Healthcare – avoid the gloomy tale of private finance initiatives

Author: George Mangion 
Published on Malta Today 24th January 2018

The darkest hour is just before dawn and this was metaphorically the time when the liquidator knocked on the door of Carillion Plc – it marked the death knell of the once famous company.

The bankruptcy of the firm Carillion, one of the UK government’s biggest contractors, threatens more than 19,000 British jobs as well as the solvency of hundreds of subcontractors and smaller businesses. HSBC, Barclays, Santander UK, and Lloyds Banking Group were urged to extend a £20m lifeline to the stricken constructor to keep the company going another week.

However, the lack of support from the government meant that any deal fell through so a team from PWC has been appointed liquidator. The Official Receiver has the onerous task to maintain operational continuity and wherever possible help to continue trade with some of the companies in the group. Carillion’s demise was caused by a combination of rapid expansion and underbidding for contracts that have low margins.

This forced the company to run up huge debts, particularly on public sector contracts, including two state-of-the-art hospitals.

Readers may wonder what Carillion is and how important it is. It is a massive construction and service company which suddenly collapsed under 1.6 billion pounds of debt, landing firmly in Prime Minister Theresa May’s lap. This is not a welcome complement to its arduous task of negotiating the best terms under the Brexit talks (now entering a crucial second stage).

It is true that Carillion was not a household name but it was an essential chink in the armoury of government contracts. The private public initiative was popular under the Tony Blair labour government. In its heyday, Carillion won 450 tenders to build hospitals and roads, maintain prisons and supply thousands of school meals. Can the sudden demise of such an essential supplier go down unsung and unheard?

Surely, these services must continue to function as school meals had to be supplied even though Prime Minister Theresa May decided not to bail out Carillion – responsible for a payroll of 43,000 persons worldwide (roughly the number of public sector staff employed in Malta). This begs the question – can the flawed private public initiative (PPI) scheme so loved by the Labour government, pioneered by Tony Blair and his erstwhile finance minister Gordon Brown, be blamed for the collapse of Carillion?

This PPI was shadowed by a massive wave of privatisations which cropped up in the early 2000 when the Labour government loved to attract big investors to run big spender debts such as roads construction, healthcare and schools. It did this by signing so-called public-private partnerships, and PFI’s – private finance initiative. Then it was the days when over-crowded hospitals could not cope with the number of patients waiting in gloomy corridors for medical attention.

The remedy was not to laden the country with debt to build new hospitals but to subcontract such services to the private sector. Such services were invariably procured at cut-throat prices which saw the private sector sweat under the rising costs of nefarious fixed rate contracts. The same strategy was used to lower demands on the exchequer funds by sub-contracting services (such as meals etc) to schools, prisons, courts, the building/servicing of new roads, maintaining the ageing London Underground and supply of essential parts to the armed forces.

Can this vast dependency on private sector lead to complacency on the monitoring of services while forcing the private sector lead to a cul de sac, meaning they signed fixed price contracts on low margins delivered to sectors such as healthcare which continuously expect superior quality but are not ready to pay for the privilege.

Furthermore, the procurement mechanism encapsulating Britain’s public services sheds a light on why the mounting cash flow strictures grasped Carillion and sent it weeping to the liquidator’s arms. Over two decades since the Tony Blair’s smart scheme to push subcontracting on the private sector’s lap and hereto save on public debt – this has failed. Another casualty was the scheme to attract private sector investment, luring it to build new facilities and in turn rent them back to the government on what appear to be competitive prices. The chosen consortium is named the “preferred bidder.”

In exceptional cases the chosen tenderer starts claiming revisions in the contracted prices due to variations in project design and the vagaries of inflation. Such occurrences are more prevalent in construction jobs since variations happen there more frequently and government architects are faced with requests to increase the rates, otherwise the project stalls. In theory value for money hangs on the idea that Carillion shoulder risks which the State would otherwise have to carry.

In these situations, the very notion of effective risk transfer from the government to the private sector is questionable. It goes without saying, that nowhere is risk transfer more questionable than when applied to private finance initiative projects in which government tries to offload the debt burden onto the private sector – but in the long term as the bidder succumbs to low margins – the boomerang comes back to hit in where it hurts.

Does this tale of woe present a lesson for us in Malta?

In my humble opinion, the deal negotiated by ProjectMalta with Vitals may have similarities in approach on the principled desire to reduce healthcare running costs for central government – a veritable millstone round its neck. Any burden sharing will improve the public purse and help us run a small national surplus.

The deal signed surreptitiously with Vitals (an obscure private contractor with dubious credentials in the healthcare sector) has raised doubts whether the €50 million so far paid to Vitals (apart from subventions for payroll) to run the three hospitals was enough to defray the massive cost. Vitals has run into cash flow difficulties and is rumoured to be unable to settle in full local supplies. So the news that it sold out its 33-year concession to a USA-based institution did not come as a bolt in the blue.

Can one postulate the shadow of Carillion’s financial demise to mimic that of Vital’s own operation in Malta? Alas, the truth will never surface unless the confidential contract signed with ProjectsMalta is published in full and is fully scrutinised by the National Audit Office. The US institution that replaced Vitals has been welcomed by the Health Minister Chis Fearne who instantly termed the deal with Steward Health Care as “the real thing”.

It is conceivable that the ghost of Carillion hovers around our shores when one recalls how the much-hyped Vitals contract was hailed as a breakthrough in a doomed private public initiative. To conclude, Malta’s diverse economy cannot be built exclusively on private public initiatives but on a healthy mix of public sector initiatives and the involvement of private companies based on effective regulation leading to cutting-edge innovation.

George Mangion

Author: George Mangion 
Published on Malta Today 24th January 2018
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