The perils of PPP

In September, Alliance of Concerned Teachers Rep. Antonio Tinio questioned the practicality of the Philippines engaging in public-private partnerships (PPPs) as they would become a burden on taxpayers. The UK parliament, he said, had concluded that the system is inefficient.

Let’s take a look at what’s happened in the UK. The private finance initiative (PFI) scheme was introduced by the Conservative government of John Major in 1992, but was pursued enthusiastically by the Labour governments of 1997-2010. A stark indication that the scheme was less than perfect came in 2007, with the collapse of Metronet.

Metronet was the government’s PPP partner, established as a PFI, contracted to maintain nine lines on the London Underground. When it went into liquidation, it left the taxpayer with a bill of up to £410 million (currently, £1 = P67), the transport department having ignored advice by the National Audit Office to adopt a hands-on oversight approach.

After the collapse, Edward Leigh, chairman of the House of Commons public accounts committee, said that the department’s “assumptions were flawed from the outset. It was naïve in assuming that Metronet would establish strong financial management and corporate governance. And its assumption that Metronet’s lenders would exert strong influence on Metronet’s governance and financial health in order to protect their investment was undermined because the department shouldered 95 percent of the lenders’ risks.”

That’s quite an indictment: A private company should not have been trusted to run its affairs competently, while the private lenders were not sufficiently interested in this matter either, knowing that Joe Public would pick up the tab if the company went tits-up.

Most frequently, British PFI projects involve the construction of schools or hospitals, with the government reimbursing the contractor over the next 30 years. As the government is required to contribute practically nothing up-front, the PFI route soon became the first choice. So frenzied did the government’s addiction become that it even sold its own Treasury building to a PFI firm and then leased it back. When the Treasury ordered a Christmas tree, its PPP partner duly provided one — at a cost of £700.

You don’t have to be a government auditor to recognize the dangers in such a scheme. As the first projects are completed, the demands on the taxpayer may not be too onerous. But as more and more PFI contracts are signed, the obligations of future taxpayers begin to mushroom. And if a scheme turns out to be more expensive than anticipated, the completed hospital may have financial difficulties.

All of this has come to pass.

In August 2009, it was revealed that, according to government documents obtained by the Sunday Telegraph under the Freedom of Information Act (now there’s a good idea!), the cost of servicing national health service PFI contracts agreed since 1997 would increase by almost 25 percent between 2011 and 2014. Moreover, of the £60 billion owed to developers, only £5 billion would have been paid by the time of the 2010 election. Staggeringly, this £60 billion was over five times the capital value of the buildings. The health service had therefore been ordered to make so-called “efficiency savings” of £15 billion as a result.

At this point, I should issue a health warning of my own. The Telegraph is popularly referred to as the Torygraph, so slavishly does it mirror the policies and values of the Conservative Party (note the reference to 1997, the year Labour was elected, and mention of the then-forthcoming election). There may be, therefore, an element of exaggeration in the previous paragraph. But only exaggeration, not total falsehood.

In August this year, the Treasury select committee released a damning report on PFI, which has far funded no less than 700 projects. First and foremost, the committee found that paying off a £1 billion PFI debt costs the taxpayer £1.7 billion, the cost of PFI capital being in excess of 8 percent — double the long-term government gilt rate of 4 percent. “We do not believe,” said the committee report, “that PFI can be relied upon to provide good value for money without substantial reforms… We cannot carry on as we are, expecting the next generation of taxpayers to pick up the tab. PFI should only be used where we can show clear benefits for the taxpayer.”

Despite claims to the contrary, the committee found that “design innovation was worse in PFI projects and we have seen reports which found that building quality was of a lower standard in PFI buildings.” It further recommended that the liabilities of PFI projects be reflected in official debt figures. The Office of Budget Responsibility estimates that this would add £35 billion (not the £60 billion earlier claimed by the Torygraph but, at the equivalent of 2.5 percent of gross national product, bad enough) to the national debt.

As scandalous as all that is, there’s more to come. Also in August, the Commons public accounts committee issued a report on the tax implications of PFI. After the projects are built, some contractors sell them to investment firms, which then sit back and enjoy a comfortable income from the taxpayer for the remainder of the contract. Some contracts have been sold nine times. However, when asked about their profits, such firms claim “commercial confidentiality,” and they apparently fall outside the scope of the Freedom of Information Act.

But wouldn’t they have to reveal their profits when completing their tax returns? That’s another shocker, because many of them are based offshore and thus pay little or no UK taxes.

Is there a Philippine shocker in this story? Yep: Talking to the Manila Standard Today on Sept. 13, Budget Secretary Florencio Abad responded to Tinio’s remarks by arguing that in “the long run, given the huge requirements, private-sector funds are better even if the cost of money is higher.” –Ken Fuller, Daily Tribune

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