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When private meets public sector: the history of a tangled relationship

GNER train in a station
GNER was stripped of the east coast rail franchise when its US parent company got into trouble – one of several private companies to come unstuck on the mainline. Photograph: Murdo Macleod for the Observer

Interaction between the private and public sectors can be a politically charged process in the UK, not least when the contracts that underpin such a partnership go wrong. Here are some recent examples of cooperation between public bodies and private companies that have caused controversy.

Scottish schools

A private finance contract to build a series of Edinburgh schools became a costly embarrassment after the new buildings were found to be faulty and one partly fell down. A report into the deal found that the contractors had used substandard concrete to build the schools, all of which were considered unsafe and in need of substantial repair. But a review by the council found that the financing behind the Edinburgh Schools Partnership (ESP) was not to blame. ESP is a private finance initiative (PFI), a popular form of funding for projects whereby a company pays the upfront construction cost and is then paid back over time by the government, which effectively pays the constructor to lease the property. However, the review did say there were aspects of the way in which the PFI methodology was implemented that “increased the risk of poor quality design and construction”.

Virgin Health

Private firms scooped almost 70% of the 386 contracts to run clinical health services put out to tender in England during 2016-17. They included the seven highest-value contracts, worth £2.43bn between them, and 13 of the 20 most lucrative tenders. Last year, Virgin Care, owned by Richard Branson sued six clinical trusts after it lost an £82m bid. It secured an out-of-court settlement. It also went on to win £1bn worth of contracts.

London Underground PPI

Bob Kiley, tube boss in the early 2000s
Bob Kiley, tube boss in the early 2000s, described the PPP financing model for transport improvements in London as ‘fatally flawed’. Photograph: Channel 4

A series of public-private partnerships (PPPs) were signed by the last Labour government in 2002 and 2003 to upgrade and carry out maintenance on London’s tube network. Described at the time by then tube boss Bob Kiley as “fatally flawed”, by 2010 the process had unravelled. In exchange for carrying out complex work on an ailing network, the businesses behind the contracts would receive a monthly payment that would increase or decrease depending on whether they hit targets for measures such as train cleanliness and reliability of services. The process became mired in endless rows over costs; the biggest contractor, Metronet, eventually went bust and the other, Tube Lines, was bought out.

East coast rail

For the second time in a decade, the secretary of state for transport has been forced to bail out a private rail company running the vital east coast mainline. In 2009, the then Labour government took the line under public control after its private operator, National Express, couldn’t pay out the £1.4bn promised under the contract. The previous holder of the franchise, GNER, had already been stripped of the route after its US parent firm was struck by financial troubles. Last year, the government waived the majority of payments due under Stagecoach’s £3.3bn contract to run the London to Edinburgh route. Whenever the merits of rail privatisation are debated, the east coast line is a key argument for those in favour of nationalisation.

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This article titled "When private meets public sector: the history of a tangled relationship" was written by Phillip Inman, for The Observer on Saturday 13 January 2018 04.00pm


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