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Monday, 30 September, 2002, 05:34 GMT 06:34 UK
Labour's public row over privatisation

The battle at the Labour Party conference over the Private Finance Initiative (PFI) is a key skirmish in a long war over the reform of the public sector.

At the 2001 General Election, Tony Blair made it clear that Labour was committed to improving and reforming the public services.

But he has also made it clear that no union "wreckers" would be allowed to stand in the way of his reform plans, and that the huge increases in public spending would have to be accompanied by a transformation of the public sector to a world-class service.

The PFI is one of the key policies in that transformation, and that is why union attacks on its viability have received such a vigorous response.

Mortgaging the future?

The PFI is designed to make capital projects - the building of roads, hospitals and schools - more efficient by giving the private sector a larger role in running them.

Private companies bid to build and run, for example, a hospital, for 30 years, in return for a fixed monthly payment from the government.

In return, they must borrow the money from a bank, who charges them interest.

It is not dissimilar to buying a house with a mortgage - but the government also requires the company to maintain that house to a good standard.

In the past, the government borrowed the money itself - at a slightly cheaper rate - and paid the private contractors in full for the building when it was finished.

But many public projects were finished late and well over budget.

The idea of the PFI is to give private sector an incentive to build on time and to quality, by giving them responsibility for future maintenance.

In addition, it is hoped that the private sector might be able to organise the workforce carrying out the maintenance more efficiently, thus saving money for the public purse.

Union fears

The unions are worried by several elements in this scheme.

They believe that the private sector makes too much money from the schemes at public expense.

They are worried that private companies will create a "two-tier" workforce. Workers who transfer to the private sector initially have their terms and conditions protected, but new workers only have to receive "broadly comparable" conditions, and usually get inferior pensions, for example.

And they are worried that the schemes are not good value for money, because the public sector could borrow the money cheaper to do the job itself.

What the public wants

The government, however, argues that the public doesn't care how projects are financed as long as they get built.

And it says that PFI is delivering many more hospitals and schools than would be possible under public spending constraints.

But the PFI does not represent "free money" and a way of avoiding public spending.

Ultimately, it is also funded from the public purse, but over 30 years.

In the initial phase, more hospitals and schools are being built, but in the long-term, the cost of paying for them mounts up, reducing the potential public spending available to future chancellors.

Whether it represents value for money depends on many things, including how efficient the private sector turns out to be in running school and hospital plant and equipment, and whether we are still in a low-inflation environment in 30 years.

And it is even questionable whether more hospitals and schools are being built yet.

Both the private sector itself, and commentators like the Institute for Fiscal Studies, believe that the long delays in the bidding process for PFI are one of the key reasons why the level of public spending on investment - which hit a record low in 1999 - has still not risen as much as the government would like.

Bigger argument

Behind the argument about whether PFI is a good idea is a broader debate.

It is about the new boundaries that the government wants to draw between the public and private sectors.

Tony Blair's ambition, in his critics' eyes, is to revise the post-war settlement which created comprehensive schools and the National Health Service, in favour of a two-tier system of specialist secondary schools and the new "foundation trust" hospitals.

In their view, giving these schools and hospitals more freedom in the guise of efficiency and reform would in effect be a return to the era of grammar schools and private voluntary teaching hospitals - where a minority of the population obtained access to decent education and health care, whiled the majority was left behind in secondary moderns or local authority hospitals.

It is by no means clear where the government stands on this broader issue.

Indeed the fierce disagreement between Gordon Brown and Alan Millburn about whether foundation trust hospitals will have the independent authority to borrow money is just one example of the private battle now being fought.

Soon, the government will have to resolve its disagreements if the programme of reform is to go forward and deliver the improvement in services that the public demands.

And whatever the decision, it is bound to have major consequences for the future of those services, the Labour Party and the UK's welfare state.

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