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Wednesday, 12 February, 2003, 18:58 GMT
What are Public Private Partnerships?
Public Private Partnerships are at the heart of the government's attempts to revive Britain's public services.

BBC News Online picks through the jargon to explain the bewildering variety of private sector involvement in the public sector.

What is a Public Private Partnership?

Any collaboration between public bodies, such as local authorities or central government, and private companies tends to be referred to a public-private partnership (PPP).

Tony Blair is keen to expand the range of private public partnerships because he believes it is the best way to secure the improvements in public services that Labour promised at the last election.

He believes private companies are often more efficient and better run than bureaucratic public bodies.

In trying to bring the public and private sector together, the government hopes that the management skills and financial acumen of the business community will create better value for money for taxpayers.

Many public sector unions, however, remain sceptical - and are particularly concerned about the extension of the private sector into new areas like schools and hospitals which have traditionally been publicly run.

What is PFI?

The Private Finance Initiative (PFI) was a creation of the Conservative government in the early 1990s - but it has been enthusiastically embraced by Labour.

Governments and local authorities have always paid private contractors to build roads, schools, prisons and hospitals out of tax money.

But in 1992, the Conservatives hit on a way of getting the contractors to foot the bill.

Under PFI, contractors pay for the construction costs and then rent the finished project back to the public sector.

This allows the government to get new hospitals, schools and prisons without raising taxes.

The contractor, for its part, is allowed to keep any cash left over from the design and construction process, in addition to the 'rent' money.

However, critics say that the government is just mortgaging the future - and the long-run cost of paying the private sector to run these schemes is more than it would cost the public sector to build them itself.

What has been done so far?

PFI may still be in its infancy for hospitals and schools, but it is already well-established as a way of paying for new roads and prisons.

For example, there are now eight new private prisons - with more in the pipeline, and major road schemes like the Thames crossing and the Birmingham relief road are being financed through PFI.

The complex nature of PFI contracts and the political obstacles involved in getting big, controversial schemes such as the London Underground PPP off the ground mean that progress in some areas has been slow.

The National Health Service (NHS) has probably seen the most new PFI activity recently.

Six major PFI projects have been completed within the NHS, with a further 17 hospitals and other facilities under construction and a further 45 in the pipeline.

It has been estimated that trade in public services could ultimately net the private sector an extra 30bn a year.

This breaks down roughly into 10bn in central government contracts, 5bn in education and 5bn in local authority contracts.

In January 2002 a Scottish fire service became the first in the country to consider the use of PPP.

The Highlands and Islands Fire Brigade commissioned a 500,000 study into the use of private cash to build 35 new stations at a cost of 26m.

Controversially, Transport Secretary Stephen Byers wants to partially privatise the London Underground and give maintenance of the network to commercial firms.

The Tube's PPP bids received in January will be compared to the 13m bond scheme proposed by the London Mayor, Ken Livingstone.

How far could it go?

Labour has embraced the concept of PFI with enthusiasm at the recent general election, and it has also widened the concept of public-private co-operation.

If privatisation represents a take-over of a publicly-owned commodity, advocates say, then PPP is more like a merger, with both sides sharing the risks and, hopefully, seeing the benefits.

Given that the health and education sectors represent 13% of Britain's GDP the potential rewards for industry of opening up the public sector to private finance are huge.

However, the government is not clear how far it wants to go in these areas in the face of union opposition.

There have been a number of high-level meetings at Number 10 to try and reassure union leaders.

But the government seems determined to involve the private sector in managing failing schools.

What are the drawbacks?

Critics argue that taxpayers will end up footing the bill for PPP.

According to a survey conducted for by Labour Research Department for the GMB union, the 'rent' for PFI projects in the health service alone will top 13bn.

The union says profits for the companies involved will total between 1.5bn and 3.4bn over the next 30 years, about 5 a year for every tax payer in the country.

In some cases, such Fazackerly prison in Liverpool, the initial cost of the project has, it is claimed, been paid back within two years, leaving 23 years of pure profit from the construction.

There is also evidence that some early PFI projects have not been up to standard.

Private companies have been accused of cutting corners in order to maximise profits.

One big criticism of PFI is that the only way companies can turn a profit is by cutting employees' wages and benefits.

Unions talk of jobs being 'privatised'.

Their members are shifted into the private sector, where they have fewer employment rights and benefits such as pensions and childcare.

One of the most famous privatisations under the Conservative government, British Rail, has been widely criticised.

Railtrack - responsible for track, signals and stations - has been taken into administration by Labour amid huge debts, and the rail network may in future be run by a not-for-profit company.

What are the arguments for PPP?

Advocates of PPP say that many hospitals and schools would not be built at all if it was not for private finance - the public money was simply not available.

They claim that PFI will lead to a dramatic increase in the quality of public services.

Performance-related penalties that are now built into most PFI contracts will ensure a continuing improvement in standards, far in advance of anything that could be achieved in the public sector, they argue.

The government has staked its reputation on delivering better public services but it is also aware that there is a limit on how far taxes can be raised.

PFI is a fast, effective - and in the short term at least - cheap way of getting new facilities built.

The biggest hospital-building programme in living memory is currently underway thanks to PFI.

Will direct funding of new schools and hospitals eventually cease?

It is important to keep PPP and PFI in perspective.

The majority of public works are still directly funded by government.

And the government insists it has not written off the public sector altogether.

However, it is gearing up for a massive increase in private involvement in public services in the years ahead.

Local authorities are increasingly being steered towards PPP.

There are some areas where public-private schemes may ultimately prove unsuitable.

Some PFI projects, such as Capita's managing of the housing benefit system in Lambeth and some IT projects, have already proved disastrous.

But the government is hoping that the current hospital and school building programme will demonstrate to sceptics - and the unions - that it is the only way to revamp the country's ailing public services.

See also:

02 Feb 02 | Politics
02 Feb 02 | Politics
01 Feb 02 | Politics
01 Feb 02 | Politics
16 Jan 02 | England
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