‘Sharing’ political authority with finance capital: The case of Britain's Public Private Partnerships

Abstract

Since the early 1980s, there has been a global trend to increasingly use private finance for public infrastructure. Part of a broader range of policies associated with the neoliberal agenda, such arrangements have become known as Public Private Partnerships (PPPs). While the proponents of PPPs stress the savings to be made by using financial intermediaries, the financial outcomes have been very different from the stated objectives. This paper seeks to develop this work by going beyond a financial assessment of the policy, focusing on political power and the way that the policy has led to a shift in the power of the state relative to the corporations. Using evidence from case studies of operational projects in the UK as exemplars, it will show how financial advisors, typically the big four international accountancy firms, play an increasingly important role in the development and implementation of policy, and how once projects are operational the private sector partners are increasingly able to strengthen their own position vis a vis the state. As such, the creeping privatisation espoused by all governments, the international financial institutions, the EU, and transnational corporations is an expression of more fundamental processes: the increasing domination of finance capital.

1 Introduction

Numerous studies have drawn attention to the way that globalisation has undermined the power of national governments. Some (e.g. Strange, 1996, p. 14) have argued that a “hole of non-authority” has opened up, while others have argued that power and authority have shifted elsewhere, particularly in the sphere of global relations (e.g. Hall & Biersteker, 2002). There is now an extensive literature on governance that emphasises the demise of statism as a mode of regulation with no single centre of authority (see Scholte, 2002). This is attributed to the rise of more than 250 supra-state organisations, such as the United Nations, International Monetary Fund, European Union and World Trade Organisation; sub-state or autonomous regional governments that can make their own arrangements with international bodies; and international private regulators that set standards, such as the International Accounting Standards Board. Another strand of the governance literature emphasises the increasing importance of corporate power, via direct political engagement, institutional participation, and the networks that both shape and deliver public policy and the elusive but significant shifts in the way in governments operate (Newman, 2001). In essence, the argument is that governments now share power with, or are subservient to, corporate and financial elites. They have raised the question of whether democratic control of economic life is compatible with giant international corporations, many of which have revenues far in excess of even medium size national economies.

There has however been less focus on the actual process(es) by which this shift in political power is taking place, and the ways in which this power is shared. The purpose of this article is therefore to demonstrate concretely how this shift has occurred, the key participants and beneficiaries, the way power is now shared between public agencies and business, the nature of the relationship and its direction of travel, using the case of Britain's Private Finance Initiative (PFI). While the policy remains highly contentious and some elements of it have been revised, it is not the purpose of this article to focus on the differing views of the policy and its merits and demerits, anticipated or actualised, but how the policy and its implementation affects the decision making processes, both prior to and after project implementation.

Under PFI, the private sector finances builds and operates public and social infrastructure, traditionally financed and run by the state. Essentially a finance lease added on to the pre-existing policy of outsourcing, the policy was later broadened to include many different forms under the umbrella of Public Private Partnerships (PPPs), the name by which it has become internationally known. Thus the key innovation is the provision of private finance. PPPs have provided the mechanism to open up – primarily to the banks and financial institutions – public and social infrastructure that could not for financial and political reasons be reconfigured as viable businesses for sale to the private sector.

Although this shift in the exercise of political power is reviewed within the British context and through the lens of PPPs, it demonstrates a global trend, because Britain is a major financial centre and has acted as a pioneer for the policy that – like privatisation and other neoliberal policies before it – is now being ‘exported’. This makes Britain an important arena for assessing how political authority is being shared between government and business. PPPs are important in this regard because unlike the privatisation of the former state owned enterprises, partnerships are defined as a continuing relationship between the public authority and the corporate providers.

Privatisation, liberalisation and PPPs were part of a broader economic and ideological movement associated with the New Right to shift power to business and the financial institutions, not just in Britain but internationally. It was the response of the corporate bosses to the failure of the post-war settlement based upon national regulation. In the advanced capitalist countries, capital accumulation became increasingly dependent not on production but trading in financial assets. These policies, of which PPPs formed a part, were not the result of a widespread movement among the public at large but were introduced by governments of all political shades at the behest of the corporations. For example, in Britain New Labour openly courted big business with its ‘prawn cocktail offensive’ in the late 1980s to make it electable, formally abandoned its reformist programme in 1994, and adopted the neo-liberal agenda. In the case of developing countries, the International Monetary Fund (IMF) or World Bank made loans conditional upon the introduction of such policies.

Privatisation in all its variant forms was typically introduced after a sustained political and intellectual offensive against the nationalised industries and the public sector aimed at ‘manufacturing consent’. The intellectual offensive focused upon the ‘inefficiency’, bureaucracy and conservatism, while the political offensive often included denying them funding and leaving them to ‘wither on the vine’. The subsequent decline of such services then paved the way for the acceptance, or at least acquiescence, of policies that met the demands of capital and had not previously commanded popular support.

The article, using as its evidence base necessarily fragmented examples derived from the research literature and the corporate press of PFI/PPP operational projects in the UK, shows how PFI has paved the way for the big corporate players take an ever greater role in public policy formation. It demonstrates that financial advisors, typically from the big four international accountancy firms, played a major role in the development of the policy and its procedures. The government brought financial services personnel into the top echelons of the civil service to override opposition and thereby ensure the implementation of business friendly policies. Sidelining the civil service, it gave private sector organisations, dominated by corporations with commercial interests in the policies, the power to manage the implementation process. Once projects became operational, the private sector partners were in a strong position to control and direct future policy decisions.

That is, the corporate and financial sectors became quite explicitly powerful players alongside and even on occasion dictating to or replacing government. While the private partners that operate the services have received most of the attention, behind them stand the banks and financial institutions. However, despite being de facto public bodies, they remain outside the limited governance procedures established for public authorities. Protected by Freedom of Information, their control and power are shielded from public scrutiny and visibility. In other words, political authority has shifted and it is less democratic.

The article is structured as follows. The first section provides background information about the policy and its mode of operation. The second section shows the role played by financial advisors recruited from the financial services and consultancy industry in its design, control and implementation. The third section outlines the way and financial corporate interests have been able to control strategic policy decisions before project implementation, while the fourth explains the shift in the balance of power between the public and private sectors. The fifth section provides examples of how the private partners are using their position to determine future policy direction. The final section discusses the findings and the impact it is likely to have on political life.

2 The origins and operation of PFI/PPP

The Conservative government introduced the PFI in 1992 at the height of the recession that followed the speculative bubble of the 1980s. It presented PFI as a way of procuring services and their underlying assets that the state could not otherwise afford. It would provide business for and jobs in the beleaguered construction industry. Under PFI, the private sector designs, builds and finances much needed new hospitals, schools, roads, prisons and other social and public infrastructure and provides the ancillary, but not the ‘core’ professional, services for 20–35 years, in return for an annual fee that covers both the capital cost of the asset and service delivery. In most cases, the public authority pays on behalf of the ultimate user. For example, the Highways Agency pays for some road projects based on the volume of traffic using the road on behalf of the road user, a payment mechanism known as ‘shadow tolls’.

But despite the Conservative government’s enthusiasm for the policy, PFI was slow to take off for legal, financial, operational and political reasons. It was the 1997 Labour government that got the policy up and running, rebranding the policy as PPPs, making it a bipartisan policy. The government introduced legislation enabling public authorities to enter into such contracts, brought in financial advisors and consultants to manage the policy, provided implicit and explicit financial support for some public authorities and/or contracts, and extended the policy beyond the PFI form, essentially a leasing mechanism, to new formats.

As these new formats are proliferating, it is only possible to give an indication of some of them. First, there are free standing projects, concessions or franchises where the private sector finances, builds and operates an asset and charges the users directly via a system of road tolls or fares, as for example the M6 toll road, Britain’s only private toll road. Second, some of these franchises or concessions would also receive public monies for the construction and/or the service element. For example, in the case of passenger rail services, franchise operators may receive a public subsidy in addition to their income from the fare box, while the few commercially viable franchises may pay a fee to the government instead of receiving a subsidy. Third, the policy would embrace and permit joint ventures (joint ownership of projects) between the public and private sectors, thereby bringing the corporations more directly into the ownership and operation of public services. The most notable programmes included the Local Investment Finance Trust (LIFT) for primary care facilities, and Building Schools for the Future (BSF) in education. While PPPs denote joint ownership and PFI contractual arrangements (Treasury, 2003), the terms are used interchangeably.

The proponents of the Partnerships policy justified the policy in a number of ways (Grimsey & Lewis, 2005; Treasury, 2003). Firstly, it would provide the capital investment that the public sector could not afford without raising taxes, or breaching European Union rules on fiscal deficits, since the loans used to finance the projects would count as private sector debt and thus would be off the public sector balance sheet. Secondly, it would deliver greater value for money (VFM) over the life of the project because of the private sector’s greater efficiency and the transfer to the private sector of some of the financial risks (and costs) that the public sector would otherwise carry, otherwise known as risk transfer. Thirdly, the private sector would ensure that construction delivery on time and within budget in contrast to conventional public sector commissioning.

Several inter-related points should be noted. First, the private sector partner is typically a consortium, consisting of a bank/financial institution and some combination of construction, maintenance and facilities management companies, organised as a Special Purpose Vehicle (SPV) to run the one project. The SPV is a shell company, which raises at least 90 per cent of the necessary finance for the construction of the asset by borrowing from a bank, possibly from its parent at commercial rates, or by issuing a corporate bond. Employing no or few staff, the SPV operates through a complex web of subcontracting, usually to its sister companies.

The legal and political significance of this corporate structure is that it operates as a subsidiary of and entirely separately from its parent companies. It means that while it provides annual report and accounts, these provide very limited financial information as all its transactions are with ‘related parties’ and thus exempt from detailed closure. In addition, if things go wrong, the parent companies can walk away from the problems with no further exposure to risk other than their initial – small – investment. While the banks hold the risk in the form of the loan to the SPV, this is essentially secure via a government backed revenue stream. Should the SPV fail for whatever reason, and control revert to the state, as more than half of PPP projects by capital value already have, the public agency has to repay the banks. In essence, the banks hold the keys to public infrastructure.

Secondly, the use of the private sector as a financial intermediary is expensive, due to the higher cost of private as opposed to public debt, the profit margins of the private partner and its extensive supply chain, and the not inconsiderable legal and financial advisors’ fees to structure and negotiate the deal for all parties to and bidders for the project. In the case of the flagship London Underground PPPs, advisors’ fees amounted to a staggering £500 million. Any costs incurred by unsuccessful bidders are likely to be recovered in future successful contracts, increasing the cost of subsequent PFI deals. The high cost matters because the services that are the subject of partnership deals have never been sufficiently cash generative to be run on a commercial, comprehensive and universal basis, which is why the state had to provide them in the first place. This in turn means that making such services ‘PFI-able’ is likely to involve substantial restructuring and rationalisation, a synonym for service reduction, either prior to advertising the tendering process or during the lengthy negotiations. Thus such projects give the corporate sector indirect or implicit control over service configuration even before implementation, an issue that will be developed later.

Thirdly, it is the private partner that designs the infrastructure that underpins service delivery not the commissioning body, meaning that it plays a major role in determining how services, including the professional services for which it is not responsible, will be delivered. This is despite the fact that it has never run such a service before. It constitutes a major change from conventional procurement whereby the public authority or its parent body designs the hospital, school, prison, etc., based on its collective experience.

As of February 2010, there were 667 signed PPP deals with a capital value of £56 billion (Treasury, 2010), although the list is incomplete. It omits the three PPPs for London Underground, worth £30 billion, which have collapsed, and other projects and the government itself routinely cites larger figures. The largest spending departments were Transport (capital value of £11.8 billion signed deals) and Health (£11.3 billion), Defence (£8.8 billion), and Children Schools and Families (£6 billion). Based on estimates at financial close, the total cost of all these projects was expected to be £267 billion, a figure that will rise as actual payments rise with inflation, changing needs and contractual changes. The financial and political significance of this will be developed later.

The Conservative-Liberal Democrat coalition government that came to power in May 2010 has signalled the end of capital investment in the public sector as part of its broader programme of public expenditure cuts, and abandoned some of Labour’s PPP programmes, such as Building Schools for the Future. Nevertheless, its preferred form of public investment is via the private sector and it remains committed to the further outsourcing and privatisation of those public services that remain. Thus in one form or another, the political and democratic issues the policy poses are set to continue.

3 The role of the financial services industry in policy design and project approval

As others have shown (Ruane, 2010; Shaoul, Stafford, & Stapleton, 2007), the PFI/PPP policy development process was driven by financial advisors brought into the Treasury on secondment or loan from the private sector. This served to overcome opposition to the policy within the civil service, as Lipsey (2000) noted. The financial advisors were largely drawn from the global accountancy industry which is dominated by the Big Four accountancy firms and is itself part of the wider international financial services sector. It has played a key role via consultancy contracts in ‘reforming’ public services, thereby acquiring ever greater financial clout and influence over both the formulation and implementation of the policy.

While the policy of bringing in ‘advisors’ began under the Thatcher government in the 1980s, this increased markedly under New Labour, particularly as it aggressively promoted PFI/PPP, and changed the relationship between the higher echelons of the public sector and business. There is now a constant merry go round between the two (Craig, 2006). Senior civil servants leave to take up lucrative posts in the private sector where they can put their knowledge of and contacts in government to good use. The Big Four accountants enter the civil service in general and the Treasury in particular. The significant numbers entering the Treasury is important because it became by far the most powerful government department under New Labour. But this creates dangerous conflicts of interests in that they advised and later staffed, in some cases free of charge, government departments. This is because they have a commercial interest in the policy: in some cases, they or their sister consulting arms take equity stakes in partnership schemes or are the main subcontractor, as in the case of IT projects.

In addition, in 1998 after commissioning a review of the policy by people in the private sector, the Labour government established the Treasury Task Force (TTF), largely staffed with personnel from the Big Four. The TTF played a key role in promoting the policy to other departments, lining up projects and organising conferences to promote the policy to prospective ‘partners’. It designed the procurement methodology and process, which is lengthy and opaque due to ‘commercial confidentiality’. It brought in private sector advisors to devise the methodology for determining whether such deals would be better VFM, a key component of which was the risk transfer valuation, than public finance, and upon which approval to proceed depended (for a critique, see for example Froud, 2003; Froud & Shaoul, 2001; Gaffney, Pollock, Price, & Shaoul, 1999a, 1999b, 1999c; Heald, 1997; Mayston, 1999; Pollock, Dunnigan, Gaffney, Price, & Shaoul, 1999). It later changed the methodology (Treasury, 2004, 2006), making it more biased in favour of the private sector and more opaque (Coulson, 2008). Ostensibly aimed at controlling the policy and ensuring sound decision-making, it served to ensure that that the private finance option was almost always selected, particularly as the government let it be known that no public funding would be made available. The TTF was also responsible for approving all the larger projects sponsored by individual departments and public bodies.

After two years, the TTF was itself privatised via a joint venture with private corporations that had a commercial interest in the policy and were the majority shareholders, to form Partnerships UK (PUK). PUK played a key role in promoting the policy and approving central government projects. The mission of PUK was ‘to support and accelerate the delivery of infrastructure renewal, high quality public services and the efficient use of public assets through better and stronger partnerships between the public and private sectors’.¹ The majority of the board members came from the private sector, with the public sector represented by only two non-executive directors and the public interest represented through an Advisory Council. The structure, ownership and control of PUK are important because they set the PFI agenda and reflected the conflict between policy promotion and policy control acknowledged by government (Timms, 2001). But this in turn means that the government had transferred a task, traditionally carried out by civil servants who are in principle at least subject to democratic accountability, to parties which had a vested interest in the policy’s expansion and were not subject to democratic accountability. It amended the legislation to enable PUK to do so. While this was a major change in the process of government, it generated little if any public discussion. While PUK was recently subsumed into yet another organisation dominated by private sector interests, the broader political issues remain.

It was not just that ‘financial advisors’ recruited from accountancy industry designed, promoted and managed the policy. These same firms also prepared the financial case for private finance for their public sector clients and on different projects, advised the private sector bidders. In this way, the financial sector was able to ensure the implementation of the policy by its role as financial advisors to public agencies considering procurement via PFI.

Furthermore, whereas policy evaluation was once carried out by independent researchers, institutions and academia, this is now typically commissioned by government from the same consultancy firms that provided the financial advisors and policy advice and management. Moreover, the financial services sector has itself sponsored reports that evaluate the outcomes of the policy (IPPR, 2001), and undertaken reports to evaluate the outcomes of individual projects and programmes (for a list of these reports see Shaoul et al., 2007), usually without appropriate design methodologies, providing the data or drawing inappropriate conclusions, as others have shown (Pollock, Price, & Player, 2007).

The increasing role of the consultancy industry in reviewing and restructuring the public sector is not confined to the Partnership policy but is part of a broader trend to use the private sector wherever possible (Craig, 2006; Leys, 1999). The government’s use of consultants has gone up markedly in recent years. While there are no statistics on this, the National Audit Office (NAO), the parliamentary spending watchdog, reported (2006) that spending on consultants across the public sector had reached £2.8 billion in 2005–2006, up from £2.1 billion in 2003–2004, an increase of one third in two years. It was highly critical of the consultants, saying that many consultants’ services did not represent value for money, and recommended that public bodies start with the presumption that their own staff were best suited to do the work. While total spending on consultants has fallen in recent years, central government alone had spent £789 million on consultants and £215 million on interim managers, i.e., managers on short term appointment, in 2009–2010 (NAO, 2010). This growth in the use of consultants reflected the sidelining of the civil service and the creeping privatisation of public services, and more importantly of public policy control and implementation, particularly in relation to the PFI.

It raises a number of important and inter-related issues. First, active championship of the Partnership policy by the Treasury and government departments raises issues about conflicts of interest if the same public bodies both promote and control these projects, particularly where there is a lack of public finance for conventional procurement. Second, this conflict is further exacerbated when such bodies themselves reflect or are owned or controlled by vested interests, thereby jeopardising any possibility of regulating and scrutinising it in the broader interest of the citizenry. This is important because as explained earlier, for PPP projects to be commercially viable and attractive to the private sector, services have to be rationalised. While some reconfiguration may be desirable, this is not for the benefit of users and the taxpayers but for the benefit of the corporations and their financial backers.

Therefore, taken together, it is not surprising that the financial consultants and advisors, who have a commercial interest in the policy, signed off large PPPs such as the London Underground, National Air Traffic Services, rail franchises, hospitals and innumerable IT projects. But within just a few years, more than half of the projects in terms of capital value collapsed at an enormous financial cost to taxpayers and users alike, while others (the Royal Armouries Museum at Leeds, the Channel Tunnel Rail Link, and the rail franchises) involved substantial renegotiations in favour of the concessionaires. The outcomes showed that risk transfer in reality meant diffusing risk to users, the workforce and back to the public authorities and taxpayers, a travesty of risk transfer. Yet contemporary analyses of some of the projects by external observers (see for example Gaffney, Shaoul, & Pollock, 2000; Shaoul, 2003) and later ‘what went wrong’ audits by the parliamentary watchdogs showed that these projects were not financially robust. Thus far from improving either policy-making or financial decision-making, the use of financial advisors and consultants, justified because the public sector lacked commercial expertise, made it worse.

It was not just union leaders, such as Unison’s general secretary, who termed the relationship between the government and its financial advisors ‘a web of deceit bordering on corruption’. Sampson (2005) found that senior accountants ‘were also shocked that the government could allow such an obvious conflict of interest’. He believed that the major accountancy firms were becoming a serious threat to democracy as their networks penetrated Whitehall.

4 Ex ante rationalisation: the indirect control of public policy

The higher cost of private finance, under conditions where public services are always severely financially constrained means that in order to make projects commercially viable for the private sector, the government had to provide some additional support. This typically involved some combination of: capital grants (hospitals); additional revenue support for local authorities via a system of PFI credits; implicit or explicit underwriting of the private sector’s debt (London Underground); or the public authority’s payments; the bundling together of projects to increase their size relative to transaction costs (schools); new build rather than refurbishment (hospitals and schools) to increase their size and reduce the risk to the private sector; adding additional tunnels or bridges that do not require investment in order to provide a larger revenue stream (Dartford Crossings); service reconfiguration or downsizing (healthcare and education); higher charges for the public authority or the users (rail); and a ‘challenging’ performance targets for staff (hospitals). New hires by the private sector operators typically saw a reduction in their wages and conditions.

The proposal to build a new bridge, the New Mersey Gateway, in addition to the pre-existing Runcorn Bridge, provides an interesting example of the way that the decision to use private finance changes existing arrangements in order to make a new project viable. The new bridge, to be built, financed and operated by the private sector and subject to toll charges, requires traffic flows that cover the financing, construction and operating costs of the bridge over the 30 year life of the concession. In an attempt to ensure that traffic flows would be high enough to deliver the requisite income and low enough not to arouse public anger as in the notorious case of the Skye Bridge, the concession involves reducing the number of lanes open to traffic on the existing bridge, diverting traffic away from the old bridge towards the new bridge and tolling the existing bridge. This will be the first known instance of tolling a hitherto free public bridge in order to make a private scheme viable. But even so, it is far from clear from the information publicly available that the scheme will result in affordable tolls, requiring the public authority to step in with further support as in the case of the Skye Bridge (Shaoul, Stafford, & Stapleton, 2011). The report of the appeal tribunal has not been released for reasons of ‘commercial confidentiality’, placing the decision making processes beyond democratic accountability.

Some at least of these measures were presented as service ‘rationalisation’ or ‘reconfiguration’, and undertaken before publicly announcing the decision to use private finance. They were typically carried out after commissioning financial advisors, as discussed earlier. But all these measures serve to reduce service levels and/or increase costs to users and taxpayers. From the perspective of this study, they provide illustrations of the way in which the decision making processes are taken in the interest of furthering a policy drawn up and managed by and for the corporate and financial sectors and become ‘shared’ between the elected bodies and commercial interests.

5 The shift in the balance of power

Research and official documents have shown that PFI/PPP has served to enhance corporate wealth at public expense and strengthen the private partners, and ultimately the financial institutions, vis a vis the public authorities. In other words, there have been winners and losers, exacerbating political inequalities. This section outlines the evidence from a few such studies whose findings have not been rebutted by countervailing research.

PFI has proved costly in ways that threaten future service delivery. The evidence from the first 12 PFI hospitals in England shows that 10 of these hospital Trusts were paying more than expected at financial close due to volume increases, inflation, contract changes and failure to identify and/or specify the requirements in sufficient detail (Shaoul, Stafford, & Stapleton, 2008a). While the average increase was 20 per cent, several Trusts were paying more than double the average increase. In other words, there had been ‘contract drift’.

The additional annual cost of private over public finance because of the higher cost of private over public debt and the profit attributable to shareholders was estimated at 21 per cent of the companies’ income from the hospital Trusts. This was however a conservative estimate because the study could not capture all the costs in part due to the limited financial disclosure by the private companies permitted by the accounting regulations, despite being de facto public authorities, and the extensive subcontracting to sister companies. Moreover, it was impossible to obtain further financial information because as private entities, they are excluded from the Freedom of Information Act, and the public authorities cite ‘commercial confidentiality’ as their reason for refusing to divulge information about their dealings with their private partners.

Notwithstanding the general increase in funding to the National Health Service and some specific help for Trusts with PFI projects since 2003, the Trusts’ financial situation was neither stable nor robust, as indeed were many non-PFI Trusts. In 2005–2006, half of the Trusts with major PFI projects were in deficit, compared with less than a quarter of Trusts overall (Health Select Committee, 2006). While it was difficult to distinguish the role of PFI from other factors, the QEII Trust in Greenwich, which had one of the largest deficits – £9.2 million in 2005 – declared that it was technically insolvent and was locked into a PFI deal that added £9 million to its annual costs over and above that built under conventional public procurement (PwC, 2005). Without government support, its long-term financial situation was insoluble. The Audit Commission’s view was that there was a ‘marked correlation between the presence of large new building projects and deficits in the NHS’ (2006, p. 27).

But crucially, it also means that their cost of capital is higher than those without PFI builds. This is important because the Trusts’ revenue is subject to the government’s system of Payment by Results, whereby they are paid according to the volume and nature of the work carried out and a national tariff that assumes average capital costs of 5.8 per cent of income. Hellowell and Pollock (2007, 2009) found that PFI hospitals had an average capital cost of 10.2 per cent of income, a shortfall of 4.4 percentage points. This, combined with deficits, must mean either a cutback in clinical services or diverting patients to the PFI hospitals to ensure that sufficient income flows to the PFI hospitals, making non-PFI hospitals vulnerable to cutbacks and service rationalisations (South London and Maudsley Strategic Health Authority, 2007). But either way, PFI comes at the expense of services in the local healthcare system.

In the case of roads, the additional cost of private over public finance for individual projects varied between 16 and 40 per cent of the annual payments (Shaoul, Stafford, Stapleton, & MacDonald, 2008b), confirming the overall thrust of the findings in relation to hospitals. According to a Highways Agency official (Taylor, 2005), 20 per cent of the Highways Agency’s budget was committed for 8 per cent of its road network and the PFI project to widen the M25 motorway that encircles London would take a further 20 per cent of the budget. This means that the additional cost of private finance for a disproportionately small part of the network comes at the expense of other investment and maintenance.

Thus like the example of the new Mersey Bridge, the corporate sector starves out what remains of the public sector, again an issue that has received little public attention. From the perspective of this study, it shows how the policy serves to increase the albeit indirect control of the corporate sector over public policy.

While the additional cost of private over public finance is rationalised in terms of the VFM to be derived from risk transfer, there is no yardstick by which to measure after the event the risks actually transferred. The returns to shareholders have been high and higher than expected by both the Treasury (see Public Accounts Committee, 2003, Fig. 2; Public Finance, 11/11/2005) and indeed some of the partners, since they have been able to sell their equity stakes and/or refinance their debt in ways to their financial advantage (National Audit Office, 2005, 2006a, 2006b). Furthermore, as earlier explained, should things go wrong, they have been able to fall back on the state by either renegotiating the deal or handing back the keys. While the shareholders have done well out of the policy, by far the main beneficiaries have been the banks.

The ever increasing concentration among the major corporations – and only major corporations can bid for PFI projects – has resulted in a reduction in the competition for PFI/PPP projects (National Audit Office, 2007a). This serves to increase the power of the bidders at the point of procurement. The National Audit Office (2007b) found that the procurement of additional services and the renegotiation of subsequent phases of the contract, usually without any further competitive bidding, were often on terms and at a cost disadvantageous to the public agency. In other words, changes were overly expensive. It confirmed both the contract drift noted earlier and the anecdotal evidence reported in the press that some public authorities had experienced problems in securing satisfactory services.

While the contracts may provide for legal redress through the courts, the cost of such action is typically beyond the meagre financial resources of the public authorities, providing further testimony to the unequal relationship between the public and private ‘partners’. Lonsdale (2005) concluded that the practical impact of long-term service contracts is to lock public authorities into long-term relationships with unsatisfactory suppliers without any effective means of redress. The corollary of such lock in is the increased power of the private partners.

6 Controlling the direction of future policy

The private consortia running these PPP projects not only acquired greater indirect control over public funds, policy and decision making, they have also acquired greater direct control over the decision making processes and thus future public policy. This section provides a few examples by way of illustration.

The first example relates to the issue of ‘unsolicited proposals’ in the context of roads. The Highways Agency, which is responsible for the network of motorways and major roads in England, as well as using the private sector to design, build, finance and operate some roads, has let long term contracts – after competitive bidding – to road maintenance contractors to service and maintain the roads. In both cases, it is the responsibility of these contractors to submit proposals for road improvements based upon increasing safety and reducing congestion. If accepted, it means that they, as the incumbent contractor, carry out the work without recourse to further competitive bidding, at public expense. The European Union’s Green Paper on PPPs (European Commission, 2004) argued that they should have some privileged treatment to maintain the incentive to initiate proposals for public spending on their projects. However, such proposals enable extra contracts or less competitive contracts and create the potential for both corruption and higher costs for the public authority since they preclude the evaluation of alternatives. Many of the world’s most controversial private infrastructure projects originated as unsolicited proposals to governments leading to ‘many negative experiences’, as the World Bank has noted (Hodges, 2003). From the perspective of this study, it means that increasingly the private sector determines policy at the expense of any broader system of planning and prioritisation.

The M6 private toll road provides another illustration of unsolicited proposals and the way they may short circuit existing planning procedures. In 1989, the then Conservative government proposed that a new road to relieve congestion in the motorways in the Birmingham area be built as a privately funded and financed venture. The concession for the M6 toll road would run for 53 years. The road opened at the end of 2003, with a construction cost of about £700 million. With its charges unregulated, the road operator originally set its prices to minimise its future maintenance costs by pricing heavy goods vehicles off the road.

Shaoul et al. (2008b) found that total revenues were £51 million, widely acknowledged to be less than expected due to lower than forecast traffic volumes, although traffic was rising and had reached 50,000 on an average working day. Intended to relieve congestion, the new toll road still carries only 20 per cent of the traffic on the existing motorway, despite reducing its charges for heavy goods vehicles. After paying interest on its loans of more than £800 million, the company makes substantial post-tax losses.

The company therefore lobbied extensively for commercial and other developments in the region that would increase traffic flows on the toll road and thus its revenues. With construction complete and evidently having cost less than expected since its loans were larger than the cost of construction, the company refinanced its debt in June 2006, taking on a larger debt that would release about £350 million cash for investments elsewhere. This serves to increase the concessionaire’s risk. It also increases the risk to the Highways Agency which would have to assume responsibility for the road should the concessionaire hand back the keys due to unsustainable losses as has happened in Spain, Mexico and Latin America in similar circumstances.

Anxious to increase the low traffic volume, the concessionaire came to an agreement with the government to use £110 million of the proceeds to finance the construction of two new road developments that would feed into the M6 toll road and be toll free. This would increase revenues and thus reduce the burden of interest charges. Although the Highways Agency refused to release both the strategic case for the roads and the contracts for the new roads under a Freedom of Information request for reasons of commercial confidentiality, it did confirm what was implicit in the press release: that the projects had been agreed without advertisement or competition. It also pointed out that as it was not at that time a legal requirement for the company to share any refinancing gain, it believed that it had got a good deal out of the refinancing.

Irrespective of the fact that the road will to be built, if it is built, without direct cost to the taxpayer, and there may be no breach of the procurement rules, this means that the road has jumped the capital prioritisation queue as a result of an unsolicited proposal from the company. That is, instead of the Highways Agency using its share of the refinancing gain for other projects, the deal has enabled the construction of a new road to go ahead that may not be justified on broader social and economic grounds. Indeed, the route in terms of road transport and traffic management makes little sense. Furthermore, the basis for the decision and the contract details have been shielded from public visibility and scrutiny under the rubric of ‘commercial sensitivity’. In other words, further initiatives have been taken to make a private road viable that may not have been justified on broader economic grounds or consistent with other transport policies.

While the Partnerships policy is paving the way for unsolicited proposals and thus greater private control over public decision-making, something that was always implicit in the policy, the more recent variants of PPPs are much more explicit in this regard. The case of the Labour government’s £45 billion Building Schools for the Future (BSF) programme, launched in 2003, to rebuild or refurbish every one of the 3500 secondary schools in England between 2005 and 2020 provides an illustration of this (Shaoul, Stafford, & Stapleton, 2010). It proposed a Local Education Partnership (LEP) as the new vehicle for procuring investment and delivering services in schools and other functional areas.

Under the BSF programme, a local Children’s Services Department establishes a LEP or partnership with a private sector company and Partnership for Schools (PfS), itself a joint venture between the public and private sectors. The private partner, chosen after a competitive process to provide the initial, quite small, block of investment, will hold an 80 per cent stake in the LEP. The LEP will oversee the delivery of new investment and manage the delivery of services, thereby controlling and managing the public authority’s capital and revenue budget, although ownership and responsibility for all aspects of education and the budget remain with the public authority. That is, the private partner will have control without responsibility, while the public authority will have responsibility without control.

The LEP contract is for a minimum of 10 years with an option to renew for a further 5 years, during which time the private partners have the first right of refusal for subsequent projects, whether they are BSF funded or not. The private partner therefore has a monopoly position allowing it to develop and implement new proposals for the schools under its remit for up to fifteen years. This enables the private sector to initiate projects, traditionally driven by the public sector, without any competition. Therefore, not only, as in PFI, is public money controlled outside the public sector, but also the lack of competition and ‘lock in’ under PFI (Lonsdale, 2005) is exacerbated. The National Audit Office (2009) has noted that even if projects do go out to competitive bidding, there may be few bidders because of fears that the LEP partner or related company has access to privileged information that preclude a level playing field, leaving the field open to the incumbent contractor and creating higher costs for the public sector.

The government proposed that LEPs could include not just those schools that are to receive BSF funding, but also all the secondary schools and even primary schools in the area. They may also replace the educational support services previously provided by local government: school meals, cleaning, building repairs and maintenance. Furthermore, LEPs could also takeover health care and regeneration services, thereby crossing traditional service boundaries, not only within the Local Authority (LA) but also between other public sector organisations. They may also involve more than one LA partner. Thus, the private partner managing the LEP may control schools and services that are not part of the original BSF investment, manage revenue streams from multiple public agencies, and initiate proposals for public funding for these services for up to 15 years.

In effect, BSF provides the mechanism to transfer many of the functions of local government to the private sector without any corresponding responsibility or accountability. In effect, local government would become a super commissioner of services paid for by public monies, operating as a special purpose vehicle subcontracting its work to private companies: a case of ‘hollowed out government’. However, despite controlling large budgets, such partnerships operate beyond public scrutiny. As limited liability companies predominantly owned by private sector organisations, LEPs will report their financial transactions as private entities not statutory bodies. Furthermore, like PFI companies, LEPs are shell companies that typically have no employees and sub-contract the work to their sister companies. Consequently, they will report only the most limited accounting information in their annual accounts and it will be impossible to trace the public expenditure into the related companies because these have multiple sources of income.

The Freedom of Information (FoI) Act 2000, which only applies to public not private sector entities, provides little means of redress. LEP contracts may and typically do include commercial confidentiality clauses, which the public authority may use to avoid disclosure. An appeal to the Information Commissioner’s Office (ICO) to reverse a refusal by a local authority to provide information on its LEP provides an interesting insight as to how a LEP operates in practice.

Bristol City Council had turned down a FoI request about the cost of an ICT contract for the schools managed by Bristol LEP Ltd. and for a copy of the legal contract with the LEP, citing commercial confidentiality (ICO, 2009). It also refused to explain the decision-making processes that led to the acceptance of the confidentiality requirements in the contract, a process it is legally required to conduct (ICO, 2009). The ICO’s report revealed that the ICT contract was one of more than 130 contracts spawned by the partnership, and neither these nor the decision-making processes surrounding them were routinely made available and accessible to the public. Furthermore, there was a long chain between the Council and the LEP and, despite the Council’s ultimate political responsibility, the Council was not formally a party to any these contracts. Eventually, after 30 months of persistence, this FoI appeal was successful. The ICO ruled that the ICT costs and the contract with the LEP should be disclosed. This example is significant because it illustrates that the LEP arrangement constitutes a system of private government operating under the cover of public government that shields it from the public at large.

7 Conclusion

This article has demonstrated that firstly PPPs have played a key role in increasing the financial and corporate sectors’ involvement in decision-making. This has taken place at the heart of government and more peripherally, directly and indirectly, with the result that the boundaries between the public and private sector have become porous. Secondly, what started out as power sharing is leading to a transfer of power. Thirdly, the article has shown the processes whereby that has occurred and the arrangements that have produced new forms of governance, which are semi-submerged and generally opaque displacing and/or replacing the formal ones. Fourthly, while the corporations providing public services have attracted most of the attention, behind them stand the banks and financial institutions.

At the policy level, the financial services sector has become embedded in the Treasury and civil service. Hampered by Freedom of Information rules that enable government to avoid disclosure where it relates to policy formation and commercially sensitive information, the public and its representatives are unable to scrutinise decision-making that increasingly is taking place outside the established structures. Post-implementation, the private sector is determining future policy and expenditure, under conditions where the reporting regulations and practices of both the private and public sector partners make it difficult to track, control and scrutinise ex post facto public expenditure, as others have shown (Edwards, Shaoul, Stafford, & Arblaster, 2004). This has rendered obsolete the traditional mechanisms of accountability for public expenditure and control of the executive. In effect, the financial elite has gained control over the Treasury and taxpayers’ money with little or no accountability.

To the extent that governments of all political persuasions are committed to annual payments via legal contracts for another 30 years, the policy locks in governments to particular forms of service delivery under conditions where needs and technologies may change. Moreover, with income set to decline as austerity measures are universally applied, then such payments serve to limit the flexibility of public authorities. It means that the axe must fall on the core professional services and budget, reducing access to services. From a political perspective, to the extent that future expenditure is predetermined, irrespective of the government in power, then the role that elections – and thus the democratic process – may play in setting out policy is further constrained.

Although the examples cited above are few for reasons of space and relate to PPPs, they are by no means unique, but part of a wider trend that has accelerated and become more overt in the last 35 years, not just in Britain but internationally. The continuation of this process can be seen in the bailout of the banks. The decision in the autumn of 2008 by the British (and other) government(s) to bail out ‘its’ banks was taken over a weekend at the behest of the financial institutions themselves, with no public consultation or conditions placed upon the banks. Since then there have been further measures to shore up the financial system, creating liabilities of more than £1 trillion. At the same time, the beneficiaries of this bailout have taken advantage of the banking collapse to restructure social and economic relations in their own interests: they are demanding the most far-reaching austerity measures in the post-war period in country after country to pay for the bailout. In other words, they determine public policy not the public at large. Furthermore, far from resolving the crisis, these measures can only exacerbate it leading, in turn, to deepening debts and insolvency – of banks, financial institutions and governments. It provides a devastating rebuttal to the question whether democratic control of economic life in the interest of the majority is compatible with giant international corporations.

Notes

1 http://www.partnershipsuk.org.uk/AboutPUK/PUKMission.asp Accessed 28.08.2007.