Private Finance, Public Promise

The Private Finance Initiative: saviour of the public purse, or Tory cuckoo in the New Labour nest? Ben Tuxworth looks beyond the spats and scandals at what PFI could do for sustainable development – and how to close the gap between performance and potential.

The key to unlocking investment at a scale previously undreamt of in the public realm, with companies stumping up much of the cash and taking much of the risk? That’s the enthusiasts’ view of PFI. And, to a government looking for delivery, delivery, delivery, there’s another strong attraction besides those heaps of low-risk wonga.

Though it may be surprising news to the schoolchildren whose buildings weren’t ready for the start of term, PFI is actually proving pretty good at bringing projects in on time and within budget. But, as emblems of the ‘third way’, PFI and its mother ship, Public Private Partnership (PPP), have certainly taken a socialist administration into choppy waters.

The detractors decry it as a kind of privatisation by the back door of our treasured national assets, placing schools, hospitals and local government services at the tender mercies of the private sector. Controversy flares on everything from financing the tube (and a big clash with Mayor Ken), to Prescott’s recent plan to solve the nation’s housing crisis by giving away public land to private developers. Sounds like a classic left-right kind of argument, and nothing to do with sustainable development?

Then consider this: when it’s nigh on impossible to get the average corporation to think beyond three years, or a politician to think past the next election, PFI’s effortless leapfrog into 25- or 30-year time horizons surely makes it a powerful vehicle for long-term thinking. Suddenly, you might imagine, all those technologies, life cycle considerations, energy, transport and waste management practices that are just ‘too expensive this year’ must surely become the no-brainers they ought to be for the public sector.

Then there’s that track record of on-time and on-budget completion. A National Audit Office report last year, PFI construction performance, found that less than a quarter of projects are late and cost more than the agreed price, compared to around three quarters procured conventionally. In terms of transparency, delivery and public satisfaction, these things weigh in well on the SD equation too. Look at what PFI actually delivers, though, and one big shortcoming stares you in the face.

Overall, 564 PFI deals with a capital value of more than £35 billion have been signed since the scheme’s inception in 1995. Ten years, all that money, those very long timescales and yet – where are the benchmark sustainability projects? Not one carbon neutral building, and far too many stories of good intentions squeezed out by bad process.

That’s the picture that emerges from the first serious review of PFI’s sustainability credentials, PFI: meeting the sustainability challenge, released in August 2004 by the lobby group Green Alliance.

GA’s Joanna Collins is afraid that the potential for a step change in sustainability in major public-sector projects is rapidly turning into a big missed opportunity. “People often don’t realise the scale of what’s going on here,” she says. “Every secondary school in the UK is being rebuilt or refurbished in the next 10–15 years, and half of it will be done via PFI.

The story’s the same in our hospitals. The proportion of public buildings being constructed through PFI makes it a powerful potential force for market transformation.” Without a much stronger steer from central government, though, that transformation won’t happen. “Reliance on guidance has its limits and we want to see much more stick and carrot in the equation.”

Take it from the top

One way forward would be to overhaul the government’s own process for approving PFI projects. As it stands, says Collins, this “is focused primarily on a very limited conception of value for money”. Instead, she argues, “departments, and particularly the Treasury, could push much harder for sustainability performance”. Will the Treasury get the message?

How it responds will be something of an indicator of whether Milburn or Brown has the upper hand in the run up to the election. If sustainability puts even the hint of a brake on the construction of one home, hospital or school, then the inside view is that the modernisers will have none of it. Time will tell. It’s strangely difficult to find anyone willing to talk on the record about any specific PFI arrangement, whether planned, in the pipeline or underway.

The problem isn’t so much secrecy as seriousness – and the sums of money involved make it a very serious business indeed. With the lifetime value of PFI contracts sometimes measured in billions, the stakes are very high. The bid process alone can cost several million pounds, and mistakes made in the early stages can cost contractors and clients millions more in the coming years. Scale, compounded by complexity, means that anything innovative, including new ways of delivering sustainability, becomes a high-risk hostage to fortune.

In some instances, the policy and technology uncertainties make 25 years a truly daunting prospect. Take waste management. Long time horizons are desperately needed to drive the culture change we need in this whole area, but the operating realities are hugely difficult to predict. So difficult, that SITA-UK’s chief executive Per-Anders Hjort commented at a recent Local Government Association conference that PFI in its current form may not be a suitable vehicle for waste management.

On the ground, it’s hard to find a great fan of PFI on either side of the equation. Amongst contractors, scepticism is rife about the weighting public sector clients give to whole life costing – instead they see contracts regularly awarded to the cheapest short-term option despite claims that their sustainability credentials were factored in to the choice. Those trying to commission more sustainable buildings, infrastructure and services point to the unwillingness of the contractors to take on the risk of untested innovations, and the whittling away of sustainability commitments in the protracted negotiations about affordability.

Baby in the bathwater

One of the most contentious PFIs of all was the first to be let: the deal struck with a consortium of contractors and banks to build a bridge to Skye, replacing Flora MacDonald and her bonnie boat. On the face of it a useful piece of infrastructure, but quickly made famous by the highest toll in the world and the relentless campaigning of Robbie the Pict. The story was picked up by George Monbiot in his ‘captive state’ book of 2001 to illustrate the many pitfalls of PFI.

The bridge, it seems, will end up costing the public at least as much as they would have spent on procuring it directly and yet will belong to an American bank. Its creation means the £1 million per year revenue that the ferries generated for the public purse is lost forever. The Commons Public Accounts Committee – which recently berated hospital trust administrators for wasting millions of pounds on fees to advisers to make PFI deals look slightly cheaper than public sector tenders – published its own conclusions about the Skye Bridge in 2004, once again calling the financial model into question.

Meanwhile, among local people the loss of control, the exceptionally high tolls and the sense that their concerns were peripheral to the deal has led to a concerted campaign of civil disobedience. The corruption, lack of accountability and breaches of trust they perceive, whether real or imagined, seem to dog PFI and undermine whatever good may come. Lots of people simply think it’s wrong.

According to George Martin, however, the problems with PFI construction are “a babies and bathwater issue” in which “largely old-style construction-sector culture is blighting an initiative with real potential” and “mistrust between client and contractor often comes to dominate the project”. As director of sustainability at the Building Research Establishment, Martin nevertheless remains generally optimistic about the future of the scheme. “The potential to think into long timescales, and the insistence in the regulations for PFI on whole life costing, mean that PFI really could be a good vehicle for delivering sustainable construction.”

Build in, not bolt on

Not just ‘could be’, but still can be, with a combination of new measures and tweaks to set it off down the right path. Martin is working closely on initiatives like the proposed new Code for Sustainable Buildings, and Andrew Stunnell’s succesful private member’s bill introducing ‘sustainable and secure buildings’ as the new focus for building regulations. One thing he believes would make a huge difference is bringing ‘post occupancy evaluation’ into the contract equation.

“If PFI deals included financial incentives for the contractor and the design team based on what occupants think of their new schools and hospitals and what the sustainability performance is like – not on the day they get the keys, but 5, 10 and 15 years in – it would give a much clearer incentive for the contractor and designers to spend more money at the design and construction stages by raising sustainability standards.”

“Getting long-term thinking and sensible investment on track”

Forum for the Future’s Phil Allies is ambivalent about PFI per se, but he too can see the opportunities. His insights come from having been close to both sides of the PFI equation. His work with local authorities includes advising them on how to procure their community’s priorities through PFI deals, ranging from waste management contracts to new schools to outsourcing of IT and other support services.

He has also worked with waste management companies on how to make their proposals more attractive in the same terms (though not on the same deals!). His conclusion? “PFI is what you make it. By and large, sustainability gets squeezed out because the public sector bodies doing the procurement don’t ask the right questions.

When sustainability appears as a bolt-on concern in the tendering documentation, it’s hardly surprising if contractors treat it that way in their bids, or that it becomes a sacrificial lamb when the financial negotiations get tough. It has to be built in from the start, and framed in terms of the public sector client’s corporate priorities, not just some abstraction that seems far removed from the gist of the contract.” Local authorities have suffered a continuing trend away from the local state as provider of cradle to grave services.

If they’re serious about using the limited power they do still have, to achieve better outcomes for local people, they can’t afford to ignore the way PFI and PPP operate. More and more procurement and enabling of services is done this way, and unless strategic concerns are brought to bear in these arrangements there’s not much point in having policies. To Allies, the commitment also needs to be there as the contract rolls out, not just during the negotiations.

“If public agencies procuring through PFI imagine that they can nail contractors to the floor, sign the contracts and put their feet up, they are mistaken. The political accountability rests with them whatever the finer points of the contract, and there will be political pain to be taken along with some of the fruits of more sustainable PFI.” It’s also worth remembering that not all contractors in PFI are money-grabbing corporates. James Warnock, community investment manager at the Riverside Housing Association, is upbeat about the potential for PFI-style deals to deliver the outcomes communities want.

He needs to be: his association is set to become a major provider of housing through PFI – on three of Sandwell’s toughest estates. “If the motivations are right, I think there can be good outcomes. Our mission is to address ‘housing and related need’, rather than maximise shareholder value, and we believe that a social housing provider like Riverside will turn out to be better at delivering sustainable communities in difficult areas than the traditional route taken by local authority housing departments.”

So who’s right? Can PFI help deliver sustainable development in its broadest sense? Paul Kelly of the Public Private Partnership Programme (4Ps) is convinced it can – but at a recent Forum for the Future event for local authorities he questioned why clearer signals are not being given.

“Why doesn’t government require that all PFIs purchase energy from green suppliers?”

“Why doesn’t government develop national policy requiring that all PFIs purchase energy from green suppliers? The potential is there to have a significant positive impact by helping to create larger markets, and such a measure would be a good start, but it’s not happening.” 4Ps was established to support local authorities embarking on new partnership arrangements such as PFI, but according to Kelly, they have yet to work on a single green building. Despite this, he’s confident that “there is no reason why PFI can’t give us a development like BedZED”.

Of course, for some there is a more obvious way to get long-term thinking and sensible investment patterns on track in key services. Anyone for nationalisation? It’s an idea that would have been laughed at only a couple of years ago, but the perceived failure of some of the privatisations of the 1980s and 1990s is finally prompting calls for a renationalisation programme.

At this autumn’s Labour conference, the party leadership suffered an embarrassing defeat on a motion calling for the railways to be brought back into public ownership. Which may seem no more than a political blip – but it raises the stakes for PFI, when private ownership of such key assets is seen by many unions as socially unsustainable. Whatever its merits, PFI is getting bigger than ever. Treasury chief secretary Paul Boateng recently set out government plans to sign new PFI contracts worth £9 billion by 2005 in the field of health, education and housing, and to push the initiative further into urban regeneration, waste recycling, sustainable energy and leisure facilities. It’s a central plank of ‘delivery, delivery, delivery’ – but the verdict on PFI as a path to sustainability is still ‘not proven’.

ZIP FILE

21 November 2004

Ben Tuxworth