A Challenge to the Chancellor

Refute these charges, or admit that the private finance initiative is built on fraud and false accounting

George Monbiot. Published in the Guardian 18th June 2002

Poor visibility corrupts; invisibility corrupts absolutely. The private finance initiative, which is the means by

which billions of pounds of new public projects in the United Kingdom are now being funded, is doubly obscure: first because it is so complicated and appears so boring that few people have grasped its implications; secondly, because so many of the crucial details are hidden from public view by the blanket ban on disclosure known as "commercial confidentiality". But slowly a few of them are beginning to emerge. As they do so, they confirm the gravest allegations the programme's critics have made.

In January, this column suggested that public bodies were being forced by the government to rig the "public sector comparator", which shows whether or not privately financed schemes offer better value for money than conventional funding. Now that allegation has been corroborated. Two weeks ago, Jeremy Colman, the auditor-general at the National Audit Office, revealed that some of the comparators being used are "utter rubbish" and "utterly irrelevant". Public service managers know that they must show the government that their plans are cost-effective. "If the answer comes out wrong you don't get your project. So the answer doesn't come out wrong very often."

They are rigging the comparators because the government has presented them with unreconcilable objectives. On the one hand it has told them, in the words of Alan Milburn, the secretary of state for health, that "it's PFI or bust": the only money the government will allow them to receive is money provided by the private sector. On the other hand it has insisted that private finance can be obtained only if it offers better value for money than public funding. Public servants are forced, in other words, to prove that private finance works.

To help them out, the government has provided them with a means of falsifying their figures. It's an accounting device called "risk costing". In principle, when a consortium of private companies agrees to build a hospital or some schools for a public body, it acquires the risk that the project might fail. This risk is "costed" and becomes a key component of the value-for-money calculations.

A recent paper by the Association of Chartered Certified Accountants (ACCA) warns that the costs of the principal risks (such as unanticipated expenses) have been exaggerated. The average cost overrun on public hospital building projects, for example, is 7%. The private operators are allowed to claim a "risk" of 12.5%, and this is likely to rise as a result of new guidance from the Treasury. By contrast, no risk costing whatsoever is added to the public sector comparator.

Last month, the British Medical Journal published a paper showing how this "risk transfer" has been used to distort the results. The government's own figures reveal that before "risk" was taken into account, the new hospital schemes the researchers studied would all have been built far more cheaply with public funds. When the "transferred risks" were costed, however, they were found miraculously to tilt the comparison in favour of private finance, in several cases by less than 0.1%. Reading these figures, it becomes plain that the hospital trusts started with the desired results, and worked backwards until they found a risk costing which matched them.

Ultimately, of course, even if the risk was assessed realistically, the entire exercise is a sham, for, rather than allow a public service to collapse, the government will bail out the private consortium which runs it, as Railtrack, the Channel tunnel builders, the passports office and the benefits agency have discovered.

purports to proffer strict empirical generalizations from objectively established facts, and economic reason and the world are both preconsciously forced to conform to its presuppositions.

Our condition is in this way an institutionalized thrall, the invisible prison of a ruling paradigm closed off from its consequences. In a mature economic paradigm, the self-maximizing behaviours of money-privileged factions would not be assumed to necessarily deliver beneficial social outcomes by an “invisible hand,” but would be tracked to their actual consequences of life gain or loss in the real world. This is the road of reason which is not yet taken.

John McMurtry

1. Smith, Adam (1909). An Inquiry into the Nature and Understanding of the Wealth of Nations. New York: PF Collier and So, Book IV, Chapter II, pp. 351-52.

—from Economic Reform, June 2002