An idiot’s guide to the Private Finance Initiative

A SPECIAL REPORT BY PAUL FOOT

This is the story of the Private Finance Initiative: how it became a jewel in the crown of New Labour, its savings, its costs, its pitfalls and windfalls, and how it changed the face of British accountancy and British politics

more firmly into the government’s programmes. But he insisted that PFI would only work if the whole of the financial risk I’m the of a project was transferred from the public sector to the private sector. This caused a Iron lot of concern to private contractors and Chancellor banks. Their directors were prepared to bid for government contracts for which the government was eventually responsible, but were not at all happy about bidding for contracts for which private contractors might be held liable. Another worry was the Labour opposition whose MPs were inclined to oppose such measures as “creeping privatisation”. So although Two Brains’ theory was officially adopted by the Tory government, it never really got off the ground. As predicted by the sceptics, the idea infuriated Labour and the trade unions. In 1996 the TUC vigorously opposed PFI and in a Commons debate on 1 May the same year, Labour frontbencher Sam Galbraith got to the root of the matter. “The private finance initiative,” he Surely concluded, “is basically all about Enron government bodies borrowing money but not having it set against the public sector Chancellor? borrowing requirement.” He forecast: “Today, the private sector will only get involved in the PFI within the health services if it carries no real risk.” The result, he said, was “a financial sleight of hand, a massaging of figures as a result of which the increase in the public sector borrowing requirement is not shown and is thus a matter of deceit.” In another debate another Labour frontbencher, Harriet Harman, denounced to build and run them — and then, at the the concept of PFI in the NHS in terms that WIND IN THE end of the process, inherit them too? won warm support from her colleagues. When he wrote the pamphlet, Willetts “When the private sector is building, was a consultant to Healthcall, a private owning, managing and running a hospital,” WILLETTS health firm. (In 1997, when the Tories lost she declared, “that NORMAN LAMONT tinkered with it. John office, he became an adviser to the hospital has been Major approved it. But the intellectual Dresdner Kleinwort merchant bank, which privatised.” Yet thrust for the idea of the private finance rapidly became one of the great unknown to Harman, initiative (PFI) came from David Willetts, beneficiaries of PFI.) But back in the early the leaders of her the Tory frontbencher nicknamed “Two 1990s, two brains were rather too many for party were engaging Brains”. In a pamphlet in 1993 called The Tory leaders of the day and the idea of PFI in secret discussions Opportunities for Private Funding in the wasn’t very popular in the treasury either. to make sure that if NHS, published by the Social Market Senior civil servants liked to keep tight and when they came Foundation and financed by the private control on NHS spending and old-fashioned to office, the private health insurance company BUPA, Two mandarins there felt the radical ideas of sector would do Brains came up with a brainy idea. Instead Two Brains might be going too far. precisely that: build, of paying for hospitals by public funding, When Kenneth Clarke succeeded Lamont own, manage and why not get reliable old private enterprise as chancellor, he endorsed PFI and wrote it run new hospitals. David Willetts MP

Copyright Pressdram Ltd. No reproduction without prior permission. Contact: [email protected] 1 Tony Blair and his chancellor boast that projects worth £14bn would be ENTER MONSIEUR Gordon Brown took their Tuscany signed by the end of 1999.” host Geoffrey Robinson into the The popularity of the new measures government as paymaster- among the contractors is one reason the BOURGEOIS general. In his book startlingly prompt action by the government The politician in charge of this dramatic Unconventional Minister, on PFI was so little noticed in the public conversion was Geoffrey published in 2000, Robinson prints. The formation in September 1997 of Robinson (right), a Coventry boasts of the breathtaking an entirely new task force dealing specifically Labour MP whose impact on speed with which he and with PFI, and a treasury press release in his party’s policies had his former City cronies which Adrian Montague modestly described until then been marginal. paved the way for PFI. it as a “really strong team of young Turks”, Robinson’s chief claim on In the week after the got almost no publicity. All the young Turks his party’s policy election he set the were lawyers, bankers or business makers after Tony Blair former Tory favourite consultants. No trade unionist, Labour MP or became party leader in Malcolm Bates to work Labour lord was even interviewed. 1994 was his on the subject. Bates enormous wealth. wrote a report in six Blair and Gordon weeks and by the end HILARY’S SAFE Brown were both of June 1997, barely dazzled by it. They two months after the made full use of election, all its 30 HARBOUR Robinson’s agreeable recommendations Two immediate problems confronted holiday villa in had been accepted. Montague’s young Turks. The first was Tuscany, not to They were that under existing laws, many of them mention his luxury implemented by passed by previous Labour governments, flat on the French November. As hospital trusts might not have been able to Riviera. Robinson had enter into legal contracts with private Both men believed drooled in a treasury businesses. The second was that local that great wealth of the press release on 23 June councils might be similarly restricted. kind available to Robinson was a sign of 1997, demonstrating his masterly control of Hence new laws were called for to boost great enterprise rather than a chance cliché: “We do not let the grass grow under the confidence of the contractors. inheritance Robinson had been bequeathed our feet here.” The first was entrusted to Hilary by a Belgian businesswoman called, Ross Goobey, the chairman of the Tories’ Armstrong, the minister of state at the new deliciously, Madame Bourgeois. Blair and PFI panel who had had doubts about PFI, department of the environment, transport Brown recruited Monsieur Bourgeois was sacked, with the entire Tory panel. It and the regions. She spoke up for the banks, Robinson to sound out friendly tycoons and was replaced by a leaner and more select which, she said, “fear that partnership woo them to New Labour. “task force” in the treasury headed by a contracts with local authorities may be Among the first City firms approached merchant banker from Dresdner Kleinworts found unlawful”. The consequences of such by Robinson was the British branch of the called Adrian Montague. Montague’s potential illegality were, she said, quite big American accountants, Arthur Andersen. “infinite patience”, wrote Robinson, had frightful: “The banks would then suffer Andersen’s sister company, Andersen been “acquired as chief legal counsel in the financial losses” and the private sector Consulting, had already demonstrated a negotiations on the Channel Tunnel”. By the would be “saddled with bad debts.” This deep and selfless interest in the Labour time Robinson wrote his book in 2000 was an appalling vista, she insisted, that the party. It had not charged a penny for the (following his sacking in 1998 for lending government must “act quickly to dispel”. help it had given Labour’s Commission for half a million quid to government colleague The new local government contracts bill, Social Justice in devising a suitable policy Peter Mandelson), he should have known she said in the debate on its second reading on tax and welfare benefits; and on the day that the Channel Tunnel and its private on 23 June, provided the private sector with Labour leader John Smith died in May 1994, enterprise controllers had been responsible a “safe harbour”. From the Tory frontbench it recruited a bright young Labour politician for one of the most appalling commercial the seasoned Tory privatiser Christopher called Patricia Hewitt who had worked on disasters in British history. But he was too Chope could not contain his delight. “I the commission and had been press officer tactful to mention it (or the key role understand,” he said, “that we probably to Labour leader Neil Kinnock. Montague had played in the almost equally would have introduced a bill in not Hewitt left Andersens in 1996 to devote calamitous privatisation of the railways). dissimilar terms.” her attention to winning the safe Labour Another vital ally in those early The following month, on 14 July, another seat of Leicester West where she was the discussions chaired by Robinson was Steve new minister, this time in the department of prospective Labour candidate. In that same Robson, a senior civil servant who had also health, Alan Milburn, an almost maniacal summer, Andersen Consulting arranged a been closely involved in railway convert to PFI, moved the second reading of conference in Oxford for Labour privatisation. Robson’s almost religious another bill “to unlock the PFI gridlock in frontbenchers in which the party’s budding enthusiasm for privatisation in every form the National Health Service.” This was the ministers were lectured by City experts on swung him behind PFI, and his limpet-like National Health Service (private finance) bill how to behave responsibly. association with paymaster-general that made it unquestionably legal for health One issue that fascinated Andersens was Robinson helped him transform the trusts to negotiate contracts with private the private finance initiative. Its experts treasury from a department known businesses “so that the financial community investigated the mystery of why PFI had previously for its prudence when dealing can have the confidence that it needs to failed so bleakly under the Tories when not with private contractors and entrepreneurs provide funding for the most advanced a single hospital PFI scheme had been into a generous provider of public funds to hospital development projects”. signed. The main reason, they quickly such people. From the Tory frontbench John Maples concluded, was that the initiative put the In his less than flattering book about MP made it clear where the bill had come private sector at too great a risk. An even Robinson, the author Tom Bower explains from. “It is not our intention to oppose the greater worry was the legal implication for why the Robinson proposals so delighted bill,” he said. “It is our bill.” Thus without a the companies engaging in PFI deals. It was the beneficiaries. “The popularity of word of protest or even doubt from the not at all clear, for instance, whether the Robinson’s proposed changes for the PFI massed ranks of newly-elected Labour MPs, NHS trusts which ran the hospitals, or local contracts among the majority of bidders PFI soared into orbit and millions upon councils were allowed in law to enter into and merchant bankers was unsurprising. millions of pounds flowed out of the banks their own contracts with big business. In The private sector under Robinson’s regime to pay for a new set of PFI hospitals. discussions with other City accountants and would be allowed to earn profits without Most Labour ministers looked on this consultants (and with Geoffrey Robinson), bearing any risks. The new terms of PFI flow of money as if it were a miraculous Andersens sought ways to change the rules contracts approved by Robinson lacked display of new investment by a private and laws to make PFI more amenable to clauses allowing the government to recoup industry transfixed with wonder at the new private corporations. They were greatly windfall profits earned by the contractors Labour administration. They did not seem to assisted in these discussions by a prominent and anticipated that the public would pay appreciate that the “new investment” carried member of the Tories’ private finance panel, more for hospitals and schools than if the with it a heavy burden of “new debt” that a former GEC director called Malcolm Bates. funds were wholly provided by the state would cripple the promised hospitals at As soon as Labour was elected in the By offering overtly more generous terms to once and had to be paid back over at least a spring of 1997, the new prime minister contractors than his predecessors, he could quarter of a century.

2 Copyright Pressdram Ltd. No reproduction without prior permission. Contact: [email protected] By the time Geoffrey Robinson and his Alan Milburn personal debtor Peter Mandelson were greeted PFI in booted out of office at the end of 1998, all the NHS with this discussion and legislation had attracted open arms very little public debate. Isolated journalists — Roy Hattersley in the Guardian, Arnold Kemp in the Herald in Scotland, Will Hutton and David Leigh in the Observer, for instance — began to wonder about the consequences for the government if the PFI contracts continued at even half the same rate. But for the most part there was silence. The contractors and their supporters in the Tory party were delighted at the PFI windfall. Indeed, some Tory MPs’ firms were part of the lucky consortia that won the PFI contracts. But most Labour MPs who might otherwise have been critical were so impressed by the sudden construction of new hospitals in their constituencies that which led inevitably to cuts in hospital beds Stonehaven hospital contract was named, it they merrily swallowed the government’s and reductions in nursing staff. included the British Linen Bank. arguments that the new hospitals would The Eye’s first reference to the new Moyes never forgot his early triumph as never have been built had it not been for initiative was in June 1997, when the a health service privatiser and banker. After Robinson’s new magic cordial, the PFI. magazine’s medical correspondent M.D. a rather dull stint at the British Retail By the summer of 1999, however, critics printed a letter written in March 1997, a few Consortium, he was recently appointed of PFI were in full voice. To start with they weeks before the election, by Labour’s then regulator for the government’s much- concentrated on the impact of the new frontbench spokesman on health matters, coveted “foundation” hospitals, which will policy on the National Health Service. In July Chris Smith. His letter — to a Ms Carlo — be floated off as business corporations. 1999, the British Medical Journal published a raised the controversial Tory PFI proposals Potential conflicts of interest in the new stinging leading article entitled PFI — for a new hospital for Norfolk and Norwich. PFIs absorbed the Eye in those early New Perfidious Financial Idiocy. The article was Smith outlined his party’s “serious concerns Labour years. In July 1998, under the based on research carried out by the School about the operation of the Tory PFI” and heading Master Bates, the Eye discussed the of Public Policy at University College London assured Ms Carlo that before making any crucial role in PFI policy-making, first under (UCL) and its professor of health policy final decision, the Labour government would the Tories and then under New Labour, of research, Allyson Pollock, a former national “rapidly undertake a listening exercise with Malcolm Bates. One of his most remarkable health service clinician. local people”. achievements was the commissioning of a In BMJ papers going back even before the M.D. went on to point out that plans for brand new hospital (like the one at Norwich, 1997 election, Professor Pollock and her the new hospital were going ahead full some way from the city centre) to replace team had established themselves as speed under the new Labour government the old and much-loved Edinburgh Royal consistent and reliable critics of PFI and, as (Smith was no longer dealing with health: he Infirmary. The old site (and four others their criticism grew, they earned for had been transferred to culture) “without a almost as valuable in the city) were snapped themselves a considerable reputation in the whiff of the promised public listening up and sold by the lucky consortium that NHS as well as the furious invective of New exercise”. As M.D. observed: had the PFI contract. The consortium was Labour and its growing band of dedicated l The new PFI hospital was sited outside headed by the big cable and construction consultants and policy advisers. Norwich city boundaries, meaning firm, BICC. “Soon after the project was In 1998 and 1999 she and her colleagues considerable extra travel for patients. launched,” Eye 954 reported, “a new director joined the board of BICC — Malcolm Bates.” published more powerful papers warning of l The new hospital would have fewer beds Bates was knighted in the Queen’s the consequences of PFI for the NHS. The than the one it replaced. latter of these papers, entitled Pump- birthday honours in summer 1998. The Eye Priming The PFI, published in The Public l The PFI was exceedingly unpopular. At a returned to the subject of the PFI king three Money and Management Journal (Jan-March meeting in Norwich attended by more than months later under the heading Master 1999), examined 35 major schemes for new 200 and addressed by the local health trust Bates Comes Again. The headline referred to hospitals, almost all of them to be built by chief executive, just six people voted in the extraordinary fact that Sir Malcolm had PFI. They found that the government’s favour of the PFI proposal. now been appointed chairman of London assumption that “efficiencies on the part of M.D.’s observation — “to most it seems Transport, in which post he would be the PFI contractors would offset the higher that political diktat is triumphing over supervising many of the PFI contracts he costs of capital” were “increasingly commonsense” — was prescient; and the himself had inspired. unconvincing”. themes of the article became increasingly Wondering whether he would be In a devastating table (see page seven), familiar to Eye readers in the months that negotiating with himself as director of BICC, put together from official figures all over followed. whose subsidiary Balfour Beatty was the country, the authors published the Labour’s astonishing U-turn in its involved in the London underground PFI, the “outline business case costs” and the attitude to PFI was exposed in March 1998. Eye put the question to BICC. It initially “current costs (1999-2000)” — even before Before the 1997 general election, Labour had confirmed that Bates was a director. More the contracts were signed off — of the first distributed “Save the NHS” leaflets in 15 PFI hospital projects. Some of the Inverness, attacking Tory plans to build a increases were hideous. At Swindon, the new PFI hospital for the elderly in increase was 229 percent; at Worcester 137; Stonehaven. At the time Dundee Labour MP at South Manchester 123; Norfolk 122; and John McAllion had described the idea as “a Bishop Auckland 100. Far from the private complete betrayal of the founding principles sector cutting the costs, the capital costs of the NHS”. Nevertheless, the complete had actually increased. betrayal continued under Labour and the Who was to pay for these increases? Some hospital in Stonehaven, financed by PFI, Hilary of them could be met by land sales. But duly opened. Armstrong clearly the extra costs of borrowing caused In July 1998, Eye 955 attributed the worried that by the increase in the costs since the outline Stonehaven contract to the ardent support banks might business case for PFI was originally for PFI among civil servants in the Scottish ‘suffer presented, had to come from somewhere Office. Keenest of these was the former financial else. But where? The papers identified four assistant secretary in charge of losses’ sources: health authority budgets at the development, Bill Moyes, who had been expense of other services, including primary “seconded” from the civil service to the care mental health; capital budgets intended British Linen Bank, a subsidiary of the Bank for the rest of the NHS; special subsidies of Scotland. In November 1996 he became a from the treasury that came to be known as full-time executive director of the British “smoothing mechanisms”; and finally from Linen Bank. In January 1997, when the the revenue of the hospital trusts themselves, successful consortium bidding for the

Copyright Pressdram Ltd. No reproduction without prior permission. Contact: [email protected] 3 Almost anyone with any record in The Perfectly Formed I ndividuals behind PFI GEC/Marconi could be sure of a warm welcome in Downing Street and the Robson improvement”. For good measure he energetic role played in that by an ministries. Almost the first greed told the Commons public admin- ambitious City solicitor at Linklater businessman to be made a lord by istration committee that the idea of a & Paines, called A. Montague. Tony Blair was Lord (George) STEVE ROBSON Simpson, chief executive of Marconi, “public service ethos” was “fantasy”. l The not very successful treasury (left), in charge whom Blair begged to come more In April 2003 Robson led the task force and the key role in it of a of privatisation closely into government, only to be right-wing Reform Commission on former City solicitor and banker at the treasury told by Simpson that he was putting reform of public services. His from Dresdner Kleinwort called A. in the early all his efforts into GEC/Marconi. colleague was New Zealander Roger Montague. days, is often Douglas, the man behind the ultra- Marconi-worship partly explains l The not very successful privatised referred to as free market “Rogernomics” that the enthusiasm successor to the treasury task the govern- produced record unemployment and for Sir Malcolm force, Partnerships UK, aka PUK, ment’s privatisation “guru”. poverty in New Zealand in the 1980s. Bates (right), a and the role of its deputy chairman, When Labour’s paymaster-general Among their conclusions was that former GEC one A. Montague. Geoffrey Robinson gave the private increased healthcare costs should not director, as the finance initiative such a boost in be funded by the taxpayer. l The significance of gongs in man best suited 1997, Robson took control of industry – in particular the CBE to launch new strategy. Adrian’s toll awarded in 2001 to A. Montague. Labour’s PFI; In 2000 he was knighted and a l The role of private finance advisers and the pro- year later Sir Steve retired from the to the New Labour government – motion (from treasury. Since then he has become a and the appointment in 2001 of industry) of former Marconi managing non-executive director of Cazenove, one A. Montague to give private director Sir Peter Gershon (below) as Royal Bank of Scotland, the mining finance advice to the deputy prime head of the Office of Government firm XStrata and Partnerships UK minister and then transport Commerce, the leading government (PUK). At PUK he is officially the overlord, John Prescott. agency on PFI. “treasury nominee” although his While all these men were l The stupendous losses at British bank, RBS, is one of the biggest ennobled, knighted and promoted, Energy and its plight under its beneficiaries of PFI. what happened to GEC/Marconi itself? chairman, er, A. Montague. Robson is outspoken in support WHEN a hugely influential transport It got hopelessly caught up in the great of PFIs and privatisation and, despite conference took place in Rome last telecoms bubble of the late 1990s and his long stint at the treasury, is a autumn, the hugely influential The Marconi Gang burst with it. It harsh critic of the public sector. In businessman appointed to drum EVEN before they took office, New posted losses many interviews he has said up support for it was one Labour ministers were always of £5bn and privatisation of the railways was Adrian Montague (above), the hunting for top businessmen to sacked 6,000 “absolutely right”. He has addressed a government’s leading expert on PFI worship. They were dazzled by the people in Britain “power lunch” at the right-wing Adam and PPP. size and reputation of firms such as alone, and was Smith Institute on “modernising” (ie Among the subjects mysteriously GEC/Marconi, one of the biggest only saved from privatising) health and education. And not discussed at the conference were: manufacturing companies in the bankruptcy by in a Guardian article in 2001 he wrote l The not very successful privati- country, built up under the legendary panic restruc- that the public sector was “averse to sation of Britain’s railways and the genius of Lord (Arnold) Weinstock. turing.

Eye questions to the relevant government presented meant that the taxpayer was in suggests Dobson cannot see the difference department then revealed that Sir Malcolm an even worse position with PFI than the between hiring a plumber to put in your had resigned as a director on the very day ordinary householder who takes out a new bathroom and letting the plumber take the Eye had asked about his role. mortgage. The government was committing over your whole house on condition he taxpayers to hugely higher payments than rents it back to you for the next 30 years — would have applied under a publicly-owned and paying him extra to do your cooking THE DARTFORD and publicly-funded system, and for greatly and cleaning.” To help the health secretary, reduced services. the Eye provided three conveniently ignored FUNNEL Indeed, it was rather like taking out a facts about the South Tees hospital and PFI: mortgage on a credit card. For the new l The new hospital was being built by Through 1998, 1999 and 2000, the Eye’s hospital at Dartford, Kent, the cost of Mowlem and Carillion. The latter was attention shifted from potential conflicts servicing capital rose from 6.7 percent strongly criticised by the independent think of interest to the central arguments about under the old system of public procurement tank Labour Research as one of the firms PFI itself. As more and more hospitals to a fantastic 32.7 percent of income under most commonly using “union busting” to were built under PFI, more and more PFI. The result? Heavy cuts in health get round the government’s fairness-at-work questions were asked about them in the services, notably to people with learning proposals. difficulties and the district nursing system. Eye. For example, were the new hospitals l Carillion, then Tarmac, was prime cheaper than a public sector alternative Similar figures applied to all the new PFI hospitals. But the issue which emerged so contractor on the first PFI hospital, Dartford and were they really affordable? and Gravesham. The national audit office clearly from Professor Allyson Pollock’s The PFI system for new hospitals is (NAO) said the scheme was certainly no work in 1999, and continued to dog the similar to that of a mortgage. The NHS cheaper and possibly more expensive than a government, was the condition of the new selects a consortium of construction traditional rebuild. companies, banks and accountants, which hospitals: notably the fact that in every case builds the hospital and runs it for a long they provided for fewer beds, staff and l The old South Tees hospital had 1,051 period, usually 25 to 30 years. In exchange, services for fewer patients than did the beds for patients. The new PFI hospital the government pays an agreed sum every hospitals they replaced. had 980. year to the consortium. The payment covers Frank Dobson, New Labour’s first health There were even more drastic cuts in “servicing”, (portering, catering, cleaning, secretary, opened the new hospital at South beds at the new PFI hospitals in Carlisle, laundry and something called the “life-cycle Tees with a flourish, denouncing the Bishop Auckland and Halifax. Prof Pollock cost”) — and the debt of the initial purchase opponents of PFI as follows: “Who do critics and colleagues found that in all the new PFI price. think have been building hospitals before hospitals there were 30 percent fewer beds As with a mortgage, the eventual sum PFI?” he asked. “Charities or volunteers? Of than in the ones they replaced. Nor was this paid by the taxpayer to the consortium is course not. They were built by the same a coincidence or accident. There was much enormously larger than the amount initially profit-making private companies now evidence that the PFI hospitals were borrowed. But the increase in the costs of involved in PFI.” Eye 986 answered as specifically designed to cut the length of the hospitals since the outline case was first follows: “This interesting new argument stay in the hospitals, increase occupancy

4 Copyright Pressdram Ltd. No reproduction without prior permission. Contact: [email protected] and so improve the “throughput” and eight more Health Concern candidates were Health Concern’s Richard Taylor in the 2001 economic “return” — or profit as it used to elected. As the Eye noted: “There are 19 general election. Lock phoned the company be known in the olden days. Health Concern councillors in Wyre Forest that produced the magazine and demanded — by far the largest party — 11 Labour, five another apology, damages and costs. He got Tory, four Lib Dems and four old-fashioned neither. All these matters came to a head at CHANGING Liberals whose slogan in the election was the June 2001 general election in what the ‘Save Our Hospital’. The alliance Eye called “the best election result by far” campaigning to save Kidderminster Hospital (1030). The new MP for Wyre Forest was THE LOCK now commands a majority.” none other than the Independent candidate The issue came to a head in This unprecedented political upheaval in Richard Taylor, former chairman of Health Worcestershire, where a new PFI hospital a not very tempestuous part of the world Concern, who got 28,487 votes compared to was to be built to replace the Worcester reflected a great wave of anger against the Lock’s 10,857. In its first test by the Royal Infirmary. How to pay for it? The government’s health policy in general and electorate PFI had been comprehensively local health authority launched an urgent PFI in particular. Opposition was further rejected. strategic review to find the money. The encouraged by a report in June 2000 from chief proposal was to demote the smaller the public policy unit of UCL. It exposed the hospital at Kidderminster to a mere devastating consequences of the huge extra HUNT BALLS shadow of its former status. Acute bill for the PFI hospital in Worcester. Its operations and beds were to be removed costs, taken together with the accumulated There was no sign that anyone in and the revenue from them shifted to the deficits in the NHS in Worcestershire, “have government took the slightest notice of new PFI hospital at Worcester, 17 miles forced the health authorities to cut hospital the Wyre Forest result, however. Indeed, away. services across the county”. The report went one of the most remarkable features of The PFI proposal was initially opposed on: “While the catchment population of the the PFI story is the length to which the by the Labour candidate for the local new PFI hospital will rise from 280,000 New Labour government has been constituency, Wyre Forest: a Birmingham residents to 380,000, acute admissions are prepared to go to distort, twist and if barrister called David Lock. To his and projected to fall by between 21 and 37 possible ignore the rising tide of popular everyone else’s astonishment, Lock was percent of the average in England.” opposition to PFI — especially in the elected to parliament in the 1997 general Prof Pollock went to Kidderminster on 25 health service. election and continued to campaign against May 2000 to announce the results of her In March 2002, Eye 1050 told the strange the emasculation of Kidderminster hospital. research at a packed and enthusiastic press story of plans to build a huge new PFI His attitude changed, however, as he conference. How did David Lock MP respond? hospital in Birmingham to replace Selly Oak climbed swiftly up the political ladder, He wrote a long letter to Lord Young of and Queen Elizabeth hospitals. As with all becoming a parliamentary private secretary Graffham, chairman of University College other such plans, they projected fewer beds, in October 1997 and a junior minister in the London’s council, complaining of “several fewer staff and fewer services but more lord chancellor’s department in 1998. factual inaccuracies” in Prof Pollock’s public money. The job of assessing public As a government minister, he could account and asking “whether Professor reaction to the hardly be seen to be opposing his own Pollock is justified in using public money to proposals fell to government’s PFI proposals in the health pursue her research in this manner”. the local service, so he defended the hospital plans In her reply to the university, Prof community health he had previously attacked. His shift in Pollock pointed out that not a single factual council (CHC). attitude infuriated the local population. As error had been identified and wondered CHCs were set M.D. had spotted in Norwich in the summer whether Lock’s letter was not “an implicit up by Labour in of 1997, PFI for NHS hospitals was threat to academic freedom”. The Eye article 1974 and were exceedingly unpopular. The people of Wyre drew a scornful letter from David Lock meant to be Forest decided to challenge the decisions of alleging that Prof Pollock had somehow independent of the their health authority and MP with their missed the provision of 600 extra hospital local health votes. beds in his area. This drew another mild bureaucracy. The What happened as a result was set out in reply from the professor in Eye 1008. She South Birmingham Eye 1005 in June 2000. As soon as the repeated her conclusions: CHC, chaired by Ursula Pearce, Lord Hunt government’s support for the new PFI l The cost of the PFI contract rose from circulated a leaflet through the area covered proposals were announced in March 1999, £49m to £108m, with a further £8m for by both hospitals, setting out the PFI the campaign to save the hospital was equipment again through PFI. transformed into a new political party called proposals and outlining an alternative based l The new facility will serve 100,000 more Health Concern. Its aim was simple: to keep on public funding and public accountability. people but there will be 44 percent fewer Kidderminster hospital intact. Its chairman The leaflet asked people in their own time acute inpatient beds. was Richard Taylor, a retired hospital and at their own expense to respond. When consultant. l The “small matter of 600 beds he claims 3,337 people did so, 3,159 favoured the There were only a few weeks to go we omitted never featured in any of the CHC alternative and only 178 backed PFI. before the council elections of 1999, but health authority’s published plans Alas, as When the CHC published these figures, several candidates were scrambled together, Mr Lock is surely aware, 400 of these are the New Labour establishment went berserk. and in Wyre Forest council, which includes “community beds” with none of the It issued three complicated consultation Kidderminster, seven were elected. Four consultant-led care of acute beds.” This was documents, none of which discussed PFI or others were elected in districts in obviously why they had been left out of the its implications. They generated very little Shropshire which came within the hospital’s official calculations. response: only 628 people replied at all, and catchment area. In the following year, 2000, But Mr Lock was not finished yet. Several less than half of these were from the months later, in April 2001, he achieved the general public. The CHC was not impressed rare distinction of being named Man in The and continued to speak out against the PFI Eye (1026). Heading the citation was further proposals. evidence of Mr Lock’s diligence in protecting Ursula Pearce was then rather surprised his reputation with the help of the law. He to be summoned with her vice-chairman to had threatened the vice-chairman of Health the headquarters of the West Midlands Concern, Frank Baillie, with a libel writ for National Health Service where she was told an article in the left-wing weekly Tribune. In in no uncertain terms that CHCs had a duty the article, Baillie attacked Lock “for going to fit in with government policy and for promotion instead of standing side by therefore had no business opposing the PFI side with the people of Wyre Forest”. The hospital. She, her national organisation and council’s insurers refused to meet the cost her lawyers all replied that the job of the of a libel action, and Baillie (who couldn’t CHCs was precisely to be independent of begin to afford the costs) felt obliged to government. issue a grovelling apology. Ursula Pearce was further surprised to Even more surprising was Lock’s reaction learn that among the supporters of the PFI to an article in a small local magazine, For hospital were officials of the Socialist Health You, that reprinted the Eye’s articles on the Association, formerly the Socialist Medical PFI hospital as part of a longer article Association that had campaigned so hard David Lock and friend supporting the independent candidature of for the National Health Service 50 years

Copyright Pressdram Ltd. No reproduction without prior permission. Contact: [email protected] 5 Consulting, then sister organisation of Arthur Andersen, later disgraced as auditor of the corrupt and bankrupt Enron. Andersen Consulting won the computer contract for the National Insurance Recording System (NIRS2) for storing pensions records, but made an almighty mess of it. This led to continuous delays in the assessment and payment of benefits. The cost of the disasters, though deplored by committees of MPs, was never calculated and certainly never paid for by the company. Eye 1001 reported how “Red” Dawn Primarolo, the paymaster-general who took over from the father of PFI, Geoffrey Robinson, explained to the Commons why Andersen Consulting should not have to pay for the mess. “It would not be sensible or cost-effective to seek further compensation from Andersen Consulting beyond the amount of £4.1m which was paid for delays in 1997 and 1998. I am satisfied that taking action against Andersen Consulting would prejudice the partnership relationship now established Tony Blair at home in the North East, extolling the virtues of PFI between it and the Inland Revenue.” previously. She eventually resigned in Harefield, and their replacement by a huge The same edition of the Eye quoted Peter disgust from the SHA — but not before she new PFI hospital at Paddington basin. This Holmes, Andersen’s managing partner, who noticed how many supporters of the PFI profoundly unpopular project gobbled blandly announced: “The structure of PFI hospital, though unable to demonstrate any public money voraciously. The original does mean that the contractor owns the real popular support for PFI, had moved on estimated cost of £380m rose by mid-2003 intellectual property rights to the system to higher things. to £800m, even before planning permission and licenses the government to use the Among the influential members of an had been granted for the new hospital. One asset. Inevitably that means the balance of advisory panel which came out strongly for reason for the staggering increase was the power is shifted to the contractor.” the PFI hospital were the newly-ennobled host of advisers and consultants clustering Perhaps unwittingly, Mr Holmes exposed Philip Hunt, the Bishop of Birmingham Mark round the project like bees at a honey pot. a central weakness of PFI. His point was Santer, Jeff Chantra and Khalid Mahmood. Tory MP John Randall found out in reinforced in a later Eye (1010) which Before long Chantra was chief executive of parliament that £3.2m had been spent on quoted Elizabeth Astall, a partner at the Good Hope hospital in Sutton Coldfield; “advisers’ fees”. Andersen Consulting, telling a Commons Bishop Santer was vice-chairman of the As for education, the transfer of all the committee that even if her firm failed to University Hospital Birmingham Trust; Lord Glasgow schools to the private company win a further contract to run the computer Hunt was parliamentary under secretary of Jarvis, singled out by Tony Blair for special system, it would still want compensation state for health in the House of Lords; and praise in the 2001 election campaign, which she modestly estimated at £100m for Khalid Mahmood was in the Commons as developed into a series of spectacular the intellectual property rights in the Labour MP for Birmingham Perry Barr. disasters, one of which resulted in a contract, plus another £14m for the Before long, into the bargain, community school’s roof falling in. In another, three software the firm had developed. health councils were abolished. computers burst into flames and light bulbs In vital computer contracts like this one, Despite the popular hostility, the exploded (Eye 1038 — for further disasters the balance of power, and the balance of government’s hysterical support for PFI see Jarvis At Bay, page eight) risk, do not shift to the private sector. No grew. Boosted by another huge majority in government could possibly walk away from the 2001 general election and more so vast a computer project as NIRS2. Nor enthusiastic encouragement from their go- I.T. HITS could a government risk being sued in court getting advisers, ministers embarked on a for the intellectual property rights (or any process which, they hoped, would commit other assets) it had so freely conceded. So every single public sector building project THE FAN invariably in such contracts it is the to the mercies of PFI. Perhaps the most appalling series of PFI taxpayer, not the company, who has to fork At the Labour party conference in 2003, disasters occurred in the area of out when a project falters or collapses for instance, the bright young schools computing systems and information which she modestly estimated at £100m minister David Miliband blandly announced technology (IT) — always an area in which even though the PFI contract transferred the that all future school-building would be prodigious amounts of public money were supervision of the contract, and sentenced to PFI. His announcement came wasted. theoretically the risk, to the private firm. in the face of signs, already apparent by the Many of the cock-ups — especially those The point was forcefully made by the election, of the calamity the PFI policy was involving the American computer company usually timid national audit office in its hatching — especially in the hospitals EDS, established by Ross Perot, the report in August 2000 into the calamitous whose construction had been hailed as such independent billionaire candidate in the scheme to provide benefits payments cards a triumph. 1992 American presidential election — have via the post office — a PFI contract that lost At the Edinburgh Royal, for example, the been exposed over the years in Private Eye. the department for social security (DSS) and cost of PFI left a huge black hole in the But under PFI, which transferred basic the Royal Mail more than £500m. The finances of the Lothian health board — a responsibility for the project from an elected private company lucky enough to win the hole that still threatens the future of the authority to a private company, the disasters PFI contract was Pathway, a subsidiary of health service in the east of Scotland three became much more frequent and expensive. the giant computer company ICL. The NAO years later. The auditor general for Scotland IT disasters had opened up another reported: “The purchasers [DSS and the post has exposed a deficit of £105m. Most of this important argument in favour of PFI, its office] did not in the end demand damages is attributable to PFI at the Edinburgh Royal. supporters claimed. For the system, they from Pathway when the project began to At Bishop Auckland, where the new PFI said, “transferred the risk” from the public slip. They felt this would not encourage hospital was opened by local MP Tony Blair to the private sector. Thus if a private firm Pathway to succeed and could deflect the making suitably sweet noises about the PFI cocked up, the private firm paid, whereas firm’s attention away from delivery to a that had made the hospital possible, the air under the old system, where the legal battle.” conditioning collapsed soon afterwards. government or a local authority was in The point about risk was raised by Sir There were many similar complaints, most charge, the cock-up would have to be paid John Bourn, the comptroller and auditor of them noted in the Eye, in hospitals at for by taxpayers. general. “Some risks,” he said, “are too great Carlisle, Swindon and Halifax. One of the earliest IT cock-ups dated for the private sector to absorb. As Eye In west London, the PFI planners back to the Tory government but involved 1010 commented: “Hence ICL never paid for proposed the closure of two popular the firm that did more than any other to its failure because the government was hospitals, the Royal Brompton and the help Labour in opposition: Andersen worried this might result in the whole

6 Copyright Pressdram Ltd. No reproduction without prior permission. Contact: [email protected]

Copyright Pressdram Ltd. No reproduction without prior permission. Contact: [email protected] Copyright Pressdram Ltd. No reproduction without prior permission. Contact: [email protected] scheme collapsing which it did anyway.” The DSS-post office contract was not the only computer fiasco in which the WHY PFI DOESN’T ADD UP government tied the taxpayers’ apron strings to ICL. Just after the 2001 election, I AS these two tables from the public health policy unit at University College London’s School of Eye 1032 highlighted the bizarre story of Public Policy demonstrate, the private finance initiative in the NHS has been particularly bad for the the Libra project, an attempt to computerise nation’s financial health. court records. Once again ICL was Indeed, in the paper Pump-Priming the PFI: Why are privately financed hospital schemes being contracted, this time by the lord chancellor’s department. Enthusiastic speeches were subsidized?, Allyson Pollock (left), professor of made by young ministers, notably Geoff health policy research at the school, and Declan Hoon from the department and Paul Gaffney conclude: “The PFI has had the effect of Boateng from the home office. Boateng raising the costs of infrastructure development called Libra a “significant step towards the in the health service. The assumption that integrated information systems which ties in higher capital costs would be offset by savings with the government’s determination to resulting from the involvement of the private have a coherent criminal justice system”. sector has proved incorrect. Alas, the government’s determination did “Rather, NHS trusts and health authorities not stretch to controlling the Libra project, which was indefinitely postponed though it have had to make savings on other budgets in had cost the taxpayer more than double the order to make the high costs of investment original value of the contract, £136m. While affordable.” the taxpayer once again bore the brunt of the fiasco, ICL was swiftly swallowed by the Japanese computer company Fujitsu, which Annual revenue implications of capital costs for 11 PFI hospital schemes at once started to win further PFI contracts comparing costs before and in the first year in which the PFI scheme is from the government. operating

NHS Trust Before PFI After PFI SIEMENS STAIN (Capital charges as % (Capital charges + of income 1998-9) availability fee as % of Two other historic computer disasters were the responsibility of another top of operations) projected income in 1st year) European company, Siemens. As early 1998 Eye 960 warned that the Dartford & Gravesham 6.7 32.7 £77m PFI scheme to computerise Swindon & Marlborough 3.8 16.4 immigration and asylum claims was a year overdue. The scheme eventually collapsed Greenwich Healthcare 2.1 16.2 completely, but the government paid West Middlesex University Hospital* 9.3 15.5 Siemens in full under what even the national audit office called “a novel payment Carlisle Hospitals 4.0 14.7 mechanism”. This was rather an understatement, since Hereford Hospitals 3.8 14.6 the real reason Siemens got paid was South Tees Acute 5.6 13.2 because it had apparently passed on “new technology milestones”. The minister in Calderdale Healthcare 3.4 13.1 charge of the contract, Mike O’Brien, claimed The Dudley Group of Hospitals* 8.3 12.8 there had been an “open competition” for the contract. In fact there were just two University College London Hospitals* 6.2 12.5 bidders: Siemens and Andersen Consulting Worcester Royal Infirmary 5.3 12.4 (later renamed Accenture), which had been disqualified because of continuing difficulties with NIRS2. * Refers to 1999-2000 Siemens’ troubles with immigration and All calculations include payments to Treasury on existing and retained estate. asylum programmes were dwarfed by Department of Health. Expenditure Questionnaire 2000. Memorandum to the Health Committee, NHS resources and activity. London: Stationery Office, 2000. another of its big computer PFI projects at Department of Health. Memorandum to the Health Committee: Public Expenditure Questionnaire 2001. London: the passport office. How upset were Stationery Office, 2001. ministers with Siemens as a result of these expensive fiascos? One answer came this year when the government appointed a Increase in costs from outline business case (OBC) to current – 1999/2000 computer king to examine PFI projects for British companies in Europe. His name? Alan Trust OBC cost (£m) Current cost (£m) Change (%) Wood. His company? Siemens. The truth is that the big companies and Bishop Auckland 26 52 100 consortia that win PFI contracts have the government and taxpayer over a barrel. And Bromley 80 120 50 one way that companies, but not the Calderdale 55 77 40 government, can worm their way out of Carlisle 48 63 31 their responsibilities is by the time- honoured method of bankruptcy. The Dartford 97 137 41 concept of “limited liability” is as central to Hereford 50 63 26 the modern corporate state as it was in the heyday of Victorian capitalism. It enables a Norfolk 90 200 122 company to go bust without too cruelly North Durham 60 96 60 affecting its directors or shareholders. If a company running a PFI operation goes bust, South Manchester 40 89 123 it obviously cannot meet any risks it South Buckinghamshire 35 38 9 undertook to shoulder. In November 2001, the building firm South Tees 65 106 63 Christiani & Nielsen went bust. Down the Swindon 45 148 229 drain went the firm’s undertakings, in a PFI Wellhouse 30 40 33 contract, to run schools and colleges in Newbury, Berkshire. The Eye noted (1017) Worcester 49 116 137 that one man who did not suffer too harshly for his connection with the firm was Alan

Copyright Pressdram Ltd. No reproduction without prior permission. Contact: [email protected] 7 Crane, a former Labour councillor who was chairman of Christiani & Nielsen. He became chairman of the government’s “Movement PFI: THE PRICE IS ALWAYS RIGHT for Innovation”, described by the Eye as “a quango set up to create self-sustaining I PERHAPS the greatest national audit office (NAO), There, the NAO discovered that continuous improvement leading to world beneficiaries of PFI are the which published the figures, the public sector comparator class high performance and increased accountants, consultants and admitted it was “unable to say proved that the public option profitability”. advisers who have buzzed whether the deal is likely to was better than the private one. Another embarrassing collapse was that of Ballast UK, liquidated subsidiary of the around the PFI honeypot ever deliver better value than a So KPMG, the accountants, Dutch combine Ballast Nedam. Six schools since they first promoted it. conventionally-financed “reappraised” the figures, in Scotland were immediately affected as For example, in the redevelopment of the estate” shoved in some highly their computers, library books and even Newcastle Estates Development (see Eye 993). questionable risk factors – and, school desks were repossessed by sub- Project, in which Amec agreed to The reason for the NAO’s lo and behold, suddenly the PFI contractors in a collapsed PFI scheme (Eye take over and develop the vast difficulty was that on that option became cheaper (see Eye 1095). The risk, naturally, could not be department of social security occasion there was no “public 1069). born by the liquidated company, which had offices in the north-east, sector comparator” to set As George Monbiot outlined at most half a million quid in the kitty to financial adviser Dresdner alongside the private spending in the Guardian on 18 June pay creditors a total of £31m. So the risk passed to the wretched education authority Kleinwort (those merchant spree. But even in cases where 2002, there are a number of — or the children who begged for a bankers again) got £404,000 – there was a public sector devices by which the public reprieve from their examinations (see Eye four times the tender price. comparator, it could still turn sector comparator can be 1098). Meanwhile the bill from into a goldmine for the conveniently (and inaccurately) Masons, a law firm, shot up accountants. tweaked to make it look more from £70,000 to £2,355,000. All The classic case was the expensive than the private sector BAX TO this was down to PFI; but the West Middlesex hospital PFI. alternative.

was being prosecuted for “a dreadful railway THE WALL THE LUCKY re-routing cock-up between Coventry and Bankruptcy, however, has not been the Hertford.” The Eye reckoned that Jarvis was only way a company or public body can running neck and neck with Balfour Beatty in pressurise the government into bailing it COMPANIES the contest for the two juicy PFI contracts on out of a PFI mess. the London Underground and Haringey Eye 1068 publicised a desperate letter JARVIS AT BAY schools. The reckoning was slightly in favour from Councillor Judy Bax, executive member Which lucky companies got the PFI of Balfour Beatty, the Eye pointed out, for life-long learning at Haringey council, to contracts? Some were old-fashioned because of the enormous amount of time the then secretary of state for education, construction firms and banks like Laings that company’s executive Colin Ostler had Estelle Morris. Bax complained that the and Barclays. But soon other less well- spent going round the world looking for council, which had signed a contract with known companies were queuing to join contracts in the distinguished company of Jarvis to maintain all its secondary schools, the PFI bandwagon. One of the first out of Labour’s minister for London and was new to PFI projects. As a result “the the blocks was Jarvis — a name that in a construction, Nick Raynsford. In the event scope of the project did not include few years became a by-word for bungling Jarvis triumphed at Haringey. furniture and equipment for newly- and ripping off subcontractors. It was four years before the result of that constructed buildings, complete access for The speed with which Jarvis gobbled up triumph became fully clear. Eye 1072 (24 wheelchairs, comprehensive cabling, IT PFI contracts was breathtaking. By early January 2003) led with a comment on an provision and building cooling systems to 1998 its railway subsidiary had secured 70 audit commission report that studied the reduce solar gain.” All this, she reckoned, percent of track maintenance contracts first 17 PFI contracts for local authority would cost an extra £2m. from Railtrack, and its education subsidiary schools. The commission “found that in The government, she noted, had been was bidding heavily for contracts to run every single one there was no improvement unwilling to shell out the money, but if it local authority schools. Its senior executives on the traditional method of procurement. didn’t, she warned, it might be difficult to grew vastly rich from these early triumphs. In some cases the traditional method would hold back the groundswell of local Chief executive Paris Moayedi earned actually have been preferable.” The schools opposition to PFI and even more difficult to £315,000 a year in salary and another were not cheaper. The contracts were not introduce PFI into the refurbishment of £2,344,000 in share options. Finance completed any quicker. And there certainly Haringey primary schools. The result of this director Henry Lafferty did even better. He wasn’t any transfer of risk (see Cllr Judy subtle argument was immediate. The Eye got an astonishing £3,516,000 from buying Bax’s letter to education secretary Estelle reported: “The threat worked and the and selling his share options. Morris, referred to previously). government (taxpayer) coughed up.” From the early days of the PFI bonanza, Tactfully the commission did not name As time went on and the companies the firm snuggled up close to the Labour any of the contractors. But the Eye could behind the early PFI schemes fell deeper government. At Labour’s 1997 party reveal that the report was based on the first and deeper into difficulties, the government conference in Blackpool, Jarvis paid for wave of school projects that were became more and more generous with the something called the “Labour leadership dominated by Jarvis. Despite the report, public money it was meant to be saving. campaign team”. The speakers were John however, the government continued to name Octagon (Laings, Barclays and Serco) was Prescott, deputy prime minister, and Hilary a consortium that included Jarvis as the one of the first PFI consortia. It won the Armstrong, the minister who brought PFI to preferred bidder for the privatised track of plum contract to build and run the Norfolk local government. Jarvis also kept a Labour London Underground. and Norwich hospital. In 2003 Octagon lord — Lord Hogg of Cumbernauld — on complained about the crippling cost of the the payroll. job it had freely taken on. In December that A lot of Jarvis’s success in the early year, the Eastern Daily Press reported a “re- years was down to the firm’s talent-spotters, Jarvis chief financing deal” between the NHS and who picked out and recruited influential Paris Moayedi Octagon. The results of this were a fine businessmen like Bob Clarke, former example of PFI even-handedness between development officer for British Rail, and Bob the private contractor and the health Pirie, former director of corporate services service. Octagon got an extra £70m at Haringey, where Jarvis bid successfully to immediately, and the health service got an build and run several secondary schools. extra £30m over 30 years. A few months later Eye 972 pointed out The paper reported that the deal “comes more advantages for Jarvis. The firm was as the hospital faces soaring waiting lists, being advised by public relations specialists acute bed shortages and an overflowing Citigate. Citigate was a sponsor of the accident and emergency department at the Labour party and had booked a table at the Colney site”. The North Norfolk Liberal gala dinner at the previous year’s party Democrat MP Norman Lamb was quoted as conference. saying: “Is this value for money for the Another important qualification was what taxpayer? The answer is: No.” the Eye called a “dodgy safety record”. Jarvis

8 Copyright Pressdram Ltd. No reproduction without prior permission. Contact: [email protected] Jarvis’s historic record on the privatised over the closure of swimming pools. Croydon Tramlink railway achieved a lot of unfavourable To make matters worse for the company, PFI catastrophe publicity after the crashes at Hatfield and the Scottish government auditors were and at the same Potters Bar. In a “Jarvis special”, Eye 1094 unhappy when they studied the “public time book some disclosed further Jarvis triumphs in the sector comparator” in which private profits to close field of education. consortia bidding for PFI contracts are the £55m hole.” Students turning up for a new year at expected to show that their project is This it plainly Lancaster University “found themselves cheaper than traditional procurement would failed to do. wandering around in the dark on wet floors have been. The auditors concluded: “The Chief executive tripping over building materials”. The new result of the public sector comparator test Staples took a pay- Brian Staples 402-room Graduate College there had been does not indicate compelling evidence that off of a quarter of built by the Jarvis University Partnerships the PFI deal offers the most economic option a million quid and went to join the board of Programme under which the firm will compared to conventional procurement.” a company called IMI and sit on the audit provide and manage for the next 38 years Few paid any attention to that warning. committee there. Amey, however, had lost another 1,956 rooms for the luckless Amey and PwC were a convincing double an enormous sum of money, not just by university. In the brand new graduate block, act and went on winning PFI contracts to fiddling the PFI books but also as a result of the external locks didn’t work (the run schools all over the country, most the deranged optimism that plagued a lot of authorities had to post security guards notably in the London borough of Waltham construction companies at the time. outside), water from the showers poured Forest. Into the bargain, and just to prove Part of the reason for this was the into the bedrooms and builders’ detritus the firm’s close association with the absurd faith placed in the company by the littered the accommodation. government, Amey was awarded a £35m, PFI-crazed New Labour government. For At the same time, at the brand new 12-year contract to run an “accounts instance, just as its 2002 financial Jarvis/PFI-built Jewish Free School in service” for the department of trade and difficulties were being unveiled, the Amey Kenton, north London, students had to be industry (prop: Patricia Hewitt, former head board was joined by a New Labour leader of sent home because light fittings were about of research at Andersens). utmost prominence. Baroness Jay had been to fall from the ceiling. It was obvious that In the same issue of the Eye (1059) that New Labour’s leader in the Lords and a the school would be the perfect venue for a reported the problems in Glasgow schools, member of the cabinet. She joined Amey conference on 26 November 2003 entitled there were warning signs that all was not when the company most needed her PPP Education: Delivering Schools for the well with Amey. At the beginning of 2002, prestige. Among her fellow directors was Future. The same issue of the Eye included Amey was knocking at the door of the former Tory secretary of state for the complaints of Jarvis sub-contractors Footsie top 100 companies in Britain. But by education, John Patten. Patten’s abilities had who had installed alarm systems in PFI-built late summer the share price had slumped. been questioned by John Major, former Tory schools in Richmond, Surrey. Though there The firm was obliged to admit that its prime minister, who suggested his problems was no complaint about the work, three stated profits of £55m were in fact, ahem, in the education department had brought months had passed and the contractors had losses of £18m. How had such a glaring about something close to a nervous still not been paid. One of the sub- mistake been made? breakdown. contractors had opened a website called Amey put most of the blame on Patten’s job at Screwed by Jarvis. something called Urgent Issues Task Force Amey was to keep Perhaps the most revealing story about Note 51, a note issued by the accounting a reliable eye on Jarvis appeared in Eye 1088. It was a story standards board. This specifically prevented PFI contracts in of petty fraud and a keen Grimsby Town an accounting trick which companies like schools. In 2003, supporter called Stephen Venney. Mr Venney Amey had used to massage their figures Amey posted a had wanted to take his family on expensive into something very different to the reality. loss of £130m and holidays in Turkey and Tenerife, so he stole One way they did this was to pretend was duly gobbled- a few thousand pounds from Immingham that the vast costs of bidding for a PFI up by a Spanish Conservative Club of which he was a contract were “investment” and therefore building company respected member. He was prosecuted and need not be set against profit figures. This called Ferrovial. sent to prison for 20 months. was nonsense and should not happen again, Sceptics in the City A few months after he came out, he the note insisted. So Amey said publicly were surprised applied for the prestigious job of finance that because of the accounting standards that the Spaniards director of Jarvis Rail, a company enjoying note, with which it obviously disagreed, it would want to buy the fruits of PFI contracts all over the had to admit that a hefty profit was really a a clapped-out loss- network. So tight was security at Jarvis that hefty loss. maker like Amey. Venney was appointed. He immediately set Even this turned out to be deception. In But the Spaniards’ about forging closer links between Jarvis August 2002 David Miller, Amey’s finance enthusiasm was and Grimsby Town FC. No sooner had he director, resigned. He was replaced by easy to clinched the deal (the lucky players still Michael Kayser. Kayser soon discovered that understand. Amey have JARVIS emblazoned on their shirts) the Amey accounts were worse even than was still part of than the local paper published the sad facts had appeared in the summer crisis, and that a consortium about his past and he hurriedly resigned. the firm’s prodigious losses were caused by bidding for a PFI Baroness Jay, who By early 2004, the great days of Jarvis much more than just a note from the contract to run joined the Amey board were coming to an end. Jarvis lost all twelve accounting standards office. As soon as he the London tube. of the new NHS “Lift” contracts for which it absorbed the state of the accounts, Kayser The cream from the tube would easily bid. A name change was obviously called resigned too. drown the losses of the past. Thus was for, and the firm’s health subsidiary got a The directors brought in a partner from Amey’s survival due in no small part to the new but not entirely accurate title, Deloitte and Touche who insisted that chancellor, Gordon Brown, described in the PatientsFirst. Not long afterwards, Jarvis £122m — an enormous sum for a company Eye as “the only person left in the country changed the name of all its operations to the size of Amey — should be written off. who still believes the London Underground the silly New Labourish rubric Engender — The 2002 Amey accounts indicated that the should be flogged off to companies such as quickly nicknamed, undoubtedly more huge write-off was necessary for reasons far Jarvis and Amey”. accurately, Endanger. wider than the accounting standards note. There was, however, one other person The accounts referred to “write-downs of who, despite all the evidence to the AMEY AMISS construction work in progress balances and contrary, continued to believe in the magic Another company that made many forward loss provision for which previous of Amey. In August 2003, at the depth of millions from PFI was Amey. optimism as to the recovery has not been Amey’s misfortune, Eye 1087 reported that It soared into the new PFI market, born out in practice”. Nigel Crisp, head of the NHS, had “put the strongly backed by PricewaterhouseCoopers In 1097 — the first issue of 2004 — the American director of a clapped-out (PwC), the biggest accountancy firm in the Eye revealed exclusively that Amey had set privatisation firm in charge of Tony Blair’s country. It was PwC, for instance, which up “a subsidiary appropriately called ‘fast track’ hospitals”. Ken Anderson, Texan- persuaded Glasgow and East Renfrewshire Treasure Park, half-owned by another born development director of Amey, was councils in Scotland to hand over the company run by a businessman not entirely “the new commercial director of the NHS” running of their schools to a consortium led unknown to Brian Staples, Amey’s chief whose job is to tempt private entrepreneurs by Amey. The public private partnership executive. Because this arrangement was with records as impressive as Amey’s to run (PPP) for the Glasgow schools led to known as a JANE (‘joint arrangement not an the new privatised diagnostic and treatment widespread protests in the city, especially entity’) Amey hoped to avoid losses on its centres.

Copyright Pressdram Ltd. No reproduction without prior permission. Contact: [email protected] 9 again, as the schemes extend further and The funds don’t advertise where they are BLAIR BABE RUTH further into areas that cannot be abandoned registered and don’t publish detailed by government, the risk comes back to accounts. Many are set up as “limited where it started: with the public authority partnerships” — a neat device which limits MAKES A CLAIM that transferred the power in the first place. the investors’ risk in the projects and at the By 2003 PFI dominated a substantial area same time ensures that the funds don’t of British business. No fewer than 570 PFI have to disclose who owns them. They are deals had been signed for business worth THE GREAT PFI well and truly private and much more so a total of more than £50bn, though than the companies selling them the PFI arguments rage on about the value of stakes. They are private in the sense of these deals. SELL-OFF “Private — Keep Out!” They are also huge. Innisfree boasts A great deal of effort was made, Very recently, a new development has £5.7bn in its four private equity funds. The however, especially by the publicity offices further shaken any confidence the public money is funnelled into the funds by of the four big accountancy firms that made may have had in these most unpopular “managers” such as Hermes, Norwich Union the most out of PFI, to demonstrate that schemes. The consortia that developed the and Henderson Global Investors. Included in most PFI schemes finished on time with big PFI projects have been selling off their this huge reservoir of wealth are majority their projects intact and sound. Indeed, in a stakes to make more money to invest in stakes in the £450m Derby hospital PFI debate on 2 April 2003, Ruth Kelly, financial more PFI deals. scheme and the £50m Birmingham schools secretary to the treasury, quoted from a Eye 1095 reported the sale by Carillion of PFI scheme. Barclays Private Equity has 30 national audit office report whose its share in the lucrative PFI deal in one of projects with a capital value of more than conclusion, she observed, was as follows: the first hospitals built under PFI, Darent £2bn. Managing these vast funds is no “Before PFI, 70 percent of projects were late Valley in Kent. The price it got was £16.4m, doubt made easier by the fact that two and 73 percent over budget, but under PFI, four times its original investment. The buyer former members of the Tory government’s the situation was dramatically reversed: 76 was Barclays UK Infrastructure fund, with private finance panel, Chris Elliot and David percent of projects were on time, and 78 obviously close connections to Barclays Lindsay, sit on the fund’s board. percent within budget. What is more, where Bank. Two issues later (1097) the Eye In the same way Star Capital, which projects were not delivered on time, the reported: “The extent of these sales has now doesn’t disclose the PFI projects it has private rather than the public sector has reached staggering proportions. A private snapped up, is backed by the Royal Bank of borne the cost.” equity group called Star Capital has acquired Scotland, whose board is graced by Sir Steve This rosy picture did not take into stakes in 25 PFI projects worth around £2bn. Robson, former top privatiser in the account the treasury’s method of calculating Why this sudden rush? One reason is treasury and still a member of PUK, the the cost of PFI contracts. Many of the probably the ‘substantial shareholdings’ tax privatised arm of the former treasury task calculations were made from the moment exemption in Gordon Brown’s 2002 Budget. force. The City ranking for this operation the contract was signed, not from the This absolves companies selling shares in can be measured by the fact that Star original outline business cases which, as we other companies in which they have at least Capital’s chief executive Tony Mallin gets have seen, grew hugely before the contract a 10 percent stake from paying tax on any over £600,000 a year. So all these funds, was finally agreed. Nor did they allow for capital gains they make.” their investors and advisers, do very well the fact that PFI contracts for roads were Considering the huge capital gains the out of this latest fashion for flogging off PFI usually easier to complete on time than companies did make on these sales, this tax stakes. others involving much more complicated exemption was obviously a big incentive to But what about the people most affected day-to-day human activity like hospitals and the companies to flog off their PFI stakes. by the PFI sales in the first place? One of schools. But above all the NAO figures did But there were also other reasons the the central arguments for PFI was that it not examine the long-term price of these PFI international funds wanted to buy them. leaves the public sector providing public projects: the heavy burden of debt weighing The PFI stakes gave the funds what they services (like the NHS) and the private down on hospital trusts, ministries, other needed most: a regular stream of income sector “doing what it does best”— ie owning government agencies and local councils from British public authorities that cannot and running buildings and services. But the from shelling out year after year for the PFI go bust. So while the PFI corporations made recent fashion for selling stakes to private projects without any control over the a hefty untaxed capital gain on the sale funds removes the PFI companies from any facilities. which they can invest in further PFI deals — responsibility for “doing what it does best”. As we have seen throughout this survey, and so on, ad infinitum — the funds got a Responsibility for running of the services, there were many schemes, especially in the steady income. Both prospered accordingly. schools and hospitals, for instance, passes National Health Service and education, Henderson Global Investors reckons that with the sale of the stakes from the where the experience of PFI was precisely “once operational, PFI concession companies contracting companies to mysterious and the opposite of the picture presented by deliver average running cash yields of 10 to remote private funds. How interested are Ruth Kelly. 12 percent per annum on projects acquired they in mending a leaking school roof or a But one conclusion surmounts all others. in the secondary market” — a nice little hospital operating theatre? The PFI hysteria in the Labour government earner by any standard. For an answer, hark once more to led to an enormous transfer of power in But what are these funds and where are Henderson Global Investors. It insists on Britain: from public, elected authorities to they registered? The main funds are run by “the ability of the management and board private unelected corporations. Into the three private equity companies, Barclays of the concession [PFI] company to ensure bargain, the corporations were guaranteed a Private Equity, Innisfree and Star Capital. that its operating costs and the costs of flow of public money that would continue The funds they manage pool money from planned maintenance are managed in for at least a generation, whatever happened some of the richest people and institutions accordance with, or better than, the to the original product. This flow of money in the country (and outside it), who are not assumptions that the purchase was made cannot be cut off and will increasingly wear the sort of people likely to have any use or on”. In other words, cut costs where down the authorities providing it. Under the concern for the state of the schools and possible. Moreover, “the portfolio should be old system of procurement, there were of hospitals they are snaffling up in the great actively managed to ensure that the course massive cost over-runs from which PFI bonanza. most of the big construction companies, performance of the investments are their accountants and finance houses optimised, and all operational, financing, tax siphoned off huge profits. The chief and accounting efficiencies are effectively difference between the old system and the identified and extracted”. In other words, new is that under PFI the public debt to the milk the newly-bought PFI stake all you can. private provider continues relentlessly for at The point is quite clear. The users of the least a quarter of a century. assets consigned to PFI are even more We are still at the beginning of that time distant from the people responsible for scale, and no one can predict what the them than they were when the PFI deal was eventual effect of this vast indebtedness first made. It was bad enough when will be. The early signs — for instance in identifiable companies, registered and the continuing arguments over the paying tax in Britain, owned and managed Edinburgh Royal Infirmary — are not the assets. But now the owners and hopeful. We know enough about these managers are hidden from public view, schemes already, moreover, to expose the heaven knows where. myth that these PFI schemes transfer risk There are signs in early 2004 (as this is from public to private sector. Again and Trailblazer? Darent Valley Hospital, Kent written) that some senior civil servants who

10 Copyright Pressdram Ltd. No reproduction without prior permission. Contact: [email protected]

Copyright Pressdram Ltd. No reproduction without prior permission. Contact: [email protected] OFF BALANCE THE STRANGE CASE OF THE VANISHING HOSPITALS

I LONG before he took office, for Brown to keep his promise not to sheet, and this was achieved. On 7 balance sheet appear on any balance Gordon Brown let it be known that he spend more for at least two years than November 2002, in answer to a sheets of the consortia that built wanted to be remembered as the the Tories had done. question from Matthew Taylor, then them. They have simply vanished into Iron Chancellor. In a debate in April Whoops! In September 1998, Liberal Democrat spokesman on a black hole. Why? 2003, Mark Hoban, Tory MP for when Geoffrey Robinson was still treasury matters, Paul Boateng, chief One answer may be a new tax Fareham, suggested that a more paymaster-general, the accountancy secretary to the treasury, gave a list of dodge called “corporate trader suitable nickname might be the standards board – the body that sets PFI contracts operational at the end of status”, sanctioned by the treasury in Enron Chancellor. out accountancy rules in Britain – the 2001-02 financial year and the late 2003 and keenly promoted by the Enron, a huge international energy rudely threatened the whole process. accounting treatment that had been big accountancy firms. If a company trading scam run by a friend of The board stated categorically that adopted for them. Of the ten hospital can show corporate trader status, it President George Bush, went bust in the capital value of PFI schemes (and contracts mentioned, nine were off can get tax relief on the entire cost of 2002. Its accountancy firm, New the related borrowing) should appear balance sheet. These included the a PFI project, as opposed to the 30 or Labour favourite Arthur Andersen, on the government’s balance sheet. new Norfolk and Norwich hospital 40 percent it would otherwise get was later shown to have specialised Anguished negotiations followed and (capital value £158m) and the Queen relief on. in a system of “off balance sheet” ended in a compromise. Elizabeth Hospital in Woolwich In the case of the Norfolk and accounting. By the rather simple In June 1999 the treasury issued (£118m). Norwich hospital, corporate trader device of taking deals and assets off its guidance on how to account for So all these projects were not status would save the company balance sheets, Enron was able to PFI transactions. These guidelines accounted for in the government (and cost the taxpayer) £30m to pretend that it made healthy profits went to the heart of the original accounts. But here’s a strange fact. £40m. The auditor of Octagon is (and, incidentally, managed to keep rationale for PFI: the transfer of risk to They are not accounted for in the KPMG, which advertises its wares on regulators and inquisitive journalists the private sector. It was agreed that accounts of the consortia either. There its voluminous website and is not off its back). if the risk was genuinely transferred is no reference on the balance sheet apparently too nervous about the Mr Hoban’s rather cheeky new to private consortia, nothing need of Octagon, the consortium that built allegations of conflict of interest name for Gordon Brown arose, he appear on the government balance the Norfolk and Norwich hospital, of between auditors and tax advisers suggested, from the way the sheet. Naturally, the government any such hospital. Indeed, the Eye that so damaged Arthur Andersen government accounted for PFI wanted as many as possible of the understands that none of the big PFI over Enron. projects. In the old days of public new PFI contracts taken off balance hospitals taken off the government Among KPMG’s other skills, it procurement, when the government boasts, is an ability to help PFI built a hospital or a school, the asset companies which own property and appeared on the government balance evaluate “whether the property could sheet and had to be paid for out of be accounted for as fixed assets or taxation. But under the PFI system the financial assets on the company’s asset does not appear on the balance sheets and the effect this will government balance sheets. So the have on the tax position and the cost of the project is not counted as timing of tax liabilities.” government spending and the To achieve corporate trader status, government does not have to borrow companies cannot keep the assets money to pay for it. built by PFI on their books. And under There can be no doubt this device accountancy rules they can only keep was the chief reason for New Labour them off if they don’t carry the risk of ministers’ almost evangelical the PFI deal. So the companies like enthusiasm for PFI. They could build Octagon that keep the assets off their hospitals and schools and, although balance sheet are saying that the risks they would be paying for them for at of PFI stay with the taxpayer, thus least a generation, they would not defeating the primary objective of PFI have to count the money they shelled and effectively calling the government out as public expenditure. More than accountants incorrect into the anything else, this made it possible Hello, cheeky: Mark Hoban in the Commons bargain. retain an element of responsibility for what government bail-out, officials at the DTI the mess in the first place. How long they they do, are growing worried about the grew nervous of PFI projects for such can keep their doubts to themselves and consequences of PFI. The gross rise in the complicated projects. So when in 2002 the how long PFI will go on delighting New estimated cost of the proposed hospital in government announced that it was backing Labour ministers, is not at all clear. Paddington Basin, for instance, has led to a new scientific facility at Didcot, What is already clear is the awful legacy further inquiries by the treasury and the Oxfordshire, it inspired what our source that PFI has left behind. Is it cheaper for the NAO before the project goes ahead. In late called “a wave of panic at the DTI in case taxpayer? No it is not. In every area where it 2003, a former employee at the National this scheme too was consigned to PFI”. has been adopted it has cost more, and will Physical Laboratory at Teddington, The magazine Building revealed: “The go on costing more. Has it led to more Middlesex, rang the Eye with details of a DTI intends to retain strict control over the dependable buildings? No it has not. The PFI staggering PFI horror story. The whole ultra- scheme to avoid a repeat of the problems of buildings are every bit as prone to disaster sophisticated new building was due to be in the National Physical Laboratory at as buildings constructed by any other place to celebrate the millennium in 2000, Teddington.” The Eye rang the DTI to ask if method. Has it “saved” public spending? but after a series of design disasters it was the Didcot project was going to be built Only by skilful manipulation of what a still unfinished. Up to now, our informant under PFI and got a sharp reply: “No this is former Labour frontbencher warned would said, the private sector had taken most of not a PFI project.” be “financial sleight of hand” and “deceit”. the risk. Laing Construction had been driven So while ministers such as chancellor “Borrow more and charge more” will forever to the edge of bankruptcy and SG Bailey had Gordon Brown and schools minister David more be the PFI slogans of government, even lost about £10m. Miliband remain firmly in favour of PFI, if that means wholesale abdication from As they dodged the private sector’s behind their backs some officials are responsible accounting and eventually from complaints and demands for some sort of beginning to regret that they ever got into all democratic government. Additional reporting and research by Solomon Hughes, Jane Mackenzie and Sue Roccelli. 11 Copyright Pressdram Ltd. No reproduction without prior permission. Contact: [email protected]