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Private debate goes public

BUSINESS: Next week's Labour Party Conference in Brighton is expected to stage the latest round in the simmering row over the increasing role of the private sector to upgrade Britain's infrastructure. Andrew Bolton looks at the arguments.

Can you improve Britain's transport systems, hospitals and schools without using private companies to provide the services traditionally handled by the public sector?

This question is at the heart of an increasingly antagonistic debate between the government and the trade unions over the private finance initiative (PFI), now increasingly known simply as public private partnerships (PPPs).

Labour, following its Conservative predecessors, has decided that, as a way to even out peaks and troughs in public spending, it is better to lease new and upgraded infrastructure from the private sector under long term PPP contracts. So keen is the government on PPPs that it has been made the preferred form of procurement for all government construction work.

The theory is that PPP contracts allow the capital costs of new infrastructure to be spread over two or more decades. By comparison, traditional public procurement programmes have to be paid for up front by the taxpayer.

But if this just meant transferring construction risk to a private consortium which could then lease a new or upgraded asset such as a hospital or school back to the government, opposition would, one suspects, be less vociferous.

Sadly nothing is that simple.

Public sector accounting rules dictate that the private sector must get involved with operating new infrastructure so that the government can avoid taking the whole capital cost of a project out of its budget in the year a contract is first signed.

As a result private consortia have had to take over some aspects of public sector work including maintenance, building security, catering and hospital porter work. In future they will also have to get involved in the maintenance of trains, track and signals on London's Underground.

Outsourcing these traditionally public services is one of the main bones of contention among union opponents of PPPs. They claim that in the health sector, for example, contracting out hospital porters and catering has driven down costs without improving the service to patients.

As a result, unions such as the GMB want the Treasury to let NHS Trusts take out mortgages on new hospitals while keeping health workers on their payrolls.

Union leaders also fear that pressure on the private sector to make money will force PPP consortia to cut jobs from the public sector teams they take on under PPP concessions. And they claim that private consortia exploit loopholes in employment law to erode the working conditions of public sector staff after they are transferred to PPP consortia.

The unions question government claims that PPPs offer better value for money than traditional procurement methods.

They claim that NHS Trusts are put under immense pressure to inflate the costs of equivalent, publicly funded buildings to make it easier to justify a PPP deal.

'The costs of the public sector comparator are commonly loaded to compensate for 'risks' allegedly transferred to the private sector consortium under the PFI deal, ' claims PFI in the NHS: a dossier, a report published by the GMB union. 'It is often only after this and other statistical sleight of hand that the PFI option can be shown as even marginally better value than a publicly funded scheme, ' it adds.

Two weeks ago the unions were preparing for a showdown with the government over PPPs at the TUC's annual congress.

The terrorist attack on the US overshadowed the conference before Prime Minister Tony Blair got to deliver his speech, and the congress was curtailed before a scheduled debate on PPPs could take place.

But earlier in the congress, trade secretary Patricia Hewitt tried to placate the unions by offering the promise of better protection for workers transferred from public to private sectors. Her efforts drew a frosty response.

However, the issue will not go away. The GMB union is planning to demonstrate against the PPP at next week's Labour Party conference and other unions are campaigning against PPPs, notably over the London Underground upgrade.

The government has now been forced on to the back foot as comparisons start to be made with the negative aspects of the 1980s Conservative privatisation programme. Accusations against the PPP include claims that it is set up to make fat cat bankers and construction companies rich and that it will lead to human disasters like those witnessed on the privatised rail network. The unions have also claimed that PPP promotes corner cutting and safety compromises in the name of profit.

But there are signs that the government and private sector is fighting back. Contractors Amec and Carillion, consultant WS Atkins, investment firm Innisfree, law giant Clifford Chance and financial institutions Deutsche Bank and MacQuarrie are among those in the PPP sector to have formed an organisation called the PPP Forum to counter criticism. All are frustrated by the government's failure to defend its own policies.

'We are not trying to be aggressive. Our main priority is to counter misinformation, ' says PPP Forum director Cathy McGlynn. She strongly contests union claims that employment conditions have worsened among workers transferred from the NHS to the private sector under PPP deals.

'The unions tried to kick up a fuss with MPs, but they couldn't provide any evidence, ' she claims. McGlynn is also organising a fringe meeting at the Labour Party conference to force some of the issues out into the open.

Government too is showing signs of removing the gloves.

Although Blair's TUC speech was cancelled, it was made public. In it he robustly defends the PPP and attacks union claims that the government is trying to privatise teaching, safety critical medical services in the NHS and signal operation on the Underground.

'Let us not misrepresent our positions for the sake of a headline or an invitation to the TV studio, ' says Blair. 'And let us hear no more false charges about privatising schools and hospitals when we are set to spend this year more money on them than ever before, are employing more people in them and their pay is rising faster than the private sector for the first time in years.'

Much of the criticism of PPPs is centred around the fact that the private sector has an opportunity to make money from leasing back assets like schools and hospitals, and from providing services like catering and hospital cleaning. There is also criticism that some deals allow the private sector to sell off or redevelop surplus land.

However, the private sector argues that it is paid to work more efficiently than the public sector and that it can only make money if it tackles the risks of construction cost overruns and failures to provide adequate services once new infrastructure is in operation.

McGlynn also points out that the risk of losing money on a PPP deal drives projects as much as profit incentives. Contracts are set up to ensure contractors are penalised for construction delays and cost overruns. They are also penalised for poor performance of outsourced services for which they are responsible.

'The private sector have put all of their best people on to these projects because it they realise that they can make more on them than on conventional building projects. But they can also lose more money if they perform badly, ' she says.

Argument about PPPs is likely to rage on, if only because the issues are so complex. Even the government has been unable to come up with a clearly understandable public sector comparator which can justify PPPs over traditionally procured projects.

Although privately financed construction projects have generally been delivered on time and to budget, it will be difficult to assess the true value of PPPs until the first multi-year concessions come to an end in about two decades' time.

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