Nov 2007 28

When Mark Rees was head of the Barking, Havering and Redbridge Trust he sacked 600 workers and cut 190 beds in order to try and bring the trust’s finances under control (reported in the Daily Mail – not online).  These are similar measures to the ones Rose Gibb, who – in a strange quirk of fate – is his partner, put in place that contributed to the tragic outbreak of C. difficile that killed at least 90 people.  They have failed to restore the trust’s finances and it was £30 million in debt when he stepped down "amid claims of weak leadership".


Despite this he is to get a £170,000 payoff with £127,500 for nine months pay in lieu of a notice period and £42,500 for ‘loss of office’.  Taxpayers shouldn’t be made to pay such extravagant rewards to managers who fail so thoroughly.  Unfortunately, the recent TaxPayers’ Alliance Public Sector Rich List showed numerous cases of such rewards for failure.

Nov 2007 28

Just stick your head through the hole
Anyone who’s ever had building work done knows the Golden Rules of value for money:
  1. Get at least three fixed price quotes in writing
  2. Make sure they cover all the required work in full
  3. On no account alter your requirements once you’ve hired your builder
Simple, aren’t they.

A shame that the Private Finance Initiative doesn’t follow them. Especially as PFI is so much more permanent than a here today, gone tomorrow, kitchen extension. Your builder comes, builds the extension, gets paid, and leaves. But the PFI contractor comes, builds the hospital, then runs its "hotel facilities" for the next twenty five years, with taxpayers making an inflation linked payment to him every single year. Mistakes today will be a millstone round our necks for the next 25 years.

And there are now 800 of these contracts, committing taxpayers to total payments of £155 billion over the next 25 years. Which is a lot of money on which not to be getting value.

We’ve blogged the PFI money-pit many times (eg see here), but the Public Accounts Committee has just given its update on how things are going. And against those Golden Rules, the news is not good:

  • Since 2004 the proportion of PFI deals attracting only two bidders has more than doubled – to one-third – with the risk of no competition at all if one bidder is weak or drops out
  • One third of public sector teams made changes to PFI projects after they had selected a single, preferred bidder
  • The average tendering time for projects is nearly three years, deterring bidders and costing taxpayers more- delays to projects cost us at least £67 million
  • Prices for contracted "soft" services (such as catering and cleaning) often get increased during the contract period (by up to 14% so far- and that’s on top of the inflation-linked increases already factored in)
  • Services are being reduced to contain costs- ie we’re getting less for the money

And why’s it such a mess?

Partly, it’s because private sector suppliers increasingly wary about dealing with our indecisive, half-baked public sector (see this blog on Shunning the Simple Shopper). But more fundamentally:

"There is a continuing lack of PFI skills and expertise across the public sector, particularly in local authorities, NHS trusts, and other locally-based teams where officials are usually encountering PFI negotiations for the first time… Good negotiating skills are essential if public sector officials are to secure good deals from private sector counterparts who are usually experienced in developing and managing PFI projects."

In other words, the same old Simple Shopper story: taxpayers picking up the tab for being represented by incompetents. And we’re on the hook for at least the next quarter-century.

There’s one other point to highlight for future reference. During the PAC hearing, the inestimable Richard Bacon tried very hard to make the Treasury mandarins tell us how much debt PFI now represents. This is something we’ve wrestled with on BOM, but it has been treated by HM Treasury and Brown as a state secret, shrouded in Enron accounting obfuscation.

Here’s the transcript of how Bacon got on:

Q101 Mr Bacon: I have been trying for several years to get to the bottom of how big is PFI, and it seems to be quite difficult to get an accurate answer. I have been told by various people, including by the National Audit Office, answers such as, “Well, really they do not know.”… you must have some notion of what is the likely amount of debt to arise there from going forward?

Mr Pocklington: The total stock of PFI projects has a capital value of approximately—
Q102 Mr Bacon: We have been through that. £54.55 billion, although if you look on your website it is actually now £58.067 when I printed that off this afternoon, so it has gone up by about £4 billion since you sent your note in…
Mr Pocklington: Table C19 from the Budget document includes our latest estimate for the years 2006-07 to 2033-32 on an annual basis.
Q108 Mr Bacon: If you add it all up what do you get?
Mr Pocklington: We have not published a number and I am afraid I am not able to add them up here…
Q111 Mr Bacon: Mr Pocklington, can you just give me, because funnily enough I have got a calculator, the numbers please?
Mr Pocklington: From 2007-08?
Q112 Mr Bacon: Yes, read them out. I will put them straight into my calculator and this will save us time.
Mr Pocklington: 7.3, 7.8, 8.2, 8.5, 8.6, 8.7, 8.8. etc etc
Q120 Mr Bacon: That comes to £157.9 billion. Is that then a rough proxy for the answer to my first question, Mr Stewart?
Mr Stewart: I think that is the liabilities accruing under PFI.
Q121 Mr Bacon: That is what I am interested in.
Mr Stewart: That is not equivalent to the debt.
Q122 Mr Bacon: Right, so the debt is something different?
Mr Stewart: The debt relates to the capital element so the unitary charges include payments for soft services.

Following the meeting, HMT eventually came up with this Sir Humphryesque statement:

"The total, if one were to add together these future and non-comparable figures without applying any appropriate adjustments, would be £170.8 billion. However, I must emphasise, as I already have to the Committee and to Mr Bacon, that this number has no meaning. To add together a figure in today’s money to a figure in the money of 2030, without making any adjustment for the changing value of money over time, produces a nonsensical number.

A more meaningful exercise would be to take the stream of future payments set out in the table and to aggregate them as a net present value. If one were to do this one would end up with total future payments under the PFI measured in today’s money which aggregate to £91 billion. The discounting methodology applies the Green Book rate of 3.5% to account for time preference and a discount of 2.8% to account for inflation. These two elements are compounded to give an overall discount rate of 6.4%. The inflation figure of 2.8% is HM Treasury’s projection for RPI inflation consistent with CPI inflation remaining at its 2% target."

So now we know. According to HMT, PFI debt may amount to £91bn (although since that ignores all payments beyond 2031-32, we should probably call it £100bn). That compares to BOM’s most recent calculation of £90bn, and our updated guesstimate of £100bn. Looks like HMT has cribbed our figures. If they want any more help, we’d be glad to oblige.

PS The CBI has also commented on the poor contracting skills of public sector PFI clients: "In a survey of PFI contractors, the business lobby group found that changed orders, delays and added costs were common. In answer to a question as to what respondents’ companies have experienced from the PFI, 69% said they had experienced changed specifications by the contracting authority before contracts were signed; 49% said they had experienced changed specifications by the contracting authority after contracts were been signed; 78% said they had experienced avoidable delays on the part of the procuring authority; and 76% said they had experienced higher than expected bid costs."

Nov 2007 28

One of the cardinal virtues that the NHS is supposed to possess is a high degree of equality.  The system clearly fails to deliver quality care relative to other developed country healthcare systems on a host of measures from control of infection to cancer survival to mortality amenable to healthcare.  However, it is felt to be an expression of social solidarity that, quality aside, we are all in the same boat with regard to healthcare.  This principle has been enshrined in the World Health Organisation’s ranking of healthcare systems but in a very imperfect manner that was more focussed on how the system was funded and allocated resources than on the actual results for people from different socio-economic groups.

There is a debate to be had on whether equality, as opposed to generally higher standards, is the right objective for a health service.  However, the Telegraph reports a Civitas study showing that even on the measure of equality the NHS is failing to deliver.  Rates of heart bypass operations, for example, are 30 per cent lower in the poorest groups.  The middle class are proving much better able to play the system and this translates into better standards of care.  "Although the poor, the least educated and ethnic minorities visit their GP more often than more affluent, well-educated people, they are less likely to be referred to a specialist."  Even if equality is treated as all-important the NHS is still failing.

Nov 2007 27

There’s a fascinating poll up on the BBC News web site today. The related story is about the Capital Gains Tax debate, in which Alistair Darling announced that Taper Relief would be abolished – a decision he is now under great pressure to reverse.

Darling’s proposal would simplify CGT, which is of course welcome, but would also raise the rate by 80% for many people, which is of course not very welcome at all.

The CBI and the Conservatives, as well as some extremely prominent individuals from the world of business, have urged Darling to abandon the change, slamming it as both poorly thought-out and dangerous both to Britain’s competitiveness and to short term stability. The Federation of Small Businesses has proposed a halfway house alternative designed to protect small businesses, too. The potential for people rushing to sell their assets in British businesses before the tax hike occurrs in April means that there is a lot of pressure for the Chancellor to make a decision one way or another soon.

So faced with this complex issue, the BBC has offered the public the chance to vote on the question "Should Capital Gains Tax be reformed?"

The first problem with this is that it provides a Yes or No choice on an issue where there are any number of answers. It rather depends what you think they mean by ‘reform’, a word both loaded with political meaning and deeply ambiguous. What kind of reform could they be referring to?

Does voting ‘Yes’ mean:

1) you support Alistair Darling’s original proposal to increase the rate of CGT – reforming CGT as it used to be.

2) you support getting rid of Alistair Darling’s CGT proposal and going back to how it was before – reversing Darling’s decision (i.e. completely the opposite of option 1).

3) you support getting rid of Alistair Darling’s CGT proposal and replacing it with the Tories’ suggestions.

4) you support getting rid of Alistair Darling’s CGT proposal and replacing it with the FSB’s idea or any one of the numerous other alternatives.

5) you believe CGT should be further reformed in any one of a myriad of ways irrespective of Darling’s proposal.

The fascinating thing here is not only that the idea of boiling down a question to which there are at least five answers into a yes-or-no ever seemed a good idea, but that over 4000 people still felt able to  vote one way or another. Amazingly, only 9% chose to vote "Not Sure". Nor did the others balance out equally as one might have expected due to the ambiguity of what "Yes" or "No" means. Overwhelmingly, "Yes" won, receiving 60% of the vote – double what "No" received.

Politically, and in campaign terms, this is a handy reminder of the power of the positive. People aren’t stupid; they weren’t being foolish voting like this. We all evolved as social animals, wanting and needing to be a productiove part of a group. Thus, faced with a question to which one’s opinion could be justifiably be identified as "Yes" or "No", people overwhelmingly identified themselves as Yes supporters.

It’s not a perfect rule – it is definitely possible to set a debate up as something where a gruff, Churchillian "Never" is attractive (for example in the North East Regional Assembly Referendum), whilst some people always like to be contrary – but for campaigners it is always worth bearing in mind whether opportunities exist to harness such trends.

And if you’re wondering, I voted "Don’t Know".

Nov 2007 27

Reuters report that the Public Accounts Committee has found that many PFI deals have been very expensive, up to 14 per cent more than before the PFI deal was put in place.

Getting private companies involved in the running of public services is a very good idea.  However, the important qualities that the private sector can bring to public services – efficiency, innovation and a focus on customer priorities aren’t made use of much in PFI deals.  PFI deals typically have the private sector borrow, put fixed capital (such as a hospital or a prison) in place and then leave the operation of services within the public sector.  In other cases private firms will be asked to undertake particular functions, such as cleaning, rather than the wholesale operation of a facility or service.

Borrowing is one thing that government can do more affordably than the private sector.  Getting private firms in to do the borrowing is to choose perhaps the least useful contribution they can make to the running of public services.  When particular functions are handed over to the private sector they often do not have the flexibility to improve efficiency.

Instead, government and private sector both try to get the best price, for them, that they can.  Sometimes government gets the upper hand but that risks putting the private firm out of business.  If the private firm is put out of business, as in the case of Metronet, that means yet more cost to taxpayers and delays in the provision of important improvements in services.  More often, the private sector wins out and the taxpayer faces a bigger bill than they otherwise would.

By allowing the private sector to run services instead of just contracting out small functions or building facilities we can avoid this entire, expensive, zero-sum game.

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