, a number of serious worries about PFI surfaced fairly quickly. For example, some PFI schemes have gone bust: but when this happened, it was normally the public sector that ended picking up the cost - giving the lie to the assumption that risk had actually been transferred to the private sector. The PFI approach also seemed to have an effect on the type of project being undertaken: there have been many examples where a public authority has started off with plans for a fairly modest refurbishment, but has ended up having been convinced that what was actually required was a much more expensive new build project. Many PFI projects are also very large: so large that the degree of competition for major PFI projects has been limited. But the major worries about PFI have related to cost. Suspicions that something was going badly wrong started to emerge when it became clear that many new hospitals were having to be planned on the basis of reduced bed numbers, in order to make the forecast unitary charge payments affordable: (for example, to make the New Royal Infirmary of Edinburgh PFI scheme affordable, a 24% reduction in acute bed numbers was required across the Lothian Health Board area.) But suspicions really started to crystallise when several PFI suppliers were able to extract large capital gains from their PFI projects, at an early stage in the life of the project, effectively by capitalising their anticipated future profit streams. In several cases, the capital gains extracted were several times the original inputs of capital by the PFI contractor. Concerns like these have been expressed very cogently by critics of PFI - notable among these being Allyson Pollock and her colleagues at Edinburgh University. The Government, however, (both at Westminster, and the previous administration at Holyrood), were having none of this. They have countered criticism by their usual techniques of unsubstantiated assertion: and they have been greatly helped in this because the required detail about projected costs and finances have been hidden away under the cloak of commercial in confidence. Insofar as the government did admit to any mistakes, it was along the lines that PFI was a learning process, that lessons had been learned, and that the internal rate of return on private sector investments on later PFI projects was dropping towards what the Treasury regarded as an acceptable 15% or so per annum. As we shall see later, however, Уinternal rate of returnФ is a very unsatisfactory summary measure to use for assessing PFI projects. Recent work we have undertaken throws additional light on what is going on. We have been able to lift the curtain of secrecy a little bit as regards what goes on in suppliersТ financial projections: and what we have found confirms that PFI can indeed be extremely profitable for private sector suppliers. But the important thing which our work suggests is that a major part of this profitability stems from a basic howler which has been committed, in the way in which the unitary charge payment to the PFI provider is uprated through time. Typically, some simple uprate rule is applied to the unitary charge, so that it increases in line with inflation, or some fraction of inflation. However, using a simple uprate rule like this neglects the fact that a major part of the supplierТs costs, namely, debt charges, will not be increasing, but will be declining through time as debt is repaid. The difference is available as a large profit: a profit which has not been earned through excellent performance, but through what amounts to financial sleight of hand. Moreover, our modelling work indicates that the PFI supplier could conceal the size of this profit: by appropriate scheduling of its debt repayments, it can reduce its apparent internal rate of return very significantly, while actually increasing its true profitability. The implications are profound. There is an urgent need for an enquiry to be carried out, in order to lift the veil of secrecy on other PFI schemes, and to establish how widespread the kind of mistakes we have identified actually are. Given the Westminster governmentТs doctrinaire commitment to PFI, we are not expecting any progress there: the stakes for Gordon Brown are too high. But the position in Scotland is very different. With the Barnett squeeze on ScotlandТs finances, Scotland is particularly threatened by the financial pressure which will result from the mistakes in PFI. Further, the new Scottish Government is, in any event, no enthusiast for the current version of PFI: witness the very welcome recent decision to abandon PFI for prisons, and its intention to develop a more acceptable alternative via the Scottish Futures Trust. It would be a matter for great credit to Scotland if it were a Scottish Government enquiry which blew the gaffe on PFI: and we urge the Government to mount an enquiry into PFI without delay. PAGE 3 бЩдГ.е╚Aжзиайак#$%+,-./23O■°Ў°Є°ЎЁuPaP uDPUБ $1CRS║╗h i ╧ ╨ ╛ ┐ ▀р#$/0123¤···°°°°°°°°°°°°°°°°°°°ЄЁ°°°`№ K@ё Normala c"A@Є б"Default Paragraph Font@TOC 1a  @ Footer 9r )@в Page Number33     O33 !Ф ХА @1РTimes New Roman РSymbol "РArial"А╨h{k╗F{k╗Fiд╣Жэa Г/V The Need for an Urgent EnquiryPreferred CustomerMargaret Cuthbert ■   ¤   ■   ■                               ■                                                                                                                                                                                                                                                                                                                                                                                                   Root Entry         └F░═.a¤%╚АWordDocument    є%CompObj            jSummaryInformation(        ш■    ■    ■                                                                                                                                                                                                                                                                                                                                                                                                                                                                           ■       └FMicrosoft Word Document MSWordDocWord.Document.8Ї9▓q■ рЕЯЄ∙OhлС+'│┘0╕Ша╚╘Ё№ 4@ h t А МШаи░ф The Need for an Urgent Enquiry~2.Preferred CustomerrSNormaloMargaret Cuthbertta20.MicrosofDocumentSummaryInformation8             Ї                                    ■       └FMicrosoft Word Document MSWordDocWord.Document.8Ї9▓qМфDell Computer Corporation</  The Need for an Urgent Enquiryt Word for Windows 95do@F├#@Ю;hн√╟@j3W¤%╚@j3W¤%╚эa■ ╒═╒Ь.УЧ+,∙о0─@Hlt |Д МфDell Computer Corporation</  The Need for an Urgent Enquiry