Raw Deal for the Public

by Michael Patrick O'Leary

This article appeared in the March 2008 edition of Lanka Monthly Digest.



In November 2001 , I read a  local newspaper columnist arguing  that Sri Lanka should avoid commercial borrowing and embrace Public-Private Partnerships (PPPs) as being a more prudent option. He cited the Private Finance Initiative (PFI) in the UK, which began in 1992 under John Major’s premiership and was continued by New Labour. So, how prudent has British PFI been in practice, and has it enabled the Government to save public funds as well as harness the expertise and entrepreneurship of the private sector?


The Adam Smith Institute, a champion of free enterprise, found costs to be higher for PFIs than for traditionally procured projects.


This is how the trick works. The company’s initial bid provides only broad outlines, not detailed specifications. The Government accepts a tender; and then, its partner discovers new costs such as inflation of labour and materials. Adjustments are then slipped in to huge spreadsheets and the Government hasn’t a clue as to how it is being short-changed.


Renovating a hospital in Coventry should have cost GBP 30 million, but that wouldn’t have delivered sufficient profits to the private sector so, the government spent GBP  311 million on a new hospital with fewer beds than the two hospitals it replaced.


The Cumberland Infirmary in Carlisle was the first British hospital built under PFI at a cost of GBP 87 million. Carlisle’s consultants committee pronounced the scheme as being “clinically unworkable”. When the hospital opened, there was a major power outage and one of the back-up generators failed. A transformer caught fire in radiotherapy, and equipment in  theatres and intensive care switched to battery power. The operating theatre was flooded with sewage.


Dr Paul Dyson, Chairman of the Cumberland Infirmary’s medical-staff committee, said: “We feel maintenance and construction standards were skimped in the first place and it is all part of PFI’s desperate desire to cut costs and make profits.”


A Department of Health study suggests that every GBP 200 million spent on privately financed hospitals will result in the loss of 1,000 doctors and nurses. Professor  Jean Schaoul of Manchester Business School estimates that the rate of return for the companies involved with 12 large PFI hospitals was 58 per cent. This comes out of the hospitals’ budgets, so less is available for health care. Beds are reduced by 30 per cent with the first wave and budgets for clinical staff cut by 25 per cent. Many health trusts are in serious difficulty and some will become insolvent.


US examples demonstrate the pernicious influence of commerce on education. Education Alternatives Incorporated (EAI) won a contract to run nine schools in Baltimore for five years. Baltimore terminated the contract because EAI students did worse in reading and the company had made claims for nonexistent students. In Hartford. Connecticut -where EAI contracted to run all 32 schools – the experiment ended when the company sacked 300 teachers to increase its profits.


The latest trend in US education is to cut deals with brands such as Coca-Cola or Pepsi- Cola to market their products to children. In 1998, Greenbriar High School in Georgia, in fact, created a curriculum around Coke.


Although defenders of the free market hail the risk-taking, adventurous spirit of the private entrepreneur, the private arm of certain PPPs cannily avoids risk. So, it is the Government that carries the burden of risk. Accounting conventions on both sides cover up the real situation. The PFI does not show the costs of buildings, for example, on its balance sheet. Its main asset is the Government’s contractual obligation to pay for the building.


The Government, in turn, can hide the fact that it is spending public money on a long-term basis. It can omit the building and long-term obligation to pay for it from the state’s balance sheet by paying a single unitary charge for the building and its maintenance, so that it can be classified as a revenue item. The UK Accounting Standards Board has called PFI an “an off balance sheet fiddle”, because the Government can move the cost of public works out of the public sector’s borrowing requirement.


PPP can only be implemented through an anti-competitive process, which leads to corruption. Major corporations wouldn’t be interested if it were otherwise. For little investment, companies can be sure of long-term profits that are, in effect, guaranteed by the taxpayer. If the consortia bidding for a project had to supply a detailed bid for the final contract before they were chosen, rather than merely a broad outline, they would have to spend much more on their tender document. When a consortium negotiates a contract after it’s been won, it can develop its bid at public expense, with no fear of loss. If the process were reformed, PFI would come to an end, major corporations have warned.


Sri Lankan proponents of PPP stress the need for transparency, cost-effectiveness and fairness. But is this going to happen in Sri Lanka – especially when it doesn’t happen in other countries? Unfortunately, corruption is inherent in the system and transparency is impossible because of commercial confidentiality.