PFI/PPP Buyouts, Bailouts, Terminations and Major Problem Contracts

Further reading: Prof Allyson Pollock and David Price: "PFI and the National Health Service in England" June 2013

ESSU Research Report No 9, Dexter Whitfield - Published February 2017

Details 11 buyouts, 20 terminations and 43 projects with major problems, plus many bailouts, accounting for 28% of PFI/PPP contracts by capital value. The public cost of buyouts, bailouts, terminations and major problem contracts is £27,902m, when combined with the additional cost of private finance, interest rate swaps and higher PFI transaction costs. This could have built 1,520 new secondary schools for 1,975,000 pupils, 64% of 11-17 year old pupils in England. The UK’s 6.8% ratio of buyout and terminated contracts is higher than the 5.4% average of World Bank projects in developing countries for terminated contracts. This ESSU Research Report explains the causes and fundamental flaws in the PFI/PPP model.

Databases of buyouts, terminations and major problem contracts.

"Neoliberalism and the state-business partnership: the PFI/PPP model

PFI/PPP projects are a product of neoliberalism. The Design, Build, Finance and Operate (DBFO) model has increased the commodification and financialisation of public infrastructure to provide new opportunities for accumulation; created new markets for finance capital, construction and facilities management companies, consultants and lawyers; reduced the role of the state; and ultimately widened the potential for privatisation of buildings, transport and utility networks and public services.

Incomplete and complex contracts

A large and complex contract is at the centre of every PFI/PPP project. A standard draft contract is amended and developed as procurement proceeds up to the point of financial closure. The final contract or project agreement can range from a few hundred to several thousand pages. But no matter how comprehensive they are, virtually all contracts are incomplete in practice (Hart, 2003), because they cannot predict future events and changing economic and social needs. Tirole (1999) identifies three reasons for incomplete contracts:

Firstly, the inability to determine the future. Long-term public infrastructure contracts have to take account of changing levels of demand, revised public policy priorities, and technological and operational changes in service delivery. Nor can they foresee the performance of the private sector consortia (construction, banks and other financial institutions and facility management contractors).

Secondly, the current focus of procurement and performance on achieving ‘outcomes’ rather than the quality of inputs, processes and outputs gives contractors greater freedom to change working methods, procedures and staffing levels that can result in unpredictable knock-on effects. Furthermore, the cause/effect of outcomes is often difficult to determine and the contract may only be partly responsible for the achievement of an outcome.

Thirdly, even if all eventualities could be identified it would make contracts too complex and costly to describe in clauses.

Finally, it is essential that the terms of a contract can be enforced without frequent recourse to the courts, which is likely to make client/contractor relations and contract management more difficult.

There is another dimension to PFI/PPP contracts and contract management. Their complexity means that most elected members and public officials have only a basic understanding of a contract . Furthermore, they are usually advised by financial and management consultants and lawyers who are generally ideologically committed to the PFI/PPP model.

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