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Weak regulation of PFI leads to fraud risk

Weak regulation of PFI (Private Finance Initiative) style contracts for public services is leading to a lack of transparency and a far greater risk of potential fraud.

Anne Stafford, senior lecturer in accounting and finance, says although the UK has been a global leader in terms of opening up public services to the private sector, the movement of ever increasing sums of public money towards large corporations is diminishing public accountability.

“There is a lack of transparency and visibility, and even when things go wrong there are often few penalties,” she says. “As such there is scope for waste and the mismanagement of public monies, which could in turn potentially lead to fraud and corruption.”

Anne says there are around 700 PFI-style contracts today across the country, some of which have been running for at least 15 years. But she claims many are not delivering value for money for the taxpayer, despite the long-standing work and numerous recommendations of the National Audit Office (NAO).

As recently as 2012 the NAO said the public sector was paying more than it should for schools, hospitals and other infrastructure projects because of the returns demanded by equity investors. “We are not yet seeing the fruits of a lot of the NAO recommendations,” she added. She pointed to the recent example of Hexham Hospital where the local NHS Trust decided to pay £53m to break a contract, in order to make greater savings over the remaining life of the contract.

The previous government’s light touch approach to the issue also meant that the public sector struggled to have sufficient resources to carry out the necessary monitoring of contracts. Added Anne: “The question today is ‘do public sector officials have the necessary resources and expertise to manage these contracts?’ I would argue that governance mechanisms are actually insufficient to have good public accountability. In the UK, as in other countries, we see a failure to learn from mistakes across different public sector functions. The public sector should take a leaf out of the private sector book and share lessons better.”

She said a particular issue was that the public sector does not retain sufficient control of the monies it is spending. “In terms of contracts today, what we are seeing is often a lack of publicly-available information in terms of understanding what contracts are costing. Payment mechanisms do not deliver budget certainty, nor do they mitigate against additional costs. It is also difficult to determine the penalties that should be applied when things go wrong.”

Anne added that the creation of SPVs (Special Project Vehicles), in the form of limited liability companies to oversee the contracts, further benefited the private sector. “Although these projects purport to be partnerships, the legal form favours the private sector, so profit is ultimately given more weight than service delivery. An SPV is part of an incredibly complicated organizational structure, often with a huge web of sub-contractors, which helps to dissipate risk and minimise loss to the private sector.”