The Great PFI Disaster

Glen Newey

Last week George Osborne announced that the government intends to cut back on Public Finance Initiative public procurement. PFI contracting, introduced by the Major government in the 1990s, grew apace under the Neo-Labs. Its attractions were obvious enough. Ministers responsible for public procurement in education, defence and health tend to find themselves under pressure to spend money in ways that deliver visible, short-term results, which has impeded capital investment in public infrastructure. PFI promised capital funding off the public balance sheet, with lots of new schools and hospitals to be paid for later. There was also the idea, which now looks ever more quaint, that for-profit businesses would bring market rigour to public works.

After signing off on more PFI deals in his first year in office than Alistair Darling did in any of the previous three years, Osborne has called for a ‘new model’ that costs less and offers better value. It’s not hard to see why. PFI contractors pitch ‘low-ball’ cost-skimming tenders to the authorities in the hope of undercutting competitors, and then squeeze costs in the under-unionised construction and service sectors. This doesn’t make it cheap for the government, however. According to a recent Commons Treasury Committee report, PFI loans typically cost 8 per cent, twice as much as the long-term government gilt rate. The public purse is now burdened by around 800 PFI contracts with a capital value of £64 billion; at current prices, the repayments will stretch for 50 years at a cost of £267 billion. As the National Audit Office report on PFI noted in April, echoing similar complaints by the Public Accounts Committee, the system has lacked ‘value for money evaluation by departments of operational PFI projects’.

Among the UK’s major PFI players is the French catering multinational Sodexo (formerly Sodexho Alliance). Over the past couple of decades Sodexo has grown from being a medium-sized food-supplier into a catering and facilities-management giant with a market capitalisation of more than €7 billion. In the year to 31 August 2011 the firm made an operating profit of €853 million on a turnover of €16 billion. Its blue-chip US client list includes Halliburton, Rio Tinto, Shell and Exxon Mobil. As a contract supplier to the US marine corps, Sodexo has done well out of the military adventures in Iraq and Afghanistan. In the UK, Sodexo is a 50-50 equity partner in the Metrix consortium building the UK Defence Academy in St Athan, south Wales, a PFI project worth £12 billion.

A subsidiary, Sodexo Justice Services (formerly Kalyx), runs jails under contract in the UK and elsewhere. Among them is Bronzefield women’s prison in Surrey, the UK’s only privately owned jail, criticised earlier this year by the Inspectorate of Prisons for ‘shockingly poor’ standards of healthcare. Another jail run by Sodexo, HMP Forest Bank in Salford, records unusually high rates of drug use and inmate-on-inmate violence. An investigation into a salmonella outbreak that claimed three lives at Glasgow's Victoria Infirmary in 2002 described Sodexho’s cleaning as ‘inadequate’.

Sodexo is no stranger to the courts. Last year it paid out $20 million to settle a fraud case. It had demanded ‘rebates’ from its contract suppliers in New York State, which it had then pocketed; under federal law, contractors must credit such rebates as part of their invoices and pass on savings to taxpayers. Sodexo exploits its status in local markets, as a near-monopsony purchaser, to dictate terms to small-scale food producers, whose margins are then squeezed by the rebate system. The suit was filed by two ex-employees, John and Jay Carciero, sacked by Sodexo after they lodged internal complaints about the scam. The company faced a class-action lawsuit in 2005 from African-American plaintiffs who alleged systematic bias: in 2004, one in eight of Sodexo’s North American middle managers were black; none of its 188 senior managers were. Sodexo settled for $80 million. At the UK Employment Appeal Tribunal in 2008, female cleaners who had become Sodexo employees when the firm took over catering services from the Hartlepool NHS Trust successfully blocked Sodexo’s attempt to deny them the protection of the Equal Pay Act 1970, using male maintenance workers at Hartlepool as comparators.

Marx famously said that the bourgeoisie produces its own gravediggers. The situation now is more that a cash-strapped state hires private firms to subcontract gravediggers on the minimum wage – or, in Sodexo’s case, often below it – who, via their taxes, pay the contractor for the pleasure.