Margaret Cuthbert speech - Bundling (or bungling): Procurement, PFI and the Scottish economy

Margaret Cuthbert spoke at an Open the Books on PFI/PPP meeting on 3 May in Edinburgh organised by Common Weal, People Vs PFI and Jubilee Scotland. We publish he speech here. You can find the research of Jim and Margaret Cuthbert, including a whole section on PFI/PPP, at their new web address www.jamcuthbert.co.uk .

THE issues that have arisen in the construction of the schools within the Edinburgh PPP1 project have once again highlighted the problems of PFI. The subject covered here, which has had little recent attention, is the effect of the excessive bundling in PFI projects on the wider Scottish economy. Not only has the PFI policy been a costly venture in terms of the long run unitary charges which we will be paying for many years to come, it has also been costly to the long term development of the Scottish economy, due to the narrow sightedness and rule book mentality of successive Scottish Government administrations.

What has turned out to be a consequence of PFI and non-profit distribution (NPD) projects has been the hollowing out of public sector' ability to provide buildings and services. Instead, responsibility for the building of schools and provision of associated lifetime services has been transferred to the private sector, and in many cases to large multinationals with headquarters outside Scotland. In this process, what we might call bundling has played a big part. Bundling takes place at two levels: first, there is the bundling of a number of schools into one PFI project: and second, the bundling of design, planning, and construction of the schools in the project with the longer term janitorial services, maintenance, cleaning, catering etc. all into the one PFI contract.

"What has turned out to be a consequence of PFI and non-profit distribution (NPD) projects has been the hollowing out of public sector' ability to provide buildings and services."

These problems, and their effect on the Scottish economy are as follows:

a) Very large contracts in themselves are likely to be associated with a restricted degree of competition. In total, there have been 37 PFI schools contracts in Scotland (this does not include schools contracts carried out under the non-profit distributing model, which was introduced by the SNP). These 37 contracts covered around 245 new schools and 45 refurbishments and/or extensions. The five largest contracts alone accounted for 107 of these schools.

b) Now, for most of us, it does not take too long to come to the conclusion that, for a small country such as Scotland, with a population of barely over 5 million, we just might not have that many big firms in construction, maintenance, and school services to compete with large multinational corporations in going for some of these bundled projects. Smaller projects would have been more in keeping with the characteristics of our economic size. What we got was, for example, the Edinburgh PPP1 project involving 17 schools; or a Glasgow PFI project involving 11 new schools and 18 refurbished. If Scottish firms were likely to be considered for such large contracts it was more often than not as sub-sub-contractors.

"So how did Scottish companies fare in the divvying out of projects? From a Scottish perspective, the larger the contract, the less likely that a Scottish firm will be able to handle it".

c) So how did Scottish companies fare in the divvying out of projects? From a Scottish perspective, the larger the contract, the less likely that a Scottish firm will be able to handle it - so very large contracts are likely to be associated with the loss of Scottish market share.Of the 24 firms involved in the construction work on the 37 contracts, (and here we are looking at individual firms, not groups), only six were headquartered in Scotland. As regards the service element of the PFI projects, only two Scottish headquartered companies gained facilities contracts. The data is therefore indeed consistent with the view that the PFI method of procurement used by public bodies in Scotland was not good for Scottish firms. (For further information on these 37 PFI schools contracts, see the paper "Failure to Learn the Lessons of PFI" which can be found under Theme 3 of our website dated Jan/Feb 2010).

d) The pressure put by Gordon Brown et al on getting government departments, local authorities, and other public bodies to get capital expenditure "off the books" meant that authorities found it easier to go for new build rather than refurbishment, and to go for PFI rather than what had been the case of traditional build and borrowing from the Public Works Loan Board at acceptable interest rates - a route in which it would have been better for Scottish firms to compete.

"PFI costs are inevitably going to pre-empt an increasing proportion of local authority budgets as we move into a period of stringent public expenditure cuts. Again, this has implications for local Scottish businesses."

e) Local authority expenditure on PFI projects is contractually committed, and hence effectively ring fenced, constituting one of the first claims on local authority budgets. The existence of such ring fenced claims means that it is other parts of local authority services which have to bear the brunt of budget cuts: in addition, PFI charges are typically indexed to rise in relation to inflation. This means that PFI costs are inevitably going to pre-empt an increasing proportion of local authority budgets as we move into a period of stringent public expenditure cuts. Again, this has implications for local Scottish businesses. Local authorities will have to reduce their spending on those matters which come lower down the list of their contractual obligations. These matters include repair and maintenance of older properties - jobs of a size fitting for local business.

f) There is also a potential problem with regard to apprenticeships and training in the industries that supply PFI - design, construction, land, etc. Yes, the build might take several years and there may be jobs for apprentices but since most of the companies are headquartered elsewhere, it is not always obvious what job prospects the trainees will have after the construction phase is over. It is surely incumbent on the government to have carried out some serious studies on the effect of their PFI/NPD/Hub etc. policies on quality training and long term prospects for young people in Scotland.

"In the assessment of the costs of public sector capital and services provision, whether schools, hospitals, fire stations, etc., the cost to the future development of the economy and to the social return to the community should be high on the list of items being considered."

It is time for change and for the good of the Scottish economy and of its citizens to be placed centre stage. In the assessment of the costs of public sector capital and services provision, whether schools, hospitals, fire stations, etc., the cost to the future development of the economy and to the social return to the community should be high on the list of items being considered. It is shameful that so little thought appears to have been given to these aspects when the whole PFI approach was being developed.

Sign the petition to Open The Books on PFI/PPP here .