News analysis - Running the risk of failing public services

4 Apr 02
One of the overriding reasons for the increased use of the private sector in the provision of public services is the spreading of risk.

05 April 2002

By bringing in the business know-how of banks, financiers, construction groups and management consultancies, so the argument goes, the burden of financial and operating risk is transferred to the private sector.

The private sector designs, builds, finances and manages a project over the lifetime of a contract, allowing teachers to carry on teaching and nurses to get on with nursing while business ruminates over the big picture – thus giving the user a better public service.

'Risk is managed effectively,' claimed Andrew Smith, chief secretary to the Treasury, in a speech last October, 'so the consumer can benefit from enhanced services without the taxpayer having to shoulder the burden of failures or fluctuations in demand.'

Smith's enthusiasm, and that of other ministers, though, may have been dented by recent events. Last month Transport Secretary Stephen Byers announced that the government would pay £300m to compensate Railtrack shareholders following the demise of the company.

Another £300m or so is pledged towards the 'restructuring' of the company soon to be formerly known as Consignia.

And in February, the government admitted that it was in talks to facilitate a £60m bailout of the brand spanking new National Air Traffic Services.

It does not end there: no-one quite yet knows how much the government, sorry, the taxpayer, will end up paying for the partially privatised London Underground.

The risk, it seems, is not quite as much of a burden for the private sector as Smith has made out.

'The government has to stand behind these projects because it cannot allow them to fail,' says Maurice Fitzpatrick, head of economics at accountancy group Tenon. 'They are all vital public services and it never has been clear to me how the government can stand aside [when something goes wrong].'

Although he believes the Private Finance Initiative has 'galvanised' aspects of public sector behaviour, he admits to concerns over the issue of risk.

Fitzpatrick is not alone. Already, public-private partnership refuseniks such as Labour MPs Gwyneth Dunwoody and David Taylor have questioned what risk there is to the private sector when essential services run into financial difficulty.

The cynical view is that companies know full well that it will not be their job to bail out important services: for reasons of politics, ministers will always ride to the rescue. Under such conditions, the taxpayer meets all the costs and gets none of the benefits – where is the partnership in that?

Chris Waites, head of the PFI team at management consultant Tillinghast, however, believes risk is still relevant. 'I would say that the theory of risk is not redundant. It remains right at the heart of PPP and PFI deals,' he asserts.

Waites points out that companies still face financial risks from issues such as time and cost overruns, the whole-life cost of a project and ensuring that the asset 'is in good nick'. In light of September 11, taking examples such as Nats as typical may be stretching a political point, he suggests.

As an answer to current problems, Waites would like to see more risk transferred to the private sector. This might involve more deals being equity-driven, rather than debt-financed, as the majority are nowadays. 'A great slug of equity' introduced into a project, says Waites, would concentrate private sector minds considerably.

Smaller deals could also see some change, with a company, for example, that has successfully bid for a PPP deal putting the total cost on its balance sheet, thus ensuring that any costs cannot be staggered over years and would have to be met year on year. This could happen through accounting changes being considered by the Accounting Standards Board.

If the risk factor is clarified, it might help sort out what value for money, if any, PPP delivers to the nation. Smith take note. For now, the sceptics feel they are aiming at an open goal. l


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