According arguments played out in Private Finance

According to Alexander Dielius,
CEO of Goldman Sachs, “Banks do not have an obligation to promote the public
good” (Wall Street Journal, 2010). This may seem self-evident given the
financial crisis of 2007-8. However a general definition of the public good is
“to the benefit or well-being of the public”, so
this should be something that the private sector (even banks) ought to be able
to deliver whilst maintaining their duties to the shareholders and staff of the
company.  There will always be some
“public goods” that can or should only be delivered by the public sector such
as financial governance or defence but these days, in the UK, a significant
number of public services have an element of private delivery to a greater or
lesser extent.   In
this essay I will look in more detail about how to quantify “a public good” and
delve further into the meaning of private delivery.  This will provide the starting position for
examining the arguments, for and against, the delivery of a public good by the
private sector.  I will then examine how
these arguments played out in Private Finance Initiatives (PFIs) which were
conceived in the UK in 1992 by the Conservative but became widespread under the
Labour Party after 1997. So to start let’s look at the public good.
Economically speaking, public goods are goods which can be consumed by all
without exclusion (Non-excludability), and which are not decreased by use
(Non-rivalry) (Pettinger, 2017). A common example is national defence,  if you protect the country from invasion, it
benefits everyone in the country (Elliott,
2018). Another is the police
service; providing law and order meanings everyone in the community will
benefit from improved security and reduced crime rates. Public goods can also
be defined as externalities, social costs and benefits provided by private
activities, which are not taken into account in the private transaction. Not
all goods provided by the government are not necessarily public goods, for
example, education isn’t a public good it is a merit good which is when people
underestimate the benefits of consuming (Pettinger, 2017). In more general
terms, public goods are activities that produce a positive outcome for all
members of the community. Typically, public goods are not provided in a free
market because firms cannot charge people directly. However, because there is
no excludability, this can lead to a ‘free rider’ problem. Consequently this
means there are no incentives for people to pay for the good because they can
consume it without paying. This will then lead to no good being provided and
social inefficiency (Pettinger, 2017).Moving on to private delivery, this relates
to a service that has been privately delivered, it is simply a service where
some or all of the funding has been provided by the private sector, either a
single company or consortium from the private sector sometimes due to funding
deficiencies, or lack of expertise in the public sector. Where funding for a
service has moved from the public to the private sector it is called
privatisation such as train operators, though this word historically has some
negative connotations it is still seen as an option in some service
delivery.  Another style of private
delivery is sometimes through philanthropy. 
An example of this is from the largest philanthropic organization in the
world, the Bill and Melinda Gates Foundation. This foundation is dedicated to
the elimination of malaria and polio, and controlling the spread of
tuberculosis and HIV. In total, they have given £24.2bn in grants to health programmes all over the world
with its work focusses on prevention, immunisation and vaccination (Mathiesen, 2015). Huge investors
such as Warren Buffet, who
joined the foundation as a trustee with a £30bn pledge, have helped the
foundation become a powerful catalyst for the improvement of lives in the world’s poorest countries (Mathiesen, 2015). So while the initial
funds have been generated in the private sector, they are making a significant
difference to the lives of many individuals across the world.  Seeing examples like this, begs the question
whether having third party actors funding public goods is something which
should be promoted more vigorously. So having defined what is meant by public
good and private delivery it allows us to investigate further the argument that
a public good can be privately delivered. 
Also the example of the Bill and Melinda Gates foundation that has
provided an excellent public good in health care, it would seem clear that the
potential for private involvement in the delivery of public goods is huge.However, where the private delivery is less
philanthropic and more centred on delivery from the corporate world, there are
a lot of additional constraints that become involved.  David Cameron stated during his time as prime
minister ‘it says loud and clear that it shouldn’t matter if providers are from the state, private or voluntary
sector – as long as they offer a great service’. During the coalition government, there was a push for more
delivery and financing by the private and third sector as it would help to ease
short-term financial constraints by providing investment (Grout, 2010). It
could also potentially keep long term cost down if they provided a cheaper and
better service. Nevertheless, a big problem with privately funding public goods
is the public’s scepticism
and suspicion surrounding them. Interestingly, the public are more likely to
question a private sectors intentions because of the profit motive, compared to
the non-profit delivery from the voluntary sector even though the public know
very little about this sector and there is no evidence to suggest they provide a
better service. The conflict between what the government want and what private
delivery can offer with what the public want and think of it is the biggest
constraint for the growth of the private sector delivering public good (Grout,
2010). Another question raised if a public good is to be delivered privately
is, are the profits perceived to be legitimate. This doesn’t mean illegally of
course, but private companies
will always endeavour to explain profit from delivery of public services unless
it is legitimised (Grout, 2010). Even implementing fixed priced contracts will
not legitimise profits as profits can be maximised by delivering the minimum
service. To fully understand if public good can be delivered privately, even
with the scepticism, we will look at a policy example and assess whether it was
a success or not. The example I will be using for this is Private Finance
Initiatives or PFI’s.PFI’s were first introduced by the
Conservative government in 1992 under John Major, but became widespread under the
Labour government in 1997 (Telegraph, 2017). They are a means of the state
financing the construction of new public infrastructure without the government
having to find the funds themselves. This includes hospitals, schools, prisons,
railways or any other public buildings. Usually,  to fund this infrastructure, the government
would raise the money in taxes and then and pay the builders to deliver the
project. After the work is complete, the public sector would then own the
asset. However, if the project was under a PFI, the Government would commission
the builder to deliver using its own money, which is normally borrowed from the
credit market. The state then pays the builder (or a separate company that buys
out the contract) regularly to effectively lease the building or piece of
infrastructure for a substantial time period, agreed as part of the PFI. PFIs’
were put in place with the prospect that the private sector would be more
efficient at delivering and managing projects than the private sector. They
were extremely popular to start as it meant ministers could invest in large
infrastructure projects for the public good, such as building new schools and
hospitals, without paying any money upfront. However, the repayments would last
over 30 years at a high interest rate meaning these huge debts were piling up
ready for future tax payers to pay off. But how much will the uk exactly be
paying off? Currently, the taxpayer will be paying off £305bn
in across 700 projects for the next 30
years. The most expensive single project is the Ministry of
Defence’s Future Strategic Tanker Aircraft (FSTA). It has a capital cost of
£2.7bn which, by the time the debt is paid off in 2035 would of increased to cost £10.5bn. However, this may be
the most expensive single project, but the most expensive department in terms
of PFI is the Department of Health. There are currently approximately 117
projects within the NHS with a capital value of £11.6bn, which will have cost
around £79.1bn by the time they are paid off (Rogers and Ball, 2016). Seeing
such a huge volume of debt definitely colours the public perception, not just
against PFIs but against private delivery in general. However it can be argued,
even in the case of PFIs and the NHS, there were (and are) both positive and negative
arguments.Firstly, we will look at the advantages of
using PFI’s regarding the department of health. Financially, the advantages are
that the project is service led and centred on patient need, not that of the
private company investing. Interestingly, before a hospital is built, both the
NHS and the strategic Health Authority need to agree that the scheme would be
affordable and deliverable, so in theory it is agreed by the public sector that
the scheme will produce appropriate benefits. 
There is also the shared liability, as no one company within a
consortium is liable for the entire financial risk, it is shared. Once all is
agreed the infrastructure project can begin. Sometimes, if agreed, the private
consortium can also provide non clinical services such as catering or cleaning,
making administration costs less. The advantages to the NHS and therefore the
general public also seem reasonable. From 1997 to 2010, over 118 new hospitals
were built under PFI’s (Rogers and Ball, 2016). By increasing the number of
hospitals, access to healthcare is greatly increased, leading to helth
improvements across the communities. 
Norfolk and Norwich Trust had estimated in 2010 that it is treating
23,000 more patients each year as a result of moving to new PFI premises
(Lambert, 2010).  Without the PFI
schemes, these hospitals would not of been built in such short time frames if
done by the public sector. The advantages are not only in the building of
hospitals, but the private consortia also maintain and update the buildings
when needed too efficiently. This is backed up with the survey done in 2002
which showed that 88% of new facilities were deliver on time (Ford et al., 2005). The use of private
investors has also opened up new employment options, not only increasing the
amount of health care professional due to new hospitals opening, but also
financiers, project managers, human resource advisers, legal and risk
management representatives. An example of a PFI scheme in the NHS which has
worked excellently is University College London Hospital. It is now the largest
hospital PFI in the country at £442 million. The scheme was signed in 2000, and
was completed on time and met the budget in 2008.  Sir Robert Naylor, who is the chief executive
of the UCLH NHS Foundation Trust, says ‘the decision as possibly the bravest
and the best “ever made in this part of the NHS’ (Lambert, 2010). Not only did
this hospital grant excellent healthcare to all patients, but it also has one
of the largest teaching hospitals for one of the top universities in the world.
In an ideal world this has all been done with no risk to the public purse as
this is taken by the private consortia. 
So, what could go wrong? Well, having established a significant number
of PFI the impact is now becoming apparent. 
Currently the NHS will have to pay back £79.1bn with the repayments
going until 2050, and the repayments will be coming from money made in taxes.
In the next 5 years, £1bn of the taxpayers money, will go to the PFI companies
in profits. Whilst the public will be paying back the governments debt the
private companies would have made serious profits building and running the NHS
hospitals. The Centre of Health and public interest put out a report saying
what PFI’s will do to the NHS over the next 6 years, finically speaking. Over
the past 6 years, they have made pre-tax profits of £831m , this money has
obviously not been available for patient care over this period. If the NHS
hadn’t been paying these profits, deficits in hospitals would of reduced by a
quarter in the 6 years (CHPI, 2017). A number of PFI schemes are generating
particularly high pre-tax profits for their operators. The company which holds
the contract for the hospital at University College London has made pre-tax
profits of £190m over the past 11 years out. This is out of £527m paid to the
company by the NHS (CHPI, 2017).This report clearer shows that profits have not
been transparent, and feeds back into the publics’ scepticism of the private
sector. To try and reduce excess profits, the report makes some
recommendations. Firstly, to use public sector loans to buy out these private
contracts. If this was possible, it would give control back to the public
sector, but could hinder things such as maintenance and efficiency. Capping the
amount of profit a PFI company can make is another suggestion, however, to
control and keep transparency could prove difficult if these companies have
already been making huge profits (CHPI, 2017). The only real way forward is to
try and renegotiate contract with the PFI companies and the NHS, seeing if the
amount that the NHS pays could be reduced due to private companies already
making substantial profit.   Poorly negotiated PFI contracts are the root
of all the problems caused. One example was risk sharing. The NHS wanted the
private companies to take all the risks, however if the risks were shared
equally, there would be more innovation. This is a huge problem when it comes
to healthcare as new technology and medicines are being developed every day,
however the lack of knowledge by the private companies, results in new ideas
not being tested. An example used one of the “successful” PFI’s (Norwich and
Norfolk hospital), the PFI was negotiated so poorly that the rates that were
paid by the local Trust, put it deep in the red. When rates were reconfigured
in 2003, two years after it opened, the NHS didn’t  benefit, however the private consortium did
to the tune of £70 million .Badly drawn up contracts have also lead hospitals
to be tied to expensive, overpriced contractors for maintenance and catering.
One example is the Queen Elizabeth Hospital in Woolwich. Each year they have
over 60 visits from pest controllers even if there have been no reports of
pests on sight. (Telegraph, 2011). This is not just a waste of time, but a huge
waste of money that could be going towards healthcare. Contractors are charging
high end prices simply because they can, in Central Middlesex Hospital they said on average a contractor will
charge £210 to fit a plug socket. The greatest criticism that PFI’s have faced
regarding the NHS has been that they a poor value for money. (Lambert, 2010)
Seeing the amount of debt that the NHS is now in makes it very difficult for
the public to see how it is good value. Dr. Flynn who is the deputy chairman of
the BMA’s Consultants
Committee said “The NHS has been saddled with debt. Had the Government borrowed
in the usual way, the amounts would have faded into insignificance by now.”
(Telegraph.co.uk, 2011). However, from the government’s point of view, they are
good value as government borrowing is the same and has always been spread
across a number of years. PFI’s are an example where the private sector
did and still are delivering public good, however, contracts were negotiated so
poorly that the positives are strongly outweighed by the negatives. However,
even though PFI’s were seen as a failure, other projects privately funded have
been a success. The Bill and Melinda Gates foundation is a
strong example of how private funding can be truly successful. Bill Gates for a
long time was the richest man in the world, and saw that if he partnered with
governments and the public and private sectors this would then promote greater
public awareness of urgent global issues (Gates and Gates, 2018). What the
foundation has done for developing countries is phenomenal, providing vaccines
and developing new research everyday for diseases such as malaria and TB.If public good can be privately delivered
successful, it heavily relies on putting polices in place to make sure there is
complete transparency. Firstly, there needs to be clear objectives with each
individual project and a way to measure its success. If it is made clear to the
public how well a project is doing, suspicion may decrease. If there are clear
objectives, this would also make it easy to negotiate fair and realistic
contracts which is the main cause of failure in private funding currently.
However, the biggest obstacle facing private sector funding is the public itself.
Due to the antipathy towards private companies, and evidence showing how that
some can and have made huge profits from public goods, it’s clear to see why
the public have their suspicions so are inclined to be anti any form of
privatisation. However, if every detail was done with complete transparency,
evidence of success and profits being put back into the projects, then there is
definitely room to believe that public good can be privately delivered.

 

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