he Private Finance Initiative was introduced
by the Conservative Government to overcome problems of "chronic
capital famine" in the public services caused by its
drive to curb public expenditure targets.
Initially it was denounced by the Labour opposition as amounting
to 'creeping privatisation" but this hostility soon abated
and the PFI has been pursued by Labour with much greater vigour
than by its predecessor. Indeed, lauded as "a huge UK
success story", New Labour has claimed that it has been
"blazing a trail" that "others will undoubtedly
Put simply, under the PFI the public sector contracts to
purchase services on a long-term basis from the private sector,
which provides finance and accepts some of the venture's risks
in return for an operators licence to provide the specified
service. The private sector consortium is responsible for
constructing and maintaining the necessary infrastructure
and makes its return on the investment through the revenue
stream arising from the service operations. The Government
claims this represents the most cost-effective way of refurbishing
the crumbling infrastructures inherited from the Conservatives,
with greater efficiency and to a higher standard than could
be achieved via direct public funding. By March this year,
around 150 PFI contracts worth more than £14bn had been signed,
with discussions proceeding over an additional £20bn worth
of deals - without taking account of the highly controversial
proposals for the London tubes.
In effect, the PFI is now the main mechanism for funding
capital investment in new hospitals, schools and the prison
service and has been described as a cornerstone of the Government's
modernisation programme. The adoption of the PFI by the Labour
Party amounts to a major reappraisal in its attitude towards
the appropriate boundary between the public and private sector.
The role of the state as "owner of capital assets and
direct provider of services" has been downgraded in favour
of its function as "a purchaser of services from a private
sector partner responsible for owning and operating the capital
asset that is delivering the service".
The PFI has been instanced as pragmatism in practice. Pragmatism
appears to refer to two main precepts.
Firstly, that policy decisions should be made on the basis
of evidence, that is a systematic assessment either of past
experience or the likely consequences of differing options.
As ministers repeatedly declare, "the key test is what
Secondly, the belief that "the old argument, as to whether
public ownership was always best or whether privatisation
was the only answer, is simply outdated". What counts
is "outcomes not ownership", "what, on balance,
will give the best results".
This argument raises two issues. Firstly, does it make sense
to counterpose an "ideological" to a "practical"
style of policy-making? Govemments may be more or less dogmatic
or narrow-minded in their approach to policy-making. They
may exhibit different degrees of willingness to take account
of available research and to innovate. But a strict differentiation
between "ideological" and "practical"
orientations is misleading. All policy-makers, Peter Hall
has observed, "customarily work within a framework of
ideas and standards that specifies not only the goals of policy
and the kind of instruments that can be used to attain them,
but also the very nature of the problem they are to be addressing...
this framework is... influential precisely because so much
of it is taken for granted and unamenable to scrutiny as a
The issue then becomes: what "framework of ideas and
standards" is being used to define and decide "what
This bring us to the second question. To what extent does
the evidence validate the claim that choice between public
and private - public procurement and the PFI - is being made
on the merits of individual cases?
Ministers have described the PFI as "central to our
drive to modermse our key public services". By the spring
of 2000 Andrew Smith, then Chief Secretary to the Treasury,
announced that PFI contracts were "present in every area
of the public sector and across the country". Over 200
contracts had been signed amounting to capital investment
worth more than £12 billion and many more were in the pipeline.
The Government insists that PFI schemes had been shown
to accomplish efficiencies in the organisation of resources
of such an order as to more than compensate for the higher
cost of capital. The outcome promises to be better quality,
more responsive and more dependable public services.
A useful point of departure is the new Cumberland Infirmary
in Carlisle, the first major PFI hospital project to become
operational. Opened ahead of schedule by the Prime Minister
it was immediately dogged by problems:
Poor quality of physical infrastructure. For example,
two ceilings crumbled because cheap plastic joints in
piping were used.
Inadequate health and safety conditions. For example,
the sewerage system could not cope with the number of
users and the air conditioning was inadequate.
Poor facilities-there were too few beds to cope with
Amec, the main construction company involved, acknowledged
a few "teething difficulties". But these appear
to be not uncommon with PFI projects. In Hereford the number
of beds is predicted to fall from 351 to 250; in Norfolk from
1,600 beds to 1,000; in Worcester, from 540 to 380. The British
Medical Association estimates that 5,000 beds will be lost
to the system once the 38 PFI hospitals, costing more than
£3.6 billion, are built.
A group of experts concluded that, as a result of cost factors
within PFI contracts a substantial shrinkage in services provision,
bed capacity and staffing is inevitable. The same pattern
appears to unfold in every PFI project examined. The House
of Commons Select Committee reported that "the evidence
we have received leads us to conclude that on current trends
the projected increases in the number of nurses and other
clinical staff fall well short of what is required to deal
with current shortages and future developments in the NHS".
It concluded that "we believe that further exploration
of the impact of PFIs is required before significant levels
of recurrent NHS funds are devoted to the servicing of the
private capital involved".
But would these capital projects have fared any better under
public procurement? Are there any reasons to believe that
the PFI suffers from inherent weaknesses as a method of providing
public goods and services? The issues involved are highly
complex and here we can only skim them. We shall focus, briefly,
on three main points: that of risk transfer, information and
According to the Treasury, a cardinal rule is that "risk
must be transferred... If insufficient risk is transferred,
a project will not represent value for money and will not
be pursued under PH". The best indicator of the extent
of risk actually transferred, according to Gaffney et al.,
is the interest rates paid by consortiums to their lenders
which, in earlier PFI schemes have been set at extremely favourable
borrowing terms on the basis of "little inherent risk."
This implies that there is little correspondence between the
sums NHS trusts ascribe to "risk transfer" and the
views of capital markets on the risks the consortiums have
actually taken on.
The point can be pursued a little further. In order to make
a fair comparison of the relative costs of PFI and public
procurement "account needs to be taken of risks which
under public procurement the public sector carries itself,
but which under private finance initiative it pays another
agent, the private investor, to bear". This is known
as the "public sector comparator". This is a crucial
element in the methodology since only "when the cost
of public sector options is adjusted to reflect this transfer
of risk [does] the apparent cost disadvantage of private finance
initiative options disappear?" Careful inspection again
has revealed the adjustments reflect quite subjective judgments
whose effect has been consistently to balance comparisons
in favour of the latter.
In a detailed investigation into the contract signed between
the Dartford & Gravesham NHS Trust and a private sector
consortium, Pentland the Select Committee on Public Accounts
discovered that the estimated savings against a publicly-funded
scheme had been very considerably exaggerated "because
the Trust failed to detect significant errors in the public
sector comparator... Had the Trust known that the savings
were marginal when negotiating the deal", the report
concluded, "it might have made different decisions".
The outcome was that funds designed to meet other health needs
had to be redeployed to meet the costs of the contract. Again,
this appears to be part of a pattern.
The fuller the information and the greater the equality in
the amount of information available to the parties to the
contract then the greater the likelihood of both benefiting
from the arrangement. Conversely, the more it is differentially
distributed between the parties, the more one-sided it will
be. Though the Government promised "transparency during
and after the procurement process", insistence on maintaining
commercial confidentiality has meant that "the financial
information on which to judge the transfer of risk and the
validity of the contracts has not been placed in the public
domain". This is not surprising since "private contractors,
and public agencies that must compete, want to keep their
costs and other commercially sensitive information secret".
Asymmetry in the distribution of information upsets the equilibrium
that, in the contract process, is supposed under market conditions
to prevail. There is evidence that this is precisely what
is happening. For example, the Public Accounts Select Committee,
in its investigation of the PFI contract for the new Dartford
and Gravesham Hospital concluded that the Health Trust were
poorly informed about the gains the contracting consortium
stood to make, exaggerated the likely savings from using the
PFI and had failed to balance of risks and potential rewards.
The heavier the transaction costs (including the costs of
drafting, interpreting and monitoring contracts) the less
the value-for-money of a PFI contract. According to the NHS
Confederation, health service managers found the PFI to be
slow, bureaucratic and requiring "us to put up a vast
amount of management time and consultancy fees at risk without
the certainty of success" and an academic study of the
use of PFI in education concluded that the PPFI negotiating
process was much lengthier, more complicated and more expensive
than conventional public procurement. The more complex and
intricate the process, the greater the reliance on external
advisers. A Public Accounts Committee investigation revealed
here a clear pattern of cost overruns. It expressed "alarm"
in its report into the Dartford and Gravesham contract that
the Health Trust incurred costs from its advisors, KPMG and
Nabarro Nathanson which, at £2.4 million, exceeded the initial
estimated £300,000 by almost seven hundred per cent.
The editor of the BMJ concluded, "much evidence is accumulating
to show that private finance initiative schemes are costing
much more than traditional public funding of capital development",
with fewer beds and fewer trained medical personnel and "with
the NHS as a whole having to underwrite these extra costs,
meaning that resources shift from providers who remain in
public ownership to those privately owned undermining still
further the goal of greater equity in the NHS". It
is therefore not surprising that the Select Committee on Health
concluded that "we believe the
Government should limit PFI to a number of pilot schemes
until a proper evaluation of the impact on staff and patient
care is produced".
Undoubtedly, for the Government the PFI had considerable
appeal as a mechanism for reconciling competing pressures-
a massively under-funded health infrastructure, public apprehension
about waiting lists and the state of the hospitals, a determination
to maintain an image of unbending fiscal "integrity"
to the global money markets and (what the Government insists
is) the reluctance of voters to pay for the quality of service
they demand. Satisfied voters, it appears, being able both
to have their cake and eat it, will be disposed to reward
those who made this possible. So what does its eager espousal
of PFI tell us about the nature of the Blair Government's
creed, and hence the future trajectory of its policy.
Differences in organisational structures, incentive systems,
reward patterns and so forth, prompt organisational employees
to think and act in different ways. The case for public
service provision never rested solely on efficiency and equity
(important as they were). A fundamental Labour tenet has been
the belief that the intrusion of the profit motive into institutions
whose purpose was the meeting of basic human need (such as
physical and mental health) would have damaging effects, that
there were "certain activities that are of such moral
significance that they should not be provided by the market,
even if they could be, because they will be tainted by the
association with financial exchange and profit".
An environment in which people will be treated as ends in
themselves rather than as means for securing pecuniary advantage
is more likely to evolve progressively, it was held, to the
extent that those working in the public services were imbued
by a culture "in which professional pride in a job well
done or a sense of civic duty or a mixture of both replace
the hope of gain and the fear of loss as spurs to action".
Within profit-maximising firms where individuals were primarily
motivated by immediate material gain, by contrast, narrowly
self-interested behaviour, a disposition to subordinate need
to profitability and a proclivity to treat people instrumentally
would be more common.
To Bevir and 0'Brien (New Labour and Networks of Public
Serice Deilvery) the Blair Government's policy of creating
"networks" rooted in public-private partnerships
is designed to foster high levels of trust and co-operation.
In fact, the logic of its policy leads in a quite different
direction. The redesign of the public services along market
lines will, as one leading authority commented, generate "a
fundamental change in incentives, and, in particular a move
away from traditional notions of the public service ethic
toward more commercial orientations" which will in time
erode trust and co~operation, sharpen division of interests,
breeding a culture in which suspicion and rivalry spread"
with detrimental effects upon (the always threatened) norms
of social obligation, altruism and public service.
Though qualified and modified in a range of ways, new Labour
has embraced much of the neo-liberal agenda: its view about
the benefits of market forces, the presumption of a natural
confluence between private interests and the public good,
and its assumptions about the nature of human motivation.
Where does the logic of policy lead? The PFI, a group of
experts has concluded, has established a framework of policy
that supplies "the mechanisms for reversing the principles
that health care should be funded out of general taxation,
that public services should remain in public ownership, and
that health services should be free at the point of delivery"
- The new NHS plan envisages that NHS patients can be treated
in private hospitals. The logical next step is that whilst
the state "would retain responsibility for guaranteeing
that all citizens have access to ... services ... they would
be able to choose freely between differein types of provider"
public or private. As the editor of the BMJ reflected, "most
institutions on the scale of the NHS end not with a bang but
with a whimper".
This is an edited version of an article from Revue
Témoin 24, www.revuetemoin.fr.
Eric Shaw teaches at the University of Stirling