14:   Road Hogs

Even the government’s private finance success story turns out to be a roaring failure

George Monbiot. Published in the Guardian 30th November 2004

Two years ago I accused the British  government in this column of  nine kinds of fraud and false accounting, arising from its private finance  initiative(1). If any of these charges  were false, I suggested, the Chancellor  of the Exchequer should repudiate  them. If he failed to do so, the  Guardian's readers should conclude  that he had no defence to offer.

Neither the Chancellor nor anyone  else in the government responded.  Since then, several reports laying  down even graver charges have been  published. The government has  ignored them, and the opposition has  left it in peace. The Conservatives  invented the private finance initiative,  so they are silenced by their complicity. The Liberal Democrats have  challenged some of the details of the  scheme, but not the principles behind  it. The trade unions, the Greens and  Plaid Cymru oppose it, but if a policy  doesn't divide the major parties, it  doesn't make the news. Public bodies,  which depend on money from the  initiative, won't criticise it openly. We  listen for informed dissent, but we  hear only the great shuffling sound of  the Establishment closing ranks.  Corporations, with the Treasury's help,  are robbing the public of tens of  billions of pounds. And they are  getting away with it.

The private finance initiative is  supposed to allow the government to  commission public services it wouldn't  otherwise be able to afford. Private  companies put up the money, build  the new prisons or hospitals or  Underground trains we need, and run  them for the next 25 or 30 years. The  government pays them the rent and  service charges. By this means, the  Treasury claims, new money is poured  into public services. As the private  sector is more efficient than the public  sector, they can run our public  services more cheaply than the state  could.

That's the theory. The practice, as  innumerable studies have shown, is  rather different. Instead of being led  by public need, many private finance  initiative projects have been designed  to generate as much private profit as  possible. In some cases cheap  schemes, such as the renovation of a  hospital, have been rejected because  they are insufficiently profitable, and  replaced with more lavish projects,  such as demolition and rebuilding.  The Walsgrave Hospital in Coventry,  for example, which was to have been  refurbished at a cost of pounds30m,  was instead knocked down and rebuilt  at a cost of pounds330m, solely in  order to make the project attractive to  private companies.(2) In other cases the  contracts have been so generous that  the companies have been able to  extract staggering rates of return. The  consortium which built Altcourse  prison in Liverpool broke even  two-and-a-half years into the 25-year  contract: it is now enjoying 22 years of  pure profit.(3) The companies which  built the Norfolk and Norwich  University Hospital were able to  extract tens of millions of pounds  from the scheme through a technique  called "refinancing", before the  hospital had even opened.(4)

And because, for any company, profits  must come before people, many of  these projects offer far worse services  than their publicly funded equivalents.  Beds are crammed together in hospitals which look and feel like giant  morgues; operating theatres are  flooded with sewage; children try to  study in permanent building sites;  underpaid prison guards sign off sick  and look for work elsewhere. The  experiment keeps failing, but the  government keeps repeating it.

On those rare occasions when ministers condescend to answer their critics,  they extract from this mess the  handful of projects which appear to  offer value for money. The sector they  like to talk about most is highways. In  1998 the National Audit Office  reported that the first four privately  financed roads commissioned and  built in the United Kingdom would  save the taxpayer around pounds100  million.(5) If you ask a minister a  question about hospitals, he will give  you an answer about roads.

But even this success now turns out  to be a fake. A report published last  week by the Association of Chartered  Certified Accountants reveals that the  figures with which the National Audit  Office was working bear about as  much relation to reality as an episode  of Friends.(6)

Before explaining what they found, it  is worth explaining what they didn't.  Most of the information they needed  is withheld from the public. Outrageously, we are permitted to see  neither the business case for the  privately financed roads, nor the  contracts between the corporations  and the government. So the report's  authors, like the National Audit  Office, have been groping around in  the dark. The government claims that  this information cannot be released  because it is "commercially confidential", but it now turns out that the  government instructed the private  companies not to publish it.(7) When  information like this is kept from us,  you know it has something to hide.

But the darkness has begun to yield  some of its secrets. The association's  researchers studied the first eight  privately financed roads in Britain:  schemes such as the widening of the  A1 and the A1-M1 link, and the  construction of new sections of the  A30 and A69. The private consortia  which built them are paid by the  government according to the number  of cars and lorries that use them.

The researchers discovered that by  2002 the roads companies were  making an average operating profit  from the eight projects of 68%.(8) This,  the authors point out, is likely to be  an under-estimate, as several of their  sources of income are hidden from  public view. What it means is that  only one third of the money we are  paying for these roads is used to run  and maintain them. In just three years,  the Highways Agency paid out  pounds618m to the consortia – more  than the entire capital cost of the  roads (pounds590m). In other words,  the government could have paid for  all eight schemes itself. As it is, the  contracts, which last for 30 years, will  cost us pounds6 billion.(9)

This remarkably bad value for money  has been disguised by a couple of  clever accounting devices. One of  them is the high discount rate used by  the Highways Agency. It assumes that  the value of the invested capital will  decline by 8% a year. The Treasury's  guidelines say the rate should be 6%.  More importantly, much of the cost  the companies are presumed to carry  takes the form of something called  "risk transfer". In principle, if traffic  growth is lower than forecast, they  risk losing money. But the risk has  been massively over-estimated. Even  when traffic has fallen short of the  companies' estimates, they have made  a thumping profit. And of course this  risk does not exist when the public  sector builds a road: the government  does not lose money if the volume of  traffic is low. This cost, in other  words, has been invented to make the  private finance initiative work.

So even the government's great private  finance success turns out to be a  roaring failure – for everyone, that is,  except the corporations and the banks.  The only interesting question is this:  for how much longer are we prepared  to let it go on?


1. George Monbiot, 18th June 2002. Public  Fraud Initiative. The Guardian. Also at

2. George Monbiot, 2000. Captive State: the  corporate takeover of Britain. Macmillan,  London.

3. Eg David Hencke, 4th July 2001. Private Jail  Makes Huge Profit. The Guardian.

4. Eg Serco, 12th December 2003. Octagon  Healthcare Completes Norfolk and Norwich  University Hospital Refinancing. Press release;  George Monbiot, 5th June 2001. Bleeding the  hospitals. The Guardian. Also at bleeding-us-dry

5. National Audit Office, 28th January 1998.  The Private Finance Initiative: The First Four  Design, Build, Finance and Operate Roads  Contracts. Press Notice. http://

6. Pamela Edwards, Jean Shaoul, Anne Staf- ford and Lorna Arblaster, 2004. Evaluating the  Operation of PFI in Road and Hospital  Projects. The Association of Chartered Certified Accountants. Accessible via http://

7. The National Audit Office, 1998. The  Private Finance Initiative: The First Four  Design, Build, Finance and Operate Roads  Contracts, Report of Comptroller and Auditor  General, HC 476, Session 1997–98, Cited by  Pamela Edwards et al, ibid.

8. Pamela Edwards et al, ibid.

9. ibid.