What cost privatisation?

Chris Ames, a freelance writer and investigative journalist, is editor of iraqdossier.com

What cost privatisation?

Posted by Chris Ames Thursday, 22 January 2009 at 12:26 pm

With the chancellor committing further billions of public money to bail out the banks, why are ministers so determined to push through an “unaffordable” privatisation that lost its rationale with the credit crunch?

As I describe today on my Spin and Spinners blog, ministers have repeatedly misled MPs about the escalating costs of the defence training review (DTR).

If it goes through, which some doubt, the DTR would be new Labour’s biggest ever private finance initiative (PFI) project. Its main element, giving a consortium led by arms companies a 30-year contract to build and run a specialist military academy in Wales, was already controversial. Then increased borrowing costs and falls in the value of surplus Ministry of Defence land pushed the cost of “package 1” of the DTR up to £12bn.

The National Audit Office recently disclosed that this “significant cost growth” led the MoD to deem the project “unaffordable” last May. But accident-prone Armed forces minister Bob Ainsworth has repeatedly claimed that it provides savings to the taxpayer.

Ainsworth was told last April of the £1bn increase that took the cost of the package to £12bn, making it unaffordable. A week later he stated in a written parliamentary answer that it provided savings of approximately £400 million over 30 years.

On 3 November, Ainsworth told MPs that “the programme is still affordable and remains more affordable than the in-house alternative”. The MoD subsequently disclosed under the freedom of information act that the cost of the programme remained at £12bn. It has also emerged that the MoD had by then developed a new in-house “fallback” proposal, which it has deemed both “affordable and deliverable”.

In their statements about the DTR, both Ainsworth and the MoD keep saying that they have worked hard to drive down costs. But, given that the price is still what it was when the project was “unaffordable”, have they actually cut anything off the price? Here’s a statement from an MoD spokesperson:

“The bottom line is that [the project] is affordable. The MOD and Metrix have over the last few months and continue to work constructively together to drive down costs without materially affecting the scope of the project. You can’t solely focus on the cost, affordability also incorporates the fact that [the project] is now the best value for money for the taxpayer.”

The spokesperson declined to deny that the MoD has simply increased its funding for the project to ease its affordability issues.

In a letter to tory MP Mark Pritchard, Ainsworth sought to backtrack from his assertion that the PFI option was “more affordable than the in-house alternative”. He appears to have realised what a reckless claim it was to make in the middle of negotiations. He told Pritchard that information on the costs of the in-house option:

“underpins our negotiating position with Metrix, and its disclosure would hinder the MoD’s ability to achieve value-for-money”.

But why is the government so determined to push through an unaffordable privatisation that is no longer the cheapest option and only ever worked because the private sector had access to relatively cheap finance?

The Metrix consortium includes arms companies Qinetiq and Raytheon, as well as training bodies City and Guilds and the Open University. There was already bitter opposition to what John Pilger described as “a British school of the Americas” – a reference to the notorious US college for latin American death squads.

There has been speculation that Qinetiq – the company spun out of a branch of the MoD – is struggling to make money. Having set it up, does the government feel obliged to throw it the occasional multi-billion pound bone?

This of course is where free market dogma comes unstuck. Sometimes the private sector can only be made to work if given large dollops of public money.

More misleading ministers

It is now clear that ministers have repeatedly misled MPs over the escalating costs of their biggest ever private finance initiative (PFI) project.

Under the defence training review (DTR) ministers plan to give the Metrix consortium a 30-year contract to build and run a specialist military academy in Wales. But increased borrowing costs and falls in the value of surplus MoD land have pushed the project’s price tag to £12bn. Many doubt the scheme's viability.

The National Audit Office recently disclosed that this “significant cost growth” led the Ministry of Defence to deem the project unaffordable last May. In spite of this, hapless Armed forces minister Bob Ainsworth has repeatedly claimed that it provides savings to the taxpayer.

Last April, a week after he was told of a £1bn increase in costs, Mr Ainsworth stated in a written parliamentary answer that the project provided savings of approximately £400 million over 30 years.

On 3 November, Ainsworth told MPs that “the programme is still affordable and remains more affordable than the in-house alternative”. But the MoD subsequently disclosed under the freedom of information act that the cost of the programme remained at £12bn. It has also emerged that the MoD has developed a new in-house “fallback” proposal, which it has deemed both “affordable and deliverable”.

Tory MP Mark Pritchard is a vocal opponent of the privatisation, which is interesting in itself. His constituency of the Wrekin includes RAF Cosford, which would close under the PFI. He says: “the project’s figures no longer add up - and neither do the minister’s words. There needs to be an early and updated statement in the House to clear up a long list of ministerial contradictions.”

In a letter to Pritchard, Ainsworth has asserted that his statement that the project was affordable was correct “at the time… following negotiations with Metrix to drive down costs and a rigorous and detailed assessment of the project’s affordability issues”.

Ainsworth declined to stand by his claim that the PFI option was “more affordable than the in-house alternative”. Ironically, he stated that detailed information on the costs of the in-house option “underpins our negotiating position with Metrix, and its disclosure would hinder the MoD’s ability to achieve value-for-money”.

Pritchard has accused Ainsworth of compromising his own department's negotiating position and prejudicing its ongoing evaluation. He claims that the government’s current financial difficulties mean the Treasury cannot ignore the rising costs of the project. "It is no longer tenable for ministers to write off the fallback in-house option." he says.

An MoD spokesperson told me: “The bottom line is that [the project] is affordable. The MOD and Metrix have over the last few months and continue to work constructively together to drive down costs without materially affecting the scope of the project. You can’t solely focus on the cost, affordability also incorporates the fact that [the project] is now the best value for money for the taxpayer.” But she refused to deny that the MoD has increased its funding for the project to ease its affordability issues.

Under the PFI, staff from Cosford and other MoD bases would have the option of transferring to St Athan in the Vale of Glamorgan as employees of the Metrix consortium, which includes arms companies Qinetic and Raytheon, as well as training bodies City and Guilds and the Open University.

The Public and Commercial Services (PCS) Union opposes the PFI. Regional spokesperson Robert O'Harney, says: “Should the PFI go ahead, it will see our members being privatised and then 4 years later being given the choice of moving themselves and families to Wales or being made redundant. Additionally the vast ex-military experience of many of our members will be lost forever.”