JM Thorn 

25 January 2009

The common assumption made about the north’s economy is that it is dominated by the public sector.  Given that the state, directly and indirectly, accounts for around two thirds of the north’s economic output and employment, this would seem to be a safe assumption.  Indeed, dependence on a public sector financed by the British treasury has been a feature of the north since its inception.   This dependency deepened with the decline of its industrial base and the onset of “The Troubles”.  However, over recent years, accompanying the development of the peace prices, there has been an attempt to shift the economy in a more liberal direction. 

One element of this is an effort to attract foreign investment, particularly in the areas of technology and finance.  The Celtic Tiger is held up, particularly by nationalists, as a model that should be followed in the north.  However, with the global recession, these ambitions have been thwarted already.  The north has failed to attract substantial investment, and existing foreign capital is draining away.  High-end technology companies, such as Seagate and Nortel, have been closing plants, making redundancies and reducing production.  Such a low level of foreign investment will not shift the public-private sector balance within the economy. Neither has there been the sell off of major state assets such as was done under the Thatcher government in Britain during the 1980’s.   However, there has been a more insidious form of privatisation taking place in the north.  The main instrument for this has been the increasing role of private companies in the delivery of public services through the use of what have become known as Private Finance Initiative (PFI) or Public Private Partnerships (PPPs).  Under these schemes public bodies enter into contracts with private consortiums for the delivery of public services and infrastructure.  While still ostensibly within the public sector these services and infrastructure have actually been transferred to private ownership – privatisation in all but name. 

A new report, commissioned by the public service union NIPSA, details how this form of privatisation has been expanding rapidly the north.  “The use of Private Finance Initiative (PFI) Public Private Partnerships (PPPs) in Northern Ireland” was produced by a team of researchers from the Centre for International Public Health Policy at the University of Edinburgh lead by Prof Allyson Pollock, a leading authority on the role of private finance in the in Britain and the author of NHS Plc: The Privatisation of Our Health Care (2005).   The report is divided into a number of sections explaining how PFI and PPP operate, and how they have been used in the north.  The Introduction sets out the development and basic structure of such finance schemes.  Introduced back in the early 1990’s by a Conservative government they now account for a significant proportion of large-scale investment projects in areas such as health, education, defence, transport, council housing, water infrastructure and waste management.  By March 2008, 627 PFI schemes had been signed in the UK, representing privately financed investment of £58.2 billion.  In the north the use of use of PFI, or PPPs as they are more commonly known, has increased dramatically since the late 1990s. As of March 2008, 35 PPP contracts had been signed, providing private investment of £1.29 billion. A further 13 contracts, with a capital value of £1.94 billion, are being negotiated with private sector bidders and will be signed by 2012.

The Introduction provides a basic description of the structure and operation of a private finance contract.  It is a long-term arrangement between a public authority and a group of private sector firms, in which the latter is responsible for financing the design and build of new facilities, and then providing certain services within them once the construction works are completed.  On signing the contract for the project with the public authority, the members of the consortium create a “Special Purpose Vehicle” (SPV) - a new private sector business that exists solely to deliver the project.  The SPV enters into sub-contracts with one or more firms (usually its own shareholders) to deliver the project. Finance is also raised from the shareholders, and from banks or the capital markets.

While PPP provides finance for investment in new facilities and infrastructure, it does not provide funding. It is a method of accessing capital that creates a long-term funding requirement for the public sector. Annual unitary charges must be paid throughout the length of the PPP contract, providing a return on the private sector’s capital and fees for the services it provides. Increasing investment through PPP inevitably requires an increase in funding which can only be extracted from the public through higher taxes and/or the introduction of direct user charges.  At its most basic PPP is a mechanism through which pubic resources are transferred into private hands. 

Section 1 of the report details the current scale of PPP use in the north and the plans for expansion.  As of March 2008, there were 35 signed PPP contracts, with a combined capital value of £1.29 billion, representing capital expenditure of £758 per head of the population.  The dramatic expansion of PPPs can be gauged from the increase in the value of projects signed each year, which has gone from just £8 million in 1997 to £444 million in 2007.  Moreover, the capital value of signed PPPs will increase significantly between 2008 and 2011, as the 13 contracts for the schemes now being negotiated are signed. The value of contracts is projected to increase from £353.6 million in 2008 to £630 million in 2011.  This will increase the value of PPP contracts from £1.29 billion as of March 2008, to £3.22 billion by the start of 2012.  In terms of distribution across the public sector, it is the Executive departments of Regional Development, Education and Health that have been the main commissioning authorities of PPS, accounting for over 90 per cent of the capital value of existing contracts.  Projecting into the future, PPP in water and roads diminishes, while continuing to have a major role in education, health and finance and personnel. 

The capital investment committed by the private sector has to be repaid with interest, along with payments for services.   These unitary charges are paid by the Executive to the private sector over the 25-30 year length of PPP contracts.  While the current capital investment of PPPs have a value £1.29 billion, over the life of the contracts they will accrue  £4.7 billion in unitary charges.  The annual payments rise from £1.5 million in 1997-08 to reach a peak of £167 million in 2010-11.  It is estimated that, by 2012, the total cost of PPPs in the north will be in the range of £10-15 billion!

Section 2 of the report charts the development of the private finance policy at a governmental level.   Prior to the first modern period of devolution (1999-2002), PPP had made barely any impression in the north, despite its growing significance in the rest of the UK. The capital value of PPP schemes signed between 1992/93 and 1999/2000 was less than £100 million, compared to £4 billion in GB.   The big advance came in the early days of devolution when local political parties began to regard PPPs as a potentially important means of increasing investment in public infrastructure. Using PPP to deliver additional finance was advocated by Mark Durkan, finance minister in the first devolved administration.  The appeal of PPPs to the Executive was that under the Treasury rules they were off-balance sheet (i.e. recorded as a contract for services rather than a financial lease) and would have no direct impact on its capital budget.  They would only count against the Executive’s revenue budget as annual charges were incurred.  It is this accounting sleight of hand that created the impression that private finance could deliver “additional” public sector investment.

The private finance policy continued to develop after the resumption of direct rule in October 2002.   One the first substantive acts of direct rule ministers was to launch a Strategic Investment Programme, as part of the Budget announcement in December 2002. This set out plans for around £2 billion of investment over the five-year period to 2007-08, including £725 million through PPP and £400 million of direct borrowing, with the remainder funded through the block budget.

Ministers finalised the policy framework for the use of PPP, and established the bureaucratic structures to deliver it. This framework was outlined in the document, Working Together in Financing our Future (OFMDFM and DFP 2003) which stated that there would be a “strong preference” for PPP in infrastructure and accommodation projects.  This was reflected in the staffing of the new Strategic Investment Board (SIB) with individuals from the PPP industry. The finalised “Investment Strategy for Northern Ireland 2005-2015” was published in December 2005, and specified that 23% of the programme – the part of it dealing with large-scale infrastructure and accommodation projects – would come through PPP.

The private finance policy became an integral part of the broader strategy of liberalising the north’s economy.  PPP was regarded as playing a critical role in the attempt to “rebalance” the economy in favour of the private sector.  Direct rule ministers argued that the public sector was too large; that the level of a public expenditure per head was higher than the UK as a whole and that it needed to be reduced; and that efforts had to be made to stimulate the private sector, including through the use of tax-funded services.   Those arguments, along with the policies associated with the liberlisation agenda, have now been taken up by the restored Executive. 

Section 3 of the report challenges the arguments and claims made for PPP.  The first claim is that PPP provides additional ‘additional’ resources for public
Services.  However, as was noted earlier, this is achieved through an accounting sleight of hand in which PPPs do not count against the budget for capital expenditure. Only the annual charges appear on the public sector’s accounts.  In reality investment through PPP has exactly the same revenue effect as conventional capital spending or direct borrowing.  The costs that arise can only be met through a redirection of revenue from other parts of the public sector, increased taxation or, for sectors like roads and water, higher user charges.  The appeal of PPP to politicians lies in its ability to deliver investment, the upfront costs of which do not count against measures of public sector debt.  This is particularly important for EU member states subject to the fiscal constraints of the Maastricht Treaty, which restricts ‘gross government debt’ to 60% of national Gross Domestic Product (GDP).

An argument for PPP specific to the north is that it will rebalance the economy in favour of the private sector. There are a number of objections to this  “macro-economic” rationale for the use of PPP.   Firstly, the argument that the public sector is too large is an oversimplification. It is the case that the north has a higher level of public expenditure per head than in GB.  However, a major part of this is connected with the high level of benefit claimants in the north - 50% higher than in GB.  The public expenditure differential between the two is therefore largely a function of transfer payments and does not imply higher spending on public services. Secondly, PPPs will not necessarily benefit local companies.  Indeed, this method of procurement tends to freeze out local companies in favour of large multinational corporations, which can better handle the transaction costs involved.  Thirdly, it is a misconception that shifting services from the public to the private sector could, in and of itself, add value to an economy.  Services transferred to the private sector through PPP will still be tax-funded – there is no reduction in public spending, or any relaxation of the public sector’s budget constraint.

The case for PPP  usually falls back on claims that it is more cost-efficient.   However, this is actually the weakest of the arguments put forward - as public finance is cheaper than private finance. This is because lending to government is extremely low risk - public bodies, unlike private companies, are unlikely to go bankrupt and default on their payments. The transaction costs of government financing are also low and the market in government debt is usually liquid and efficient.  To illustrate this the authors cite an examination of financing costs for Scottish schools PPPs carried out by Audit Scotland which found overall rates of return on private finance in the range of 8-10% a year, some 2.5% to 4% higher than a public authority would pay if it had borrowed money on its own account.

The report concludes by restating the disadvantages of PPP and calling for an independent review of capital in the north, and a moratorium on the further use of PPP until it is completed.   Overall, the authors provide a good summary of how PPP operates in general, and its specific application in the north.   What is particularly impressive is the evidence-based approach employed by the authors to refute the claims made for PPP.  They provide powerful practical arguments against privatisation that cannot be dismissed as being ideologically driven.  The question for NIPSA, and the broader trade union movement, is how these arguments will be used.  Will they be part of a lobbying operation that seeks to persuade ministers and MLAs of the folly of privatisation, or part of mass campaign to defend public services?  The experience of opposing water charges suggests that the former strategy will fail.  At that time the trade unions were armed with a report from Professor David Hall that comprehensively demolished the case for water charges, but because there was no mass campaign its impact was limited.  While politicians were certainly aware of the arguments against water charges it did not shift them.  Likewise a report on PPP won’t shift them.  The parties within the Executive are ideologically committed to privatisation in spite of all the evidence of its costs and failures.  The will only be moved by an up swell of opposition from within the working class.