Glenn Rikowski: Brown’s PFI Monster Creates Education Spending and Policy Crises

Public-private partnershipGlenn Rikowski: Brown’s PFI Monster Creates Education Spending and Policy Crises

Introduction

In the world of education politics, as in life generally, sometimes actions of the past come back to haunt those who set them in train. This seems to be the case with Gordon Brown’s Private Finance Initiative (PFI). The PFI appears to be casting a chill-inducing shadow over schools in England today. This article explores the PFI as Gordon Brown’s out of control Monster that is eating up his education policy options and spending plans.

The PFI Monster

The PFI was brought in by the Conservative Party in 1992, during John Major’s administration. However, it remained a moribund and neglected initiative until Gordon Brown, as Chancellor of the Exchequer, breathed new life into it when New Labour came to power in 1997. Matt Weaver sums up the PFI neatly:

“Under a PFI scheme, a capital project such as a school, hospital or housing estate, has to be designed, built, financed and managed by a private sector consortium, under a contract that typically lasts for 30 years. The private consortium will be regularly paid from public money depending on its performance throughout that period. If the consortium misses performance targets, it will be paid less” (2003, p.2).

Typically, different companies perform the four chief functions: i.e. build, design, manage and finance. Major banking operators are big players in this last function. To complicate the matter further still, secondary markets have arisen in PFI. Contracts have been sold on to other companies, sometimes more than once, making the questions of ownership, responsibility and accountability ever more complex and shrouded in mystery and financial confidentiality [2].

For New Labour, the PFI had some particular attractions. First, prior to the 1997 General Election and during 1997-1999, New Labour tied itself to the spending plans of the previous Conservative government! This was supposed to convince the City of London and business interests that New Labour had grown out of its ‘tax and spend’ habit, and voters in Middle England that income tax hikes by a Labour government were a thing of the past. This put a squeeze on new capital projects. However, the PFI ‘avoids making expensive one-off payments to build large-scale projects that would involve unpopular tax rises’ (Weaver, 2003, p.2). Secondly, as the risk and task of raising finance shifts to the private sector then ‘in the government’s accounts it does not show up as increased public borrowing’ (Ibid.). By these cloak and dagger stratagems, New Labour could begin to build new schools and hospitals without raises taxes or spending. Gordon Brown’s strategy at the Treasury, of promoting and extending the PFI as far as he could, appeared to some (especially construction companies and others involved in servicing the four functions noted above) as a cool move. As Alan Milburn explained in 1997, the then Minister for Health:

“When there is a limited amount of public sector capital available, as there is, it’s PFI or bust” (in Osler, 2002, p.119).

The PFI was encouraged literally ‘at all costs’. George Monbiot (2000), focusing on some key examples, indicated that the long-term costs of PFI were higher (and sometimes fantastically so) than conventional financing of government capital projects. His account of the Skye Bridge, built under PFI, shows this scheme as hugely wasteful, scandalous and yet almost surreally funny: how could The Great British Public let such monumental rip-offery occur? The PFI is like buying something on a mortgage. Those saddledwith mortgages know especially that it would have been far cheaper to pay for a house outright – without the profit-taking interventions of layers of finance capital. Gordon Brown and the New Labour government shoved this common and basic insight aside when their eyes light up and they swooned to the lure of the PFI tune. The ‘have now, pay later’ mentality prevailed: and these people say that it is school kids and students that require more ‘financial literacy’ (see Rikowski, 2007)! 

Monster out of Control      

For the last ten years, the PFI Monster has been a gentle giant, and although there have been periodic bouts of regret and unease when PFI profits get out of hand (the early projects had particularly poorly drafted contracts as far as the public wallet was concerned), and complaints about the quality of some PFI buildings (including some schools) New Labour’s commitment to PFI has rarely wavered, whatever damning evidence regarding the PFI (e.g. Monbiot, 2000, and Pollock, 2004) has emerged. Now the PFI Monster is turning on its nurturing and faithful owner.

Thus far, PFI spending has not figured as government debt. However, New Labour is under an obligation to ‘adopt international financial reporting standards for public accounts from next April’, according to Giles and Timmins (2007). They note that:

“A squeeze on capital spending on schools, hospitals and other public infrastructure could be in prospect as billions of pounds worth of private finance initiative projects are poised to come back on the government’s balance sheet … If only two-thirds of the £29bn of PFI projects that do not currently count as government debt come back on the books, the existing sustainable investment rule looks set to be broken” (Ibid.).

The ‘sustainable investment rule’ (SIR) was invented by Gordon Brown when he was Chancellor, and devised as a signal to the City of London and business interests that government borrowing for investment in public services would be limited. Basically, the SIR ‘limits public sector net debt to 40 percent of gross domestic product’ (Giles, 2007). Brown also invented what is known as his ‘Golden Rule’: ‘only to borrow over the economic cycle’ (Ibid.). If a substantial proportion of PFI debt sinks into the Treasury accounts then the current Chancellor, Alistair Darling, may well have to break Brown’s SIR, and perhaps even his ‘Golden Rule’ – thought the Treasury could always play fast and loose with its definition of the ‘economic cycle’ to cram the PFI debt into ledgers. 

However, there is doubt regarding how much the smell of PFI debt will cause Treasury noses to tremor. According to Ken Wild, who is on the government’s Financial Reporting Advisory Board and also the International Financial Reporting Interpretations Committee (IFRIC - from where the new rule originates), the Treasury will have an input into the precise rules regarding how much PFI debt is included in government accounts (Ibid.). Yet even Wild reckons that most of the debt will endup on New Labour’s table. He predicted that ‘most’ of the £29bn would wing its way into the government’s debit column (Ibid.).

Reading between the lines of Nicholas Timmins’s article on public service reform (Timmins, 2007a), it seems that possibilities for government debt and spending crises might call the financial bluff on New Labour’s public service ‘reforms’. According to Timmins:

“Public service reform, most notably the introduction of competition, choice and greater use of the private sector, became the central plank of the third-term domestic agenda” (2007a).

Yet the introduction of the private sector into running and managing public services and organising capital projects nurtures private operators’ propensity to turn state revenue into private profit, in their many imaginative and innovative ways. Simply, bringing in private operators costs extra, all other things being equal: they need to make a profit, and this has to be financed. There will be problems of what is a ‘fair’ or ‘reasonable’ profit in these circumstances (which has bedevilled the PFI and UK construction companies involved in it). Timmins (2007a) ponders on why Brown’s first Queen’s Speech (laying out his legislative plans) focused on security, constitutional reform and shape-shifting office space for new government departments, rather than on public service reform. Timmins does not really answer his own question, but rather proposes a deeper business hole be dug into state revenue by arguing that New Labour’s marketising initiatives and opening doors to state services for business has been half-hearted. My answer would be different:at last it looks like the lid might be blown on the juvenile economics of letting private operators run state services for profits and piously believing that this will bolster government coffers.

Timmins (2007b) indicates that the shift of PFI debt into the government’s realm could pose problems for government spending on public services and infrastructure:

“Over the next year or two, capital may not be in too short supply [for the government]. There will, however, be heavy demands on it: for reshaping national health services and for transport, for example. In the longer term, with public spending getting much tighter, resources could run short in the absence of an off-the-balance sheet source of money.”

Translating, this means that with large chunks of PFI debt on the government’s books, there will need to be a significant squeeze on government expenditure, which will hit schools and other public services.

The PFI Test and Blood on the Balance Sheet

So, what are the possible consequences for schools arising from any financial reconfiguration that places PFI debt in the government’s lap? The Financial Times poses the following teaser:

“Off-balance sheet accounting has a long and often dishonourable history. Just think of Enron … Britain and many other countries including Canada, Japan and Australia, use PFI to pay for infrastructure. Instead of paying a contractor to build a school, the government will pay to lease it over 30 years, transferring some management and operating risk to thebuilder. The question is whether that 30-year lease commitment is a debt, in which case it should be on the balance sheet, or not” (2007b). 

The Financial Times position is that the current situation is unacceptable (Ibid.). First, as PFI debt does not figure in off-balance sheets for the private sector (and this is an IFRIC ruling), then it should be included in the government’s books; otherwise we have ‘assets floating in the ether, owned by nobody’ and that is ‘intolerable’ (Ibid.). Second, there is inconsistency in the system. As Giles (2007) indicates, in the UK, PFI prisons and roads ‘tend to be on the government books’ but schools and hospitals do not. Thirdly, it appears that the government is more concerned with massaging its accounts rather than putting the PFI through a clear test of whether it is a cost-effective method of government procurement. The Financial Times bites the bullet and argues that:

“After years of debate it is time for the test: put the PFI on the balance sheet, and let it live or die by its merits as a financing technique” (2007b).

However, if this is done then the SIR rule will be broken as up to £30bn of PFI debt enters government accounts. But the Financial Times argues that the SIR is becoming ‘increasingly discredited’ (2007b), but fails to say why. The second consequence is that:

“…in future new schools and hospitals will mean debt on the balance sheet, and there is a risk that the perception of indebtedness may lead to a fall in capital spending” (Ibid.).

Thus, there may be negative consequences for New Labour’s Building Schools for the Future (BSF) project; a rolling programme of refurbishment of secondary schools (and more recently primary schools have been included). Though the BSF project is the most obvious cause for concern, the inclusion of PFI debt may have other nasty implications.  

‘The PFI Monster Ate My School!’

First, integrating the PFI debt into government accounts may well lead to a general squeeze on public sector pay, including the pay of teachers. Secondly, there could be rationalisation or downsizing of public service programmes and initiatives, and it is in this light that Gordon Brown’s commitment to building 400 Academies at £20 million a throw now looks rather foolhardy. All the more so now that the Academy programme is facing a number of problems and growing forces of opposition.

One of the ‘tests’ thatBrown faced when he became Prime Minister a few weeks ago was whether he would take up the Blairite Academies programme enthusiastically and go along with its expansion to 400 such schools by 2010 [3]. Taking up the New Labour challenge, Brown passed the test and gave his backing to the 400.

However, Brown’s commitment to massively expanding the Academies programme is questionable on the basis of a number of considerations. In the light of these, it seems that he may be overreaching himself.

First, the ‘cash for honours’ scandal, which included some instances of sponsors of Academies appearing to get honours in exchange for their ‘philanthropy’, made it difficult to get sponsors for Academies, especially the ‘dynamic entrepreneurs’ so beloved of New Labour. No doubt the recent whitewash regarding this fiasco where ‘No one is to face charges in the cash-for inquiry’ after a ’16-month investigation’ (Hills, 2007), will help the sponsorship problem, but the mud has been smeared across the Academies programme nevertheless. One response has been to let local education authorities (LEAs) or merely Local Authorities (LAs) as they are now known, back into the fold. Thus, in a few areas, LAs have got involved in sponsoring Academies. The whole rationale for Academies, as being ‘independent’ of LAs that have apparently not served local people well regarding provision in schools, is therefore undermined. Furthermore, some LAs have resisted having an Academy foisted upon them as the only alternative to a ‘failing’ school. In recognition of this, Ed Balls, the Minister for the new Department for Children, Schools and Families (DCSF) created by Prime Minster Gordon Brown, announced that LAs will attain powers ‘in determining whether new business-sponsored city academies should be given the go-ahead’ (Boone and Barker, 2007). Such a stance gels with Brown’s stress on localism, and returning powers to local government, according to the Financial Times (2007a). Yet this also constitutes a significant watering down of the ‘independence’ of Academies. As the Financial Times acknowledges:

“Academies were devised to be independent of local councils and to offer an alternative to what had gone before” (Ibid.).

In the absence of a more robust local tax regime, the Financial Times argues that localising manoeuvres such as this over Academies will make ‘public service reform’ (that is, bringing in the private sector on an expanding scale) more difficult, which, for the FT, is regrettable.  

Secondly, and relating to the first point, in the face of criticisms of the Academies programme, New Labour has tried to give it more academic kudos, as well as trying a variety of methods to solve the sponsor problem. Thus, universities have been encouraged to become sponsors. So far, 9 universities have declared an interest in sponsoring Academies, including elite universities such as University College London and the University of Manchester (Wintour, 2007). However, many higher education institutions don’t have a spare £2 million floating around to become sponsors of Academies, so Ed Balls at the DCSF has announced that the £2 million rule be abolished (Hall, 2007). But is seems that this rule does not apply to God-upped philanthropists seeking to ram the Word down the throats of hapless school kids (Ibid.). No doubt wondrous Philanthropists will call for the Almighty to strike his vengeance on Balls for giving universities ‘privileges’ over the powers of money and superstition. After all, universities are only merely educational institutions. As Balls says:

“The test of whether an organisation can be a potential sponsor should not be its bank balance, but whether it can demonstrate leadership, innovation and a commitment to act in the public interest” (in Boone and Barker, 2007).

This is surprising: the notion that public institutions such as universities can provide leadership and generate innovation! It might have been thought that the Party of Business would have assumed that only the private sector and hyped-up entrepreneurs could bring these goodies to our schools!    

Thirdly, the increasingly schizoid position of Academies – infused with business values and practices, marketising elements and so-called ‘independence’ on the one hand, yet seeking to enhance community regeneration and education standards on the other – yields wild and bizarre consequences. AsFiona Miller (2007) notes, the Academies programme is almost a form of policy madness:

“His [Gordon Brown’s] government’s supportfor city academies is incomprehensible, given its simultaneous promise of more citizen participation, greater democracy, transparency and localism.”

The almost untenable position of Academies – as business-infused but supposedly community organisations – was exposed on the issue of whether they should pay Valued Added Tax (VAT), or not (see Rikowski, 2005a). Academies are prima facie supposed to play a part in regenerating local communities, yet as they are bathed in business values and supposedly ‘innovative’ in their behaviour, they seek to charge where possible (e.g. for use of rooms and facilities) – and hence VAT looms over their messed-up mission. Another apparently off-the-wall development is that some Academies are planning to have state boarding students – making them more like elite private schools (Marley, 2007). However, they have been clever in how they have framed this proposal, for the schools argue that young people in care could benefit from such an experience. Yet they are probably aware that New Labour is keen on state schools attracting overseas students and becoming export earners (see Rikowski, 2006), and thus likely to be supportive of the idea. This plan, for the long-term, projects Academies as education ‘businesses’ and hence as VAT worthy (as indeed, conventional and traditional private schools should be, their charitable status being anomalous).      

Finally, there has been growing political opposition to Academies. The National Union of Teachers takes a strong stand against them on paper, though is dragged into working with and within existing Academies for those teachers employed in these autocratic (where they are sponsored by philanthropists) and undemocratic educational experiments. There have also been a number of local campaigns against Academies. The most celebrated being that in the London Borough of Brent, where a camp site has been in existence since last Easter near the Wembly Stadium trying to stop first Andrew Rosenfeld (a tax exile in Switzerland) but more recently ARK (Absolute Return for Kids – headed by a mega hedge fund speculator) from starting up an Academy (see Brent Teachers Association, 2007; and Nousratpour, 2007). The advent of the Anti Academies Alliance has given a national focus to local struggles [4].

If the PFI debt shit hits the education budget fan, will Brown recant on Academies and scale down the programme to Blair’s original 200, or scrap the programme altogether? Or, will the PFI Monster eat up some of the money that should have gone to schools?  

Conclusion: Something Will Have To Yield To the Monster

The PFI debt situation perhaps will put the expensive and divisive Academies programme into further doubt. However, to back down from his commitment to produce 400 Academies by 2010 Prime Minister Brown would risk huge political fallout. Such a u-turn would seem to be a sign of weakness in the media. His original commitment to the 400 would appear to have been chronically poor judgement (which is true, actually).

Thus, it is hard to see Brown backtracking. Given that he has many other pressing calls on government finances: the Iraq war dragging on, the recent floods, the commitment to a belated yet much needed housing strategy involving significant social housing, the channelling of £400 million a year into student grants (to shore up the current fees regime and have some chance of meeting the target of 50% in higher education by 2010), and other things beside, his main option seems to be a squeeze on education spending. If this is the case, then in effect the PFI Monster’s debt disease will have consequences for the pay of teachers (the biggest cost item in schools) and other elements of classroom-based expenditure (books, IT and so on).   

Yet if Brown took this route then Ed Balls’ attempt to get on better terms with the teacher unions than his predecessors (especially Charles Clarke and Ruth Kelly) and especially with the National Union of Teachers – would seemed doomed. All the more so when bank interest and mortgage rates are on the rise and any clampdown on teachers’ pay would be likely to cause industrial action.

The PFI Monster is out of control. It seems something will have to yield. Hopefully, it will New Labour’s Academies programme, or perhaps the PFI Monster itself will be cut down to size (the Party of Business will have a lot of stick from sectors of industry and finance and the CBI if that happens). Maybe Brown will stake all on fixing the rules regarding government accounting of PFI debt. But that will just feed the PFI Monster and encourage its belly to expand further. Meanwhile it is to be hoped that teachers and their unions will see off any attempt to pillage their pay so that the appetites of the PFI Monster can be satisfied.  

Notes:

[1] AOL blogs are restricted to 25,000 characters (including spaces and code). Thus, I have had to split this one up into four parts. However, the whole article can be viewed as a single entity at Wavering on Ether, my MySpace blog, at:

http://blog.myspace.com/index.cfm?fuseaction=blog.view&friendID=14758904&blogID=294094529&Mytoken=9E6CA865-4685-4D62-BB5EBDE32F7516A830672746

[2] For a more detailed account of the PFI, see Pollock (2004), and chapter 8 of David Osler’s excellent book, Labour Party plc: New Labour as a Party of Business (2002).

[3] Like the PFI, Academies started off from a Conservative Party education policy that achieved low impact but was given new life by New Labour post-1997. City Academies were brought in by John Major’s administration in 1992. New Labour got rid of the ‘city’ tag as it was argued that such schools were also appropriate for rural areas facing social and educational disadvantage. Academies as currently constituted are:

“State-maintained independent schools set up with the help of outside sponsors … [and are] … the government’s latest attempt to drive up standards by replacing failing schools in struggling education authorities … A private organisation, such as a faith group, puts in £2m, and then the government gives £20m. The private organisation then runs the school outside of the local education authority’s (LEA) funding control, but still operates it within all the national requirements forcurriculum and standards” (Curtis, 2004, p.1). In addition, they have ‘additional freedoms to areas such as leadership, organisation and the curriculum’ (Specialist Schools and Academies Trust, 2007). These ‘additional freedoms’ are significant. Academies have greater control over staff pay and conditions than individual LEA schools (Grant, 2005). Although the National Curriculum applies, Academies can apply for the power to ‘innovate’ more than any other type of state school. Not only faith groups sponsor Academies, but also businesses, educational charities and philanthropists. The power to adjust the National Curriculum and also the right to set a school ‘ethos’ has proved attractive to those rich folks with desires to sponsor an Academy in order to insert Creationism or Intelligent Design into science and religious education. Sponsors also have the right to convene a governing body that provides them with a majority, making them independent of LEA control and with ‘deeply undemocratic governance arrangements, which give total control to sponsors’ (Millar, 2007). Francis Beckett’s (2007) brilliant account of the ‘City Academy Fraud’ provides tremendous detail on these strange schools, including data indicating that many sponsors do not fork out the full £2 million. Some sponsors have also run dubious ‘consultancies’ which have filtered away Academy funding (see Rikowski, 2005b). Tony Blair’s regime originally set the limit at 200 Academies, but towards the end of his reign he upped that to 400.

[4] See the impressive Anti Academies Alliance web site: http://www.antiacademies.org.uk/

Volumizer, 31/07/07

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