False promises, the PFI mess

The recent news that some London Health Trusts are in financial difficulty does not come as a surprise to me for two reasons: I read Private Eye and I have seen or been involved with a number of PFI (Private Finance Initiative) deals. With every single PFI I have looked at, I have never thought that any of them delivered genuine value for money for the taxpayer. But as there was no other money available and as the political instructions were very clear that they should be used, I like many other civil servants, simply had no choice but to get on with it. The sad truth is that many spending promises made by Government in the last 12 years were false promises, using money it did not really have and signing up to deals that were simply licences to the private sector and the banks to rob the UK taxpayer. Thus Labour (and no doubt the Coalition will too) put the public finances into debt in order to buy votes and thanks to the financial/banking crisis the chickens are now coming home to roost.

Maybe I should provide a brief explanation of how a typical PFI arrangement works so that people can understand how ludicrous PFI is. Bear with me as I try to simplify a very complicated area of government business.

Let us say that you are in charge of a project such as building a hospital or school or even to supply the Royal Air Force with air to air refuelling tankers. All this has been done under PFI. You need a big chunk of money to do so, for simplicity’s sake, we will use a nice round number of £1 billion. You are told, that your Department does not have the money and Treasury will not give it to you. But to maintain the current service, the operating budget is £50 million a year and this can be increased to £100 million a year (don’t ask how they manage this, it is a mystery!). As a good project manager, you need to think through-life for your project, thus you combine the cost of buying your hospital/school/tankers and the cost of running it. You need to put a time frame on it so you say 20 years. This neatly means you need £2 billion all in for a 20 year project (£1bn to buy and £50m x 20 = £1bn to support). Lo and behold, the £100 million a year operating budget over 20 years the Department is willing to give you also comes to £2 billion. Result! (Warning: most PFI do not work out this simply, I can almost guarantee that in most cases the PFI forecast is more expensive over the 20 years rather than breaking even, explanation of why is below)

So you now have a requirement, a budget and a plan and so you compete for a private company or consortia able to build what you need and keep it running for 20 years. This competition process may cost you £2 million (team of lawyers, commercial officers and experts to assess bids etc) and takes, at a minimum, two years to get to contract. Fast forward to you have selected your bidder/consortia and the discussions now turn to raising the money. Needless to say, most companies don’t have £1-2 billion in cash, so they go to the bank. The bank is willing to support the deal, but of course they are going to charge you interest on any money borrowed. Oops, this means you need another £200 million over the 20 year project because of course the £100 million a year estimate did not include commercial interest rates (remember it is £50m a year to support, another £50m a year from capital costs). This is where it gets farcical, the Government can borrow money from the Bank of England for a far lower interest rate, but you are not allowed to do so. PFI is about using private money to fund public projects. Your Department approves this increase in budget because you really badly need the hospital/school/tankers.

Off you go, things get built or made and the service is up and running. A financial crisis hits and the bank raises interest rates. That is another £100 million added to the cost. Don’t forget you have effectively borrowed £2 billion for 20 years, money costs more over time due to interest. Now your project will cost 2.3 billion over the 20 years. Of course if you had fronted up the £1 billion construction money from the beginning you wouldn’t have to pay the interest, but you did not have the money and so that is that. Your private company/consortia is able to get a better deal on the interest payments through refinancing, but the contract does not mean you get any of it. The private entity can also sell your PFI contract to someone else and again you contractually have little power over this. The contract is all about delivering output and availability, how it is delivered is not meant to be your concern as long as you get the service you asked for.

Let’s go back a bit and remember that previously it was costing the Department £50 million a year to deliver a service that was probably ok, but not brilliant. Your private entity has managed to get the costs down to £45 million a year by being ‘efficient’. One would think this is a good thing and the private entity is earning the extra profit through this ‘efficiency’. Ignore the fact that the cleaners are illegal immigrants barely paid the minimum wage, maybe the hospital/school is not as clean as it used to be and maybe a few shortcuts are being taken here and there to save money. There are two big problems. One is inflexibility. It is all about the contract. Don’t really need 100 beds or a 1000 school places any more? Tough, it is what was asked for in the contract, you still have to pay for it until the contract ends even if you don’t use it. Of course you could ask for a contract amendment, but I can promise you that the bill will sting. Why should the private entity play nice? Remember, they want the profit, what is in the public interest is your problem not theirs. The second problem is that almost without exception it is impossible to transfer sufficient risk to the private entity, not least because the cost is astronomical and/or you remain responsible no matter what. In the case of the RAF’s tankers, they may well be technically owned by the banks, not the RAF. Funny enough banks are very averse to letting their assets fly to dangerous places no matter how desperate the need. The RAF could over-rule them, but will have to pay a contractual penalty for doing so or suffer the consequences such as a plane having to divert to an airfield thus not achieving its mission. What if a patient dies in your hospital because the contractor did not clean it properly? It may be the contractor’s fault, but the NHS/Department of Health is still ultimately liable because it is with them that the patient has the ‘contractual’ relationship. You struggle to pass the cost to the contractor because the contract said it should be cleaned daily and that is what they did even if badly.


The example above is actually very conservative and I have not tried to over-egg the maths. In the real world, the figures are often considerably worse. All too often the private entity would have recovered all the cost by year 12-15, but of course the Government is still paying the flat rate as stated in the contract. Thus that private entity would, using the example above, make £50m of pure profit for the last 5 years of the contract. So much for saving the taxpayer any money...

Of course there is the irony that thanks to the financial crisis the taxpayers now own most of the banks holding the PFI contracts. So effectively the Bank of England is now loaning/giving the money to the banks who put commercial interest rates onto it and lend it to the PFI contracts who add their cut which is paid for by the Government. No wonder the whole thing is so complicated! Maybe life would be so much easier if Government departments borrowed the money directly from the Bank of England to pay a contractor to build the hospital/school/tankers (thus owning these assets), then paid for the support of these assets to other contractors on a rolling basis. They could even do clever things like break the support contract into small chunks and choose a local small firm thus ploughing money into a deprived local economy. Perhaps such a thing is rather old fashioned, but it does mean the taxpayer is not paying a huge interest bill and inviting the private sector to find ingenious and less than moral ways of making more profit (funnelling payments off-shore to avoid tax, employing illegal immigrants etc). Don’t get me wrong, I am not saying there is no role for the private sector and that they should not be invited to bring their own assets to make a public service work better, but PFI has to be the most convoluted and flawed way possible to achieve this. It has effectively saddled the Government with a huge annual mortgage bill that it is very hard to get out of. There are some PFI success stories, but the astronomical cost and mis-management completely outweighs them.

This Government has set the goal of deficit reduction its number 1 priority. How will it achieve this unless it rips up those billions of PFI deals? Aha, there is a better way – let the contracting authorities such as the London Health Authorities go bust and the PFI investors lose their shirts. Possibly a number of people will be made redundant. Sorry NHS, as the doctor might say, “it will sting a bit, but this treatment is necessary.” But who will treat those patients desperately in need of care? Step up Andrew Lansley’s new commissioning bodies and ‘any willing providers’. Probably the same people who shafted the UK taxpayer on the original PFI deals. Mind the dead bodies as you go please…

Being in the civil service

So what is life like in the civil service? A frequent and natural question. I like the phrase civil service. It has a certain mystique about it, but as the phrase implies, civil servants are there to be civil and to serve! Ok, I will stop the silly jokes now, but there is an important point to be made here with that play of words.

To some people, we seem like a faceless and sinister breed able to shape government policy at will, manipulate clueless politicians and to backstab all enemies of good government policy in the name of the national interest in the style of that shown on the fantastic never grows old show, Yes Minister. To others we are feckless and lazy, love red tape, there to build our own little empires and to stop businesses from doing critically important things such as making lots of money. You won’t be surprised to hear me say none of that is true. Well except for the stopping businesses making money bit, but that is only when they are being bad people of course! By the way business leaders, a small tip, there are more important things in life than making lots of money! Like families, friends, health and hobbies… Ah what the hell, just call it having a life! And yes screwing people or the environment is a bad thing. Get a grip on your humanity/morality sometimes! (rant over)

It is well understood that civil servants do not join to make lots of money and in reality very few of them are power hungry. I work in an open plan office and so my response to the question at the top of this blog post is, “If you work in an open plan office and you look around at your co-workers, what do you see?” Lazy people, hard working people, smelly people, loud annoying people, nice people and so on. The civil servant environment is no different in this regards. What does make the civil servant environment different are the expectations placed upon us and the work we do.

The expectations of a civil servant

Do what is right A stupid, common sense statement no? So what happened with those casino bankers? What happened in the case of Trafigura who caused environmental catastrophe in the Ivory Coast? What about A4E who it is alleged their staff systematically worked to defraud UK taxpayers? Civil servants are not meant to be motivated by profit and so they are not motivated to do what makes the balance sheet or shareholder report look good at the end of the financial year, possibly at the expense of others. They make mistakes, as do everyone, but the goal is always to try and do what is right for the UK as a whole. This is important, we are paid for by the taxpayer, we serve them and we are told strategically how to do so by elected politicians representing the will of the UK public. (I will cover the issue of the democratic deficit in the UK in another post)

Treat your staff well If there is one thing I will say a civil servant is likely to do better (on average) than a private sector counterpart it is in managing staff fairly. This is not to say private companies cannot manage staff fairly or well, far from it. This is also not to say no civil servant badly manages staff, that would also not be true. The point I wish to make is that I have been taught as much of UK law as I need to know and I have been taught in no uncertain terms that discrimination, bullying, harassment and so on are unacceptable. In the pressure of a private sector office, these things can sometimes slip by and staff can be too scared talk, in the civil service these negative behaviours are much harder to get away with. Apart from line managers being extensively trained to avoid them, there are plenty of openly advertised routes for scared or bullied staff to raise their fears. A confident organisation is one that is not afraid to look for these problems and to confront them in a fair way. I sincerely believe that if you are from an ethnic minority, gay, a woman or disabled you (as a group) get well treated in the civil service and can compete equally on merit. This is right, the civil service must be seen to uphold best practice and to show the highest standards and where we get it wrong, we always look to fix it rather than brush it under the carpet. I will add a discordant note here that from what I have read in the Private Eye and from conversations with friends and strangers, the NHS is a shameful exception to this expectation from civil servants. No doubt other areas are equally bad, but I am picking on the NHS because it is such an open secret. From my personal experience, I have never had a bad line manager in the civil service. I have known of them, but never had one. Only my experience, granted but it does say something.

Be accountable Possibly one of the hardest things for a non-civil servant to understand. You want us to be transparent in our decision making and in our data? Fine, but understand that this is very time and resource consuming. I am not saying we should not do it, civil servants themselves believe that people must have confidence in the work they do, but when people complain that things takes so long to get done, you can bet that accountability is a big reason why. Need to make a decision on how to spend £100 million? That all needs to be documented, due diligence performed, everyone has to agree, including Ministers, and we have to spend a large chunk of our time answering damn fool questions from MPs in Parliament! All necessary in a democracy, but it comes at a cost and the private sector can move faster than us without this need for accountability, no doubt of that at all.

 Deal with complex problems Much has been made of dubious statistics showing that civil servants are paid more on average than those in the private sector. Since nearly all government departments seem to have outsourced the cleaning and catering work and anything else not judged as 'core business' what do you have left? People who are meant to run billion pound projects, experts in specialist fields and managers who might have to decide things like how much disability severely disabled children get or whether suspected terrorists should be detained for x days without charge. Do you really want to try to pay these people the minimum wage while still getting a good service? Historically, the civil service used to be known as the profession the rich clever kids with good public school education went to. This is no longer as true as it was (a good thing) and while civil servants don't join for the money, they do want to be paid a decent wage. They still need to do complex work dealing with life changing policies or complex technical systems and they know damn well that they can get paid more for this work in the private sector. They may not be rich public schoolboys any more with a good grounding in Latin and Greek, but making and implementing government policy remains a complicated task even if people don't always see it that way. Always remember, almost no government decision is truly black and white, money or effort put into one area or policy is money or resources not going somewhere else and sometimes it is not easy to get the evidence of which cause is more deserving.

Neutrality I am apolitical and I make a deliberate point of not supporting any political party. For me (not everyone) this is important. It does not matter whether I dislike those politicians in charge or whether I disagree with their policies, they were elected and it is my job to implement the policies they were elected on. Because I am not wedded to any political ideology (does not mean I don't have my own opinions) I do not feel compelled to defend any particular policy and I can be man enough to admit I was wrong if someone can come up with the evidence to prove it. And here I will take a pop at the very senior civil service, they are not adhering to this expectation of neutrality as rigidly as they should and the rot is spreading downwards. Successfully being promoted to the top of the civil service should be on the basis of competence and being able to tell Ministers that their policies (like everything else in government) will have certain unintended consequences. I cannot help but look at those at the top and feel that too many of them got there because they kept telling the people above them what they wanted to hear rather than the full truth. Many recent government policies have looked half baked and I think the senior civil service should share in the blame. There can be no doubt that the civil service has been politicised (both Labour and Conservatives are guilty) and this can be seen in the declining performance of government policies. In short, we have lost a precious commodity at the top of the civil service - leadership. I sincerely hope we get it back one day.

The work we do

The great thing about the civil service is that there is so much variety. I will not go into details about what I have done or where I have been, but I can only say that there are some experiences and work areas that money can't buy. I get the opportunity to influence government policy, I have the opportunities to influence foreign governments, I get to meet all sorts of interesting people and to do strange things, I help those who need it the most, I punish the corrupt and the venal (after due process), I see the unvarnished truth behind many newspaper headlines and all this in one career! Now is a demoralising and depressing time to be a civil servant, with politicians, business leaders and newspapers attacking us in all directions for their own agendas and to cover their own mistakes. But I will always have the opportunity to do something interesting and important. I don't have to sit in a depressing office somewhere crunching spreadsheets and doing mundane tasks so that some undeserving chief executive of the company can take home a nice fat bonus.

This for me is what being in the civil service is about. Many of my friends are accountants, lawyers, teachers, nurses, entrepreneurs, but when they talk about work it is as boring as hell more often than not. I have many more interesting work stories to tell and only my very closest friends vaguely know this, but the reality is that I cannot tell them. I can live with that, I am a civil servant and this is what I do. I don't take plaudits and I don't brag or boast or get more than a pat on the back for a job well done. I just go and do what is supposed to be important and the fact that I enjoy the work will just have to be its own reward.