Health, education and prison PPPs

In health and education PPPs, the private consortium usually designs, builds, and operates the non-medical services in the institution, whereas in prison PPPs the company may also operate the actual prison services as well.

In these kinds of PPPs it is extremely difficult to specify accurately the performance standards for the consortium as relatively non-measurable psychological factors such as the quality of human relations and the quality and atmosphere of the building itself can make a tremendous difference to the overall performance of the institution.

Relatively little attention has been paid by PPP promoters as to whether this transfer of traditionally public-sector functions to the private sector will benefit the delivery of services. There has, as the EIB’s Armin Riess puts it, been “a sometimes uncritical, if not ideological presumption that private sector participation in the provision of public services can do no harm”.

If the design, construction and operation of a facility are bundled together in a PPP contract, the private sector partner theoretically has more incentive to make cost reductions than if three separate companies were contracted by the public sector to perform each stage. However this depends on the rates of return that the deals already have built into them. This is usually kept secret but cases from the UK suggest that margins are often already so high that there is little additional incentive to cut costs.

Another question is the degree to which cost cutting is desirable, as it may involve a decrease in the quality of service that cannot be foreseen or measured by contractual obligations.

The trouble with PPPs for core services

Examining whether some sectors are more suitable for PPPs than others, Riess suggests that the bundling construction and operation of services into a PPP contract, along with private ownership, provides a cost-cutting incentive, which may be of benefit in some cases, but may in some services result in a decline in the quality of service that is impossible to prevent by means of foresight in the contract.

Among the services he names as potentially harmed by bundling are information technology, education (core services), health (core), prison services (core), and railway networks.

This is either because of rapid technological advances that cannot be foreseen by contracts (IT and core healthcare) or because performance is difficult to measure in some services (healthcare, education, prisons) and people have limited knowledge or possibilities for avoiding under-performing schools or hospitals.

Rail networks

Rail networks are seen to be of questionable merit as PPPs due to the high need for public safety taking precedence over potential cost-cutting.

Prisons

Prison PPPs have often included some core services and have been highly controversial. A UK National Audit Office report found that the performance of PFI prisons varied and was comparable to the sample of public prisons studied, however it also highlighted the difficulties of comparing public with PFI-run facilities.

Serious doubt has been cast on whether the provision of services in prisons by the private sector can be adequately measured, as the companies risk paying performance penalties whenever incidents such as assaults or the smuggling in of drugs take place in the prison, and there is therefore an incentive to under-report such events. Several PFI prisons also seem to have problems with recruiting and retaining suitable staff.

Health and education

In reality, it has not only been PPPs in core services which have caused problems, but also the use of PPPs for accommodation in the health and education sectors, which has resulted in some unwanted ‘efficiencies’:

“the high cost of PFI schemes has presented NHS [National Health Service] trusts with an affordability gap. This has been closed by external subsidies, the diversion of funds from clinical budgets, sales of assets, appeals for charitable donations, and, crucially, by 30% cuts in bed capacity and 20% reductions in staff in hospitals financed through PFI. Though NHS funds have increased since 1999, there is no evidence that much has flowed through to baseline services.”

The shortfalls caused by having to pay for the PFI hospitals also affect publicly-owned hospitals because PFI capital and service costs are to a large extent fixed, and it is therefore easier to make cuts in the non-PFI hospitals.

In other words, non-PFI public services suffer because of the affordability problems caused by PFI projects. In South-East London, where the problem is particularly serious, the local Strategic Health Authority specifically advised that cuts should be focused, where possible, on district general hospitals without major PFI commitments.

Flaws in PPP buildings

There have also sometimes been problems with the design and construction of PPP buildings. For example at the Princess Margaret Hospital in Swindon, UK, the recovery room is located 80 metres from the operating theatre. The UK Commission for Architecture and the Built Environment (CABE) has also drawn attention to flaws including:

• leaking plumbing; rooms so small that doors hit beds; atrium too hot to work in (Cumberland Hospital, Carlisle)
• dated design that hinders the application of new technology (Calderdale Hospital, Halifax).

CABE has pointed to widespread problems:

“CABE’s experience is that the vast majority of PFI buildings commissioned to date have not been designed and built to a high enough standard and public service delivery suffers as a result.”

For example a CABE assessment of the design quality of new secondary schools in the UK found that 9 out of 10 of the most poorly designed schools were built under PFI.

Poor quality construction is not unique to PPPs, but the use of turnkey, fixed price contracts and the fact that user or public authority payments begin only once the infrastructure is available for use may incentivise hurrying the design stage to the extent that not enough care is taken. The question is whether the benefits of providing incentives for speedy construction outweigh the risks of hurrying the design.

Lack of sanctions in case of under-performance

In theory, the quality of service can be maintained through contractual obligations and sanctions for non-performance. However contracts can never foresee all eventualities and sanctions have resulted in a low level of payment deductions.

“...the UK experience also highlights the need to increase the means of effectively monitoring and influencing the performance of the private sector. To this end, credible sanctions, performance measurement and payment deduction provisions have to be designed and carefully implemented. Most importantly, contract termination must become a credible threat.”

Yet it is hard to see how this can be done, as the public authority has an interest in the project company continuing to function. If the company collapses, as Metronet did in the London Underground PPP, the public authority will either have to re-nationalise the project, support the company or bear the expenses of re-opening the PPP.

Thus the public authority is naturally reluctant to enforce heavy penalty payments or terminate the contract.