The 3 P's − PFI, Private Equity, and Pensions

By Rob Ray, 9 August 2007
Image: South Sea Bubble Playing Card, 1721. Bancroft Collection. A wealthy landowner has gambled successfully with his servants' wages

As money expands, society contracts. In the UK the unholy trinity of Private Finance Initiatives, Private Equity and Pensions embodies this logic, turning jobs, services and infrastructure into factories for finance capital. Rob Ray explains how the 3 P's interact to pile up corporate fortunes and devolve risk on to the rest of us

If Tony Blair’s 1996 speech claiming that his government would be all about the ‘Three E’s – education, education, education’ famously proved inaccurate, the business community has been rather more thorough with its own magic letter.

P stands for three of the most fast-moving, complex and important economic issues of this decade: Private Finance Initiatives, Private Equity and Pensions. In each case, through the tenure of New Labour, massive change has occurred, almost always to the delight of company bosses desperate to find new ways to increase their profit flows, and almost always at the expense of everyone else.

How this affects the vast majority of people is difficult to determine, simply because such huge sums are involved and invade our lives in so many ways – if you go to a hospital, leave your bins out, work, don’t work, are retired, just starting to save, if you are a school child, or a driver, or take the bus, the manoeuvrings of the three P's will affect you. As far as possible, you should know what is going on.




The Private Finance Initiative (PFI) represents one of the government’s flagship policies for overhauling public services.

PFI sees the public sector make long term contracts with the private sector to provide or upgrade services rather than keeping all operations in-house. As an example, to build a new hospital, the private sector put up the initial funds, organise the building works, and agree to maintain the building. The state then pays back the money over the course of a 20-30 year period, with interest. In effect, the state is taking out mortgages or in some cases, simply renting services from the PFI companies.

PFI was launched in 1992 by the Conservatives. After a slow start, the sector gained speed, primarily in the NHS, before a series of high-profile scandals saw the government forced to cut back on PFI in health in 2005, while expanding in other areas, notably education, housing and transport.

Early 2006, however, saw a reinvigoration of PFI in the health sector, heralded by the signing of a £1 billion contract for St Bartholomew’s Hospital in London.

From a standing start, even with a year long health hiatus, the sector has built up a huge portfolio worth up to £60 billion in just 15 years, including over 700 projects in the UK and with more on the way. The single largest PFI project signed to date, for the Ministry of Defence, will see the Airtanker Consortium provide 14 new tankers at a cost of £13 billion – up from a £10 billion initial estimate.

Pointing to the sheer volume of building works and changes to the entire economic landscape of the UK, leading companies say that switching from state-owned to state-rented provides the only means to keep up in a fast changing world.

Loud voices have challenged this view. Unions, NGOs and political groups argue that not only is PFI a sly way to reduce the size of the public sector, but that it represents one of the largest ongoing rip-offs of public money by private concerns of the last century and serves the current government’s ongoing attempt to hide massive levels of debt.

On average it costs 30 percent more to build and run services under PFI than through keeping the system in house, with several standout examples faring far worse.

The Skye Bridge PFI scheme cost £93 million when it should have only cost £15 million. The Norfolk and Norwich hospital, a flagship project for the government, saw a refinancing operation by the PFI operators saddle it with £106 million in extra liabilities to help increase profit margins.

Cumberland’s Royal Infirmary saw a drop in bed numbers, poor design leading to ‘bed jams’, and major architectural problems after outside contractors with little knowledge of NHS needs took charge of the redesign. The cost, meanwhile was £500 million for a job which, according to one inside source, should have cost £64 million.

In one of the most notorious education deals, a PFI scheme at Balmoral High School in Northern Ireland is under investigation after it emerged the school is due to close in 2008, while its PFI continues until 2027.

This last example illustrates one of the major arguments against PFI. Deals which were signed at the height of a spending boom from the government are already proving difficult to maintain as Gordon Brown winds down state funding.

The government insists PFI is cost effective, saying it is value for money, and 88 percent of PFI projects are delivered on time and in budget, while 70 percent of state projects are late and over budget.

Yet evidence from both within and without the administration has suggested otherwise.

The Treasury itself has said that delivery on ‘soft-service’ (e.g. catering) commitments from PFI companies has been inadequate, while the National Audit Office has called the value for money calculation ‘pseudo-scientific mumbo jumbo where the financial modelling takes over from thinking’.

Most damning has been a report earlier this year into the headline 88 percent figure. In a study published in the Public Money and Management journal, a research team found that statistics in five studies cited to back this statement up were ‘either non-existent or false’.

Two reports were based on interviews with PFI project managers, one had no comparative data at all, in a fourth, the government denied access to the information altogether, and in a fifth it was found that only three PFI schemes were tested, purposely excluding failing or bankrupt schemes and using different baselines when comparing cost changes.

At an estimated 39 percent average return on investment, rising to 58 percent in health, PFI remains a tremendously lucrative contract to sign for the private sector. For the government too it has enormous benefits, as only one thirtieth of what is borrowed is counted on state figures because of the extended repayment cycle, allowing Brown’s figures to add up.

But tremendous extra costs for taxpayers are building in the long term. The plain fact is everything has to be paid for, and New Labour have sacrificed £60 billion in public funds to a type of redevelopment project which after 15 years is continuing to draw far more out in profits than it puts in through work.


Private Equity


If you work, there is a high and increasing likelihood that you work for a private equity funded company. One in five workers in the UK are now under the control of some form of private equity, with the number set to increase as the sector becomes more powerful.

Private equity funds are most commonly known for two functions, direct investment (they are heavily involved in PFI), and takeover operations. In the first case, money is raised from investors to put into startup companies which look like they could be profitable.

Generally, this is seen as a positive thing, both by the markets and the general public. Private equity takeovers however are far more controversial. They occur when funds buy out publicly listed companies and take them off the stock market as private entities.

The most common use of this system for generating profit stems from the ’70s when business tycoons developed ‘the flip’, where a management team takes over a company, aggressively attacks wages and jobs to ‘cut away fat’, then sells back to the market in a three to five year cycle.

The flip is achieved through what is known as a ‘leveraged buyout’ where the massive funds needed to take over large companies are loaned by banks and investors, and secured with the assets of the company being bought out.

The practice reached its first peak in the ’80s when major takeovers were attempted by firms later labelled ‘the asset strippers’ for their practice of taking healthy companies, selling their assets, firing much of the workforce and then foisting a shell back onto the public markets.

The private equity market died down in the ’90s, as mega-mergers placed many of the big players beyond the reach of even major private equity groups and confidence dimmed due to the risks of investing during an economic downturn.

However, the rise of the ‘club buyout’ in the last 4-5 years, where several major funds combine to target bigger game, has recently seen some of the biggest companies in the world stalked.

A glut of available credit offered by banks has lead to increased confidence in the last few years, with the majority of the risk redistributed to reduce their liabilities should things go wrong.

Banks currently hold around a 20 percent stake in the private equity market, with 80 percent held by institutional investors – hedge funds, mutual funds, insurance companies, pensions, etc. Effectively, most of the risk for private equity is held by the general public, through the various ‘safety net’ schemes which a person signs up to in the course of their life. Paying into a pension? Home insurance? A mutual society? Well, the very wealthy people controlling your money are also the ones helping build the private equity boom by placing your funds in the hands of investment managers who may then make a risky deal to take over your workplace, fire your friends, attack your pension and destabilise the company you work for.

The sector has grown at a stunning pace, nearly doubling from £56.9 billion invested in 2004 to £108.8 billion invested last year, and an estimated £202 billion war chest for further buyouts.

Although a failed effort, Sainsbury’s was a target earlier this year, and an extended battle has just been concluded with the buyout of Boots. But these are just the tip of a very large iceberg. Other major buyouts in the last few years have included the AA, Debenhams, and the largest completed so far, the energy group, TXU, for £22.5 billion.

Unions have launched an attack on the sector following a brutal fight at the AA, where unionists accused the buyers of gutting the business by selling buildings and then leasing them back, outsourcing personnel and where that wasn’t possible, simply cutting staff so roadside coverage was compromised. At Debenhams, the company has posted its third profit warning after being taken public, as the company struggles to shrug off underinvestment and cuts. Unions are accusing private equity of resuming the cycle of the ’80s.

The union drive looks set to be a flash in the pan, demanding only that private equity be taxed more. But the sector is a clear and present danger to workers, as a model which diverts massive assets away from wages and employment towards the ultra-rich, producing nothing while taking larger and larger risks not with the money of the wealthy, but capital produced by millions of smaller earners who think their money is safe.




Their, your, money is not as safe as you might think in pensions. It is dependent on a continued reasonable performance of the stock markets, underwritten, ideally, by the company employing you.

While the state works on a principle of workers paying in and then withdrawing directly from the national coffers, private sector workers in larger companies pay into ‘pension pots’ over the course of their employment, which companies are required to match.

Recent years have seen a series of attacks on the age at which pensions can be taken and the payout given upon retirement, using the justification that when pension pots were originally devised, it was not taken into account that people would be living longer, or have rising standards of living.

This view is a relative newcomer to the British stage. In the late ’80s and early ’90s Britain’s pensions were known as ‘the envy of the world’. They were well funded, organised and provided a reasonable living standard.

During the early stages of the Labour government however, an economic boom led to Gordon Brown giving companies ‘pensions holidays’, where they did not have to contribute into the pots as they had developed a massive pensions surplus in line with thriving stock markets.

These holidays proved catastrophic for the sector when a market downturn hit in the late ’90s, wiping around £30 billion off the value of pension pots. Company bosses administering the pots had speculated heavily in unstable dotcom stocks, these crashed, pensions were hit hardest.

This, combined with companies attempts to either evade or undermine their duty to underwrite pension pots, has put the future of millions of people worldwide in jeopardy.

While public sector pensions have received the most attention with government attacks on the age of retirement and payouts, it is in the private sector where some of the most radical attacks have occurred. Some companies have simply ignored the build up of liabilities – the amounts they expect to pay out to retirees – but others have switched pension payouts from final salary pensions (where your payout is based on the last salary you earned at the company) to working life schemes which average out your wages across the term of your employment. Inflation, promotion and other pay rises that the average worker will have achieved are undermined by doing so, leading to lower payouts.

In some companies, pension schemes have been closed to new members, impacting the final payout for those already in as payments dry up, while others have sold off their pension schemes entirely, clearing immediate liabilities in order to release themselves from any further responsibility to the workers in the schemes.

In many cases, this has actually proven an unnecessary measure. As of this month, the approximate pension deficit – projected payout compared to funds available and being made – for private companies had dropped to a manageable £3 billion, down from £100 billion in 2003.

Some of this is due to the attacks on workers’ retirement plans, but much of the liabilities have been cleared through simple growth in the stock markets. Today, newly invigorated pension pot managers are again starting to take major risks with the money, holding dodgy debts in companies which may not pay up, and investing heavily in private equity.

This largely undeclared risk is exacerbated in companies which are takeover targets for private equity. At both Sainsbury’s and Boots, the deal was stalled by warnings from the pension funds that should massive debts be shifted onto the companies, pension pots would find themselves unable to function properly under the financial strain.

Amazingly, some companies are considering taking more pensions holidays, as the markets continue to defy gravity following this injection of private equity, PFI and war funding.

Detail from Bubblers medley, 1720. Satire on the South Sea Bubble

Image: Detail from 'Bubblers medley, or A sketch of the times: being Europe's memorial for the year 1720', a satire on the South Sea bubble

In a period of relative calm, the trouble being stored up can seem a long way away. In the financial markets however, we are seeing state and private sector bosses taking big risks with money we have earned – and hope will be there for us in years to come – to make themselves even richer than before.

Private equity is highly unstable, and a single failure with one of their shiny new multinational holdings could floor market confidence, pulling down other companies with it. That in turn would impact on the vulnerable pension pots which have invested in the sector, leading to more attacks on workers’ savings or worse, insolvency and the prospect of thousands of people being thrown onto the State’s tender mercies. The State, of course, could by then be having its own problems with private equity-held PFI companies.

Given the interconnectedness of the 3Ps the above scenario would have far ranging effects. The whole set of fiscal dominoes incorporating our retirements, our jobs and (the remains of) our public services, is in the hands of an industry renowned for its ruthless pursuit of a minority's profits at the majority’s expense. One should not overstate the probability of such a crash. It is quite possible private equity will stumble along for a while before dying down again, in which case only limited damage will be sustained, in the same vein as the ongoing fallout from private equity today. And although the City is becoming increasingly concerned about threats to the current liquidity boom, company bosses and shareholders are always the last to feel the pain of a downturn. For the rest of us, the 3P's have already started taking their toll.

Rob Ray <> is editor of Freedom anarchist newspaper, a fortnightly based in London