Britain - Market havoc in the public sector

May/Jun 2008

A long series of recent scandals highlighted the increasingly uncontrolled and uncontrollable activities taking place in areas of public services which have been either farmed out as a whole to private profiteers, or sliced up and shared between them.

So, for instance, Brown's government was embarrassed over recent months by a series of cases involving lost data. By far the worst of these was the loss of a copy of the entire contents of the child benefit database, containing the records of 25 million people, complete with names, addresses, dates of birth, national insurance numbers and bank details. The disks were lost in transit, after being sent from HM Revenue and Customs offices in Tyne and Wear, via the internal post (operated by courier company TNT) to the NAO (National Audit Office) in London. Government sources tried hard to pin the blame on a junior official - but then a different story emerged. It turned out that the NAO had not actually required all of this data - in particular, not bank details - but that a conscious decision was made by HMRC management to send the whole lot. Why? Because to download a limited selection of the data would have cost £5000 - the price charged by IT contractor, EDS, because this straightforward operation is outside their contract!

In this case, the government, with its fervour for privatising and contracting out had been hoist with its own petard. Its rationale is always that the state cannot run things because it is a monopoly and only a competitive market can deliver "value for money" - never mind that this has been proved wrong again and again! But it makes no difference, since all this market talk is just a cover for providing the capitalist class with more opportunities to make profits.

This particular farce would never have arisen had there been someone with the clout, or the political will, to tell EDS to just get on with the work and forget about their ridiculous charge. But profit-driven contracts set the rules. And given that bits and pieces of public sector activity have been parcelled up into thousands and thousands of such contracts, there must be many similar cases of wastefulness that no-one hear about. What this shows is how little social control there is on these "public" activities which are run by big and small cow-boy companies, as a function of money rather than in the interests of society.

Milking the public sector cow

The "lost data" scandals are just the tip of the iceberg as far as the disruption and expense caused by the dismembering of the public sector goes. Even if it does not usually have such a spectacular fallout, the preoccupation of all these private contractors is to use the terms of their contracts to make more money, as was illustrated by a report published by the NAO in January. This report reviewed the 500 PFI (Private Finance Initiative) contracts currently operating throughout the country, including the building and operation of new hospitals and schools, for instance, which are projected to cost the public sector a total of £91bn over the next 25 years. It assessed the way the contracts are operating and exposed the ways the private contractors are finding to squeeze even more money out of their already-lucrative contracts.

It is when there are "changes" to the original contract that there is scope for the contractors to give their profits a big boost. Once the 25-year contract is signed, they effectively have their public sector "clients" over a barrel! A "change" can be as little as a simple maintenance job, for which PFI contractors shamelessly overcharge. The NAO found that charges for installing an electrical socket ranged from £30 to £300 - and one public body was charged £500 for having a new lock fitted! On top of the cost of installation of a new "asset", contractors often slap on an annual charge, supposedly to cover its maintenance for the remainder of the contract, although such charges are largely arbitrary. So, one public authority, which had removed smoking shelters from its premises, was charged an extra £2600/year by a cleaning contractor for the additional job of picking up cigarette butts over a wider area!

When it comes to substantial jobs, like new construction or maintenance work, public bodies are legally obliged to put out a tender, but PFI contractors are not, so they can name their price. For instance, when the NAO compared two courtroom refurbishments, one of which was a PFI-managed building while the other was not, they found that the PFI contractor had put in a quote that was 30% higher than the going rate. Another trick is to add "management" fees on top of the actual cost of new job, however big or small. This increased the cost by up to 15%, in a case quoted in the report. When a client challenged such fees, on the grounds that they were not mentioned in the original PFI contract, the contractor simply replied that they were not excluded either...

The NAO presents this daylight robbery as an "aberration", which could be corrected by strengthening the contracts and controlling them properly. As if there could be "water-tight" contracts insulated against profiteering, when the objective of the contractor is precisely to make as much profit as possible! Besides, this is also assuming that there is no corruption in the relationship between the "overseers" and the contractors - when, in fact, there is plenty of potential for this. By turning a blind eye to its own discoveries, however, the NAO report was able to conclude that PFI works perfectly well!

The extortion practised by private companies was also exposed by the four-year Office of Fair Trading (OFT) investigation into price-fixing by construction companies, which produced its final report in April. It found 112 construction companies guilty of colluding to put in bids which were over-the-odds when tendering for work. The bulk of these contracts were for public sector building work, like new schools and hospitals, and the companies involved include giants like Balfour Beatty and Carillion, which have made millions from PFI deals and contracts in the privatised railway and tube. Theoretically, the companies could be fined up to 10% of turnover, but there is no suggestion of banning them from bidding for public sector contracts in the future, much less of putting an end to the outsourcing and contracting out which provided such scope for this kind of large-scale fraud in the first place.

Metronet kills the golden goose

Labour's "own-brand" version of privatisation - PPP, or public private partnership - has not fared any better than PFI. PPP was the label under which the maintenance and refurbishment of the Tube was hived off to two consortia, Metronet and Tubelines, which were made up mainly of large building and engineering firms (though the Metronet shareholder companies also included Thames Water and electricity provider EDF). These PPP contracts - which were finally signed at the beginning of 2003 - were extremely complex, running to 3 million words, with a maze of targets, penalties and conditions, and cost an astounding £500m in legal and consultancy fees, before any work was even done! Under these contracts, Transport for London (TfL) had no say over the work which was to be carried out. Instead, the contractors would decide what work they would undertake in order to meet their performance targets. To complicate things even more, the provision and maintenance of trains on the Northern and Jubilee lines had previously been contracted out to Alsthom, under a 20-year PFI deal, so Alsthom became a sub-contractor to Tubelines. It is not hard to imagine the implication of having so many fingers in one pie - not just in terms of parasitical legal and accounting cost, but also in terms of the resulting disorganisation of vital maintenance!

It all went very publicly wrong in October 2005, when Northern Line trains experienced repeated failures of the emergency braking system. Drivers refused to operate the trains until this safety issue was resolved and the line came to a complete halt. Then, in July 2007, Metronet (whose contract covered two-thirds of the Tube network) went bankrupt. The company had run up a projected £1.7bn of cost-overruns in its station refurbishment programme, which TfL was disputing, and it was way behind with the work. Having been refused any more bank loans, it went cap in hand to TfL for more government funding. When the Rail Regulator, acting as arbiter, refused to allow it the £551m it needed just to continue with day-to-day operations, the game was up.

This prompted an enquiry by the Commons, which revealed that Metronet was dishing out all the work to its member companies and their subsidiaries, who obviously had no incentive to keep their charges low. In fact, it appears that there was an understanding in Metronet that they could charge what they liked for station refurbishment and TfL would stump up for the "extras".

In the end, the cost of this fiasco will be met from public funds. Metronet's constituent companies had very limited liability. Between them, they had put up £350m, but the bulk of the funds needed had been borrowed - and under the terms of the PPP contract, 95% of bank loans taken out to fund contract work was guaranteed by the state. In February, Transport Secretary Ruth Kelly announced that she was obliged to find £1.7bn from the government's contingency funds to pay Metronet's debts, plus another £300m for the cost of TfL taking over the contracts for the outstanding work.

So the five partners in Metronet, all major companies, were able to walk away from the mess, without having a penny to pay, while still picking up £14.4m/week for continuing the work on the jobs they had awarded themselves. Nine months after Metronet went into administration, this was still going on. In the words of a Department of Transport spokesman, "It's a riddle of contracts, to be honest. They don't yet know what the total cost to the public will be." So much for transferring "risk" to the private sector!

Naturally, the failure is blamed on the way Metronet in particular was doing business, and not on the uncontrollable sub-contracting and atomisation of responsibilities. But the fact that Tubelines, the other PPP contractor on the Tube, has not hit the same financial difficulties, does not mean that there are not the same kind of problems. The reality is that safety lapses and breakdowns are on-going and this, despite the fact that the government is estimated to have spent between £6bn and £8bn on the Tube in the five years since the PPP contracts began - a huge amount compared with the £44.1m funding allocated to the Tube in 1997/8. Is that what Labour calls "value for money"?

The energy market - a glowing example?

The government claims in its 2003 public sector policy document, "in the right circumstances markets can provide the best means of delivering services upon which people rely". One can only wonder what the "right circumstances" are, given all the evidence of the private sector's ability to "deliver" higher costs and bad services. However, the document goes on to explain: "Well-functioning markets can ensure services are delivered in a customer-focused and efficient manner, as is the case with utilities such as electricity and gas."

So, in what way can gas and electricity be considered such success stories? When Labour came to power the old state-owned electricity monopoly had already been broken up into 16 different private businesses. It was under Labour that the industry was really deregulated and various forms of competition introduced. First the industry was broken up into three tiers - generators, distributors and suppliers. Suppliers bought electricity from generators and supplied it to consumers, using the services of distributors, who were responsible for installing and maintaining the connections to users.

Meanwhile the privatised British Gas was split three ways in stages. Centrica took over the gas supply business (which kept the name British Gas) and the gas production business in the North Sea and South Morecambe fields. BG group was formed from the international gas exploration and production business. Finally National Grid, the electricity transmission network company, absorbed the gas transmission networks.

The deregulation of both gas and electricity allowed many more businesses to vie for a piece of the pie, at various different levels - including the dozens of gas shippers which buy gas from the producers and pay National Grid to distribute it via their pipelines, as well as the suppliers, who buy gas from the shippers and sell it to consumers.

Since profits had to be generated somehow from the many players emerging in these processes, thousands of engineering jobs in gas and electricity were cut to pay the bill. At the same time, the resulting myriad of contracts and legal wrangles was a huge bonanza for the legal and financial professions.

Finally the process was completed by the opening up of markets - in the case of electricity, four official markets, plus any number of independent internet-based ones - so that energy supplies became another gambling arena for speculators.

A single regulator, Ofgem (Office of the Regulation of Gas and Electricity Markets) is supposed to control this complicated mess, and ensure that all the wheeling and dealing somehow benefits the consumer. But in the face of escalating fuel bills, it would be hard to convince anyone that the extension of competition in the energy market has benefited consumers!

True, average bills did fall by 18% for gas and 23% for electricity between 1996 and 2001, and in 2001, were at their lowest since 1974. However, this was mostly down to a strong pound and to the fact that the privatised operators were investing very little and had low labour costs, having cut so many jobs. Then, from 2003, prices began to rise again. Big price hikes over the past few years have meant that average domestic electricity bills have risen by 64%, and gas bills by 90% between 2003 and 2006, six to nine times faster than general inflation. Although the companies eventually dropped prices by 10% in 2007 - after prices on wholesale energy markets halved - in the latest round of increases, between January and March 2008, prices jumped again by an average of 15%.

Naturally, the companies blame the "volatility" of the energy markets, where prices have risen by 50% since last summer. But the way that wholesale prices affect retail prices is far from transparent. Production costs are only an element in the cost of energy, so even if wholesale prices increase by half, the overall costs do not increase as much. Plus, the "big six" UK suppliers all have a producing arm, which benefits from higher wholesale prices by "selling" its production to the supplier arm of the same company. The way the final price is determined is, therefore, arbitrary, only designed to fit in with the needs of the companies. Besides, on top of all this muddying of the waters, there is the effect of speculation, because the companies can also use speculation on the electricity and gas markets to artificially boost "wholesale prices". This all adds up to an impenetrable tangle, where the causes and effects of price rises are almost impossible to discern.

Despite their efforts to conceal their profiteering, there was an outcry when the energy companies announced big increases in their profits, hot on the heels of the January round of price rises (Centrica, for instance, reported a 40% profit increase to £1.95bn, and its shareholders enjoyed a 17% increase in dividend payouts - no "volatility" for them!).

This led a Commons committee to announce an investigation into "possible (!) anti-competitive behaviour in the UK's energy market". That pushed Ofgem to announce that it, too, was going to carry out a special investigation into whether the energy markets were sufficiently competitive, though it also said it already knew that the market was not failing, but was responding to "consumer concern". So, not much was to be expected on that side!

Of course, consumers can take advantage of the "competition" between suppliers by switching from one to another - this is the basis for the claim that the system benefits consumers. The problem is that where one company leads, in terms of price increases, the others follow, so it turns out to be hardly worth the effort of searching for the "best deal". And Ofgem has always refused to see any evidence of "collusion" in this price-fixing!

No wonder the number of households in fuel poverty (defined as households which spend more than 10% of their income on energy) has more than trebled since 2003. The companies turn the screw hardest on the poorest. Because, while suppliers offer discounts to those paying by direct debit, households using pre-payment meters, often because they were unable to keep up with their extortionate bills in the past, end up paying the highest prices. And the gap is growing, with households using pre-payment meters paying on average £141 per year more than those on direct debit deals.

Ofgem, supposedly the champion of consumers' interests, only fines a company when they break competition rules, not when it turns the screw on the poorest or charges consumers for safety checks and repairs, which used to be free before privatisation. As to the government, is does not go further than to ask companies if they would kindly consider adopting a more "social" policy towards the poorest customers - which, of course, they won't, especially in view of the government's very modest target of pulling just 200,000 out of fuel poverty (i.e. 4.4% of the total!).

The only way in which this market is "customer-focused and efficient" is in terms of allowing the energy companies to focus their efforts on emptying customers' pockets!

Squeezing every last drop

In the privatised water industry, Ofwat, the regulator, has just as little control over the actions of the water companies. Over the past few years, Ofwat has allowed the companies to increase prices by much more than inflation (around 15% between 2004 and 2006), on the grounds that major investment is required. But the companies prefer to pour their increased profits (£2.6bn overall, in 2006 - an increase of 17%) into the pockets of their shareholders, or into buying up other companies, rather than into pipes, sewers and pumping stations. So that, in 2005, year one of the 5-year investment programme the companies were supposed to embark on, £1bn less than Ofwat expected was actually spent. Yet all Ofwat does is to produce rather uncritical reports bemoaning the fact.

Never mind the fact that the failure of the companies to maintain, let alone improve, the basic infrastructure can have disastrous consequences. Las summer, eight people died and hundreds of thousands of homes were damaged by floods which hit Yorkshire and the Midlands. The government and the companies ducked their responsibilities by blaming global warming. However, the truth was that the inability of some of the drainage, sewer systems, flood defences, etc.. , to cope in a bad year was known in advance. The companies had just failed to put the money in where it was needed and Ofwat had looked the other way.

It must be said that the companies found a much cheaper way of meeting their performance targets - lie! The most notorious case was that of Severn Trent Water, which deliberately falsified the data it submitted to Ofwat over a period of years. Blatant though this was, it might not have come to light at all, were it not for the actions of a whistleblower, who eventually went to the papers, when he got nowhere raising the matter with Ofwat. But even when they were forced to look into it, Ofwat put the problem down to a "culture" of false accounting in the company. So company directors got off scot-free, unlike the whistleblower himself, who was hounded out of his job. Severn Trent was ordered to pay back £42m to its customers for having overcharged them. In addition, Ofwat could have fined Severn Trent a maximum of 10% of the company's turnover but they actually did not go nearly as far and settled on a fine of £35.8m. That was supposed to be 3% of turnover - but who can be sure what the company's real turnover is, anyway? In any case, the fine will not make much of a dent in Severn Trent's £488m profit from last year.

Severn Trent is not just one "bad apple". Thames Water, Southern, United Utilities all got into trouble for some kind of "irregularities" and Three Valleys Water is under investigation as well. Yet, not one director is in jail, despite the Serious Fraud Office being involved in at least two cases. But is this any wonder, since Sir David Arculus, Severn Trent's chairman at the time of the scandal, was nevertheless appointed chair of Labour's "Better Regulation Taskforce", the body which was supposed to advise the government on ways to improve the effectiveness and credibility of its regulation? Ironically, his three-year stint at this post, for which he received a knighthood, culminated in the publication of the Arculus report, entitled "Regulation - Less is More"... He should know!

Another fine mess

And what about the railways, which have provided the most scandalous case of profiteering on a vital service? The antiquated infrastructure was in dire need of massive investment, yet after ten years of private operations, Britain still does not have a modern railway. Trains still run no faster than 125 mph (on these tracks, at least). And the safety system for stopping trains which pass red signals is an adaptation of the cheaper old system which was designed to stop trains only up to 70 mph. It should theoretically stop trains at higher speeds, but is hardly state-of-the-art. Britain is woefully behind the rest of Europe in the electrification of the network and the development of genuine high-speed links between the major cities. Though the West Coast line has some brand-new trains, the East Coast line, the other most important route in the country, is making do with an overhaul of the ancient diesel "High Speed Train" ("high speed" for 30 years ago, that is!) engines.

Yet privatisation has delivered extortionate fare rises, as well as increasing the bill to the state. Presumably this is an example of where, in government-speak, the market fails "to function well" and "government can ... intervene to address specific market failures through competition policy or regulation". Certainly, Labour did not prop up Railtrack - they could hardly ignore such bare-faced profiteering at the expense of safety and besides, they had the interests of the train operators to think of. But they did not take advantage of Railtrack's collapse to reunify the railway, let alone to renationalise it.

The "not-for-profit" Network Rail ended the sub-contracting of rail maintenance (thought not of the laying of new track) and now directly employs the 15,000 workers who had been outsourced along with their jobs. But it was not intended to address the problems caused by the fragmentation of the service, such as the rivalries between companies which have an incentive to try to avoid the blame, and therefore the cost, for any delay. Rather, it was aimed at cutting costs - witness the current spate of strike ballots among Network Rail workers against cuts in the workforce and in their terms and conditions.

And never mind the fact that the artificial internal market created between the companies operating in the railways is blatantly not a "customer-focused and effective" way of delivering services. What matters is that it allows the operators of freight and passenger services, not to mention the owners of rolling stock, to carry on piling up profits thanks to the subsidies of the state.

Regulation or control by the population?

The different forms of "regulated" privatisation and subcontracting of public services, as they have been introduced since the 1980s and managed since 1997, have certainly offered very "efficient" ways for the capitalist class to gain greater access to the coffers of the state. But not only do they imply that public funds have to provide for the profits of a whole layer of capitalists (in fact, a whole parasitical industry has grown out of the booming subcontracting of public services and would not exist without it), they also imply that anarchy which is a built-in feature of capitalist profiteering, becomes part and parcel of public services.

As the various examples given in this article illustrate, the degree of disorganisation, human and material waste and parasitism which is introduced into public services by private companies, represents a social cost which is simply unacceptable. And regulators, who are drawn from the very same social milieu as the directors of the private companies they are meant to "discipline", are not only incapable of changing anything to this state of affairs, but they are not meant to do it either. After all, the regulators, like the governments which appoint them, are there to ensure that the interests of capital are preserved. Their briefs always include provisions that guarantee the regulated companies a minimum level of return on investment and if reaching this level can only be achieved at the expense of consumers, the consumers just have to foot the bill.

Of course, there is no point in being starry-eyed about state-run public services. They are mirror images of the society in which we live, where governments are in office to manage the affairs of the capitalist class and promote its interests, and as such, spare no effort to reduce the state's social expenditure as much as they can get away with. Nor are state-run public services free of various forms of corruption, patronage, graft, waste, etc... But at least they are not impregnated with the obsession that what matters is the end-of-year balance sheet and the verdict of shareholders regardless of the consequences this may have for the organisation as a whole. In short they implied (and still do, where the profit sharks have not yet been allowed too much leeway) a certain sense of social responsibility which is the exact opposite of profiteering.

Thanks to a decade of Labour's bending over backwards and its efforts to meet the wishes of big business, the private companies which run the privatised public services, whether as a whole, or just small slices of them, display intolerable arrogance. With the encouragement of this government, they have come to think that they can squeeze as much as they please out of working people. The levels reached by today's fuel, phone or water bills are not any more acceptable or affordable than the level of rents charged by so-called "social landlords" or the level of transport fares.

This racketeering mafia is a permanent threat to the standard of living of the working class as a whole. And yet there is no economic necessity for the exorbitant taxes they impose on workers. These only reflect the huge degree of parasitism they exercise on the lives of working people. And there is no reason why this should not be challenged.

The profiteers can live - and do live very well - under a regulatory system. But the last thing they want, the last thing they can afford, is any form of social control, that is control which is exercised collectively by the working class.

Day in and day out, workers are told that they need to tighten their belts one more notch and work harder, because of "rising world prices", because of a "housing boom" pushing up costs, or, on the contrary, because of a "recession". And yet companies and the wealthy display, with the most indecent arrogance, ever increasing wealth. Isn't this a good enough reason for the working class to give itself the means to control the accounts of those who are demanding always more sacrifices from workers, whoever they may be? "Commercial confidentiality" is the ultimate veil behind which the capitalist class conceals its profiteering from the eyes of the working population. But it can be by-passed, if only with the help of insiders. How many scandals have been exposed this way, often thanks to just one individual? And how many more would be exposed if workers organised themselves consciously to force the profiteers to show where they get their profits from and where they disappear to?

In a period when the capitalist class is on the offensive, as it is today, and when, in addition, a serious crisis may be looming, the best defence for the working class is to go on the offensive and to use its collective strength to impose its social control over society, against the criminal parasitism and social irresponsibility of the capitalist class.