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The escalating costs of public-private partnerships in the UK (I)

Added 13 Nov 2019
This is the first of two blogs looking at PPPs in the UK. Read the second part here

A team of investigative journalists linked to UK media iNews have undertaken an in-depth investigation into the scandal of private finance initiatives 
(PFI) – the British term for Public Private Partnerships or “PPPs – in the UK. The resulting series of articles detail alarming numbers on how much of taxpayers’ money is being sunk into PPPs. The investigation comes nearly two years after the collapse of Carillion, a construction giant involved in many PPPs within the UK and Ireland. The incident drew attention to the large number of PPPs in the UK along with the huge overall burden they place on the public budget. The figures surrounding the PPP costs scandals raise the key question of “who pays the bill?” and who benefits from these deals.  

PPPs are long term contracts through which the private sector provides infrastructure assets and services that traditionally were provided by governments, such as hospitals, schools, airports, prisons, roads, railways, and water and sanitation plants. These contracts also include some sort of so-called “risk-sharing” where governments aim to attract private investment by shifting the risk from the private investor to the public purse. However, evidence shows that in most cases PPPs are the most expensive method of financing and significantly increase the costs borne by the government.  

The in-depth enquiry by JPI Media Investigations revealed that “PFI has sucked an extra £5bn out of public sector budget.” This adds to the list of controversial PPP projects reported in recent years. In January 2018 the UK National Audit Office revealed that the annual charges of the 700 operational public-private partnership deals amounted to £10.3 billion in 2016-17. That same month, Carillion collapsed. Given these mounting controversies, the UK government announced in December 2018 that they would abandon PPPs. 

One of the key problems with PPPs is that the contracts tend to be very complex and inflexible and usually last between 15-35 years, however occasionally for over 70 years. As a result, it can become very expensive to make changes. In some cases, for any unforeseen change, for example for technology upgrades or new purchases, the public entity is bound by the contract. This means they are obliged to purchase from the original contractor, who can therefore take advantage and charge very high prices. While evidence has long been available of how the length and inflexibility of PPP contracts is a problem both globally and in the UK, these latest investigations shed light on the escalating costs incurred by UK PPP contracts (the so-called PFIs). 

For example, they revealed that one hospital was charged more than £5,300 for a new sink, while another spent £24,000 to adapt a disabled toilet. Meanwhile, the £1bn deal made in 2004 to upgrade the Queen Alexandra Hospital in Cosham, Hampshire, will end up costing more than £1.7bn. This is money, which, as many observers have pointed out, could instead have gone to caring for the people of Portsmouth. The Portsmouth Hospitals NHS Trust that runs the hospital, made headlines in 2011, when the hospital was forced to take out a £13m loan to pay its bills while also cutting 700 jobs and 100 beds, all to meet the PFI’s £40m annual revenue cost - a private finance initiative (PFI) that was previously run by Carillion. These figures add to the recent IPPR findings on the NHS. According to the report, NHS trusts will spend £2.1bn on PFI repayments this year, rising to more than £2.5bn in 2030. This money is badly needed for vital patient care. As of October 2019, £3bn worth of critical maintenance issues remain unresolved, according to IPPR. 

Escalating PFI costs aren’t limited to hospitals. Investigations revealed that a school was charged more than £25,000 for three parasols, another UK school paid £1,017 for an LCD screen, while a school in Swindon spent £6,100 to fix a sign in their sports hall and a police force was charged £884 for a chair. Meanwhile, in some cases, the public authorities ended up paying for services that aren’t even provided. Again, this is linked to the inflexibility of PPP contracts, which are basically unbreakable. For example, if a custody suite is no longer needed or a hospital wing no longer meets new safety standards, the public entity is still bound by the contract and its related financial commitments.  

Additional costs are sometimes linked to re-negotiation. More than half (55%) of all PPPs are renegotiated, on average every two years. In the majority of cases, these renegotiation result in a tariff increase for users. The latest investigation found that an NHS maternity unit built and run by a private company closed after just 16 years, yet it is still costing the taxpayer millions of pounds.  Similarly, a police force in the South East of England is trying to think up new uses for a mothballed custody suite that it is still paying for. And the cost of a hospital wing in Sheffield has shot up by £6m despite it having to close for nearly a year due to fire safety concerns. 

The UK is no stranger to PPP scandals. They are the reason behind the UK Government abolishing PFI contracts for new infrastructure projects in 2018. However, there are fears that other kinds of PPPs may replace the old PFIs, especially as last year’s Conservative government declared its commitment to using PPP “where it delivers value for the taxpayer and fairly transfers risk to the private sector.