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Thursday, October 20, 2005

More great corporate swindles

More fun and games at the expense of the public by big business...

Public buildings and private finance? That's a formula for tomorrow's slums
Larry Elliott,The Guardian, Monday August 29, 2005


That's it for another year. The annual summer ritual is over, following last week's publication of the GCSE results. Are the pupils getting smarter or the papers getting simpler? Who knows? But even if the exams have not been dumbed down, the buildings in which they were sat certainly have been.
So here's a multiple-choice question for you. Is this the fault of (a) local education authorities, (b) the government or (c) the private finance initiative?

You get no marks if you answered (a), two if you answered (b) and a full five marks if you answered (c).The government spin on PFI is that it has harnessed private sector money and expertise to clear the backlog of work in the public sector without skimping on quality.
This is poppycock. At best, the schools, hospitals and prisons being built are depressingly mediocre - bog standard, to coin a phrase. At worst, they are the slums of tomorrow. There are people in government who know this and are worried about it.

At root, however, there is a tension between the pile 'em high and build 'em quick mentality that lies behind the PFI and Labour's historic commitment to quality design in the public sector that goes back to the days of municipal socialism and beyond. As William Morris once said: "Commerce has become of very great importance and art of very little."

Defenders of the PFI approach say it is a question of priorities. Quite rightly, they argue that there was an enormous backlog of work in 1997 after 25 years of neglect of the public realm and it was vital to get children out of portable classrooms and to prevent cancer patients being trundled for miles around the corridors of Victorian hospitals.

That's only part of the story, however. The PFI was a wheeze dreamed up by the Treasury for Kenneth Clarke when the Tories had run out of money in the early 1990s and were looking for a live-now-pay-later way of financing public infrastructure. But by the time Labour came to power in 1997, the PFI was clearly not working and could have been painlessly killed off.

Labour - perhaps to show it could now rub shoulders with the big wheels of finance - decided to breathe new life into the PFI and made it a flagship policy. What had been little more than financial sleight of hand under the Tories became an article of faith under Labour.

From the start, though, PFI proved controversial, particularly with the party faithful. Indeed, the PFI would probably be right up there with Iraq on the list of reasons why Labour's natural supporters are fed up with the government. As Peter Robinson of the Institute for Public Policy Research showed as long ago as 2000, there was never any fiscal rationale for the PFI. Gordon Brown could have borrowed the money in the traditional manner without breaking his financial rules, which explicitly allow the government to borrow for infrastructure projects.

It's true to say that most of the attention since 1997 has been on whether PFI projects really cost less - they don't - and whether they are good value for money - they're often not. Less attention, though, has been focused on the quality of what's being built, and that's a shame, because if the buildings are not as good as those that would have been built in the traditional fashion, that's a false economy.

Again, the government would probably say that it has few complaints from teachers and doctors about their new PFI buildings, but that's hardly surprising. The quality of design and the likely longevity of a building come some way down the list of priorities if you've been working in a draughty 100-year-old hospital where the roof leaks. An independent report prepared for the Building Research Establishment in 2002 said the design of PFI schools compared unfavourably with those procured in the traditional manner, adding that there was a "sparsity of finishes" and a "utilitarian aesthetic". Writing in the latest edition of Soundings, Ken Worpole, a writer on urban design, said the government had succeeded in transferring risk for projects to the private sector but only at the expense of "asset-stripping and de-skilling local authorities in their historic role as architects, planners and publicly accountable asset-holders. At the same time, PFI projects tend to produce bland design and build formulaic architecture that pays little or no attention to local circumstances or conditions."

It's easy to see why this should be. Traditionally built schools and hospitals start from a simple premise: what will be best for the pupils and patients. In PFI schools, design is only one part of the mix. Consortiums have to be careful that the designs are not so bad that their reputation suffers (the Jarvis syndrome), but they invariably go for the no-frills, low maintenance, economies of scale approach.

Paradoxically, there is more innovation and risk-taking in publicly procured projects than under the PFI; the bankers and the lawyers have a tick-box mentality. They will meet all the targets set for them but they are not in the slightest bit interested in trying anything original. Originality means risk, and risk can be expensive.

The picture is not universally bleak. Some local authorities have maintained their own design teams and have been able to eschew the PFI route. Hampshire county council, for instance, is seen by architects as a beacon of excellence for its in-house designed schools, and there are other authorities which have retained enough expertise to see when a PFI consortium is cutting corners. But this tends to be the exception rather than the rule. All that's left in Britain is the husk of a once proud municipal tradition that spanned left and right, and included millionaire philanthropists as well as town hall socialists. When it came to the public realm, there was agreement that beautiful buildings were not just desirable in themselves but contributed in a fundamental way to the creation of the good society.

The past 30 years have seen that tradition virtually disappear. Local government has been stripped of its powers and the values of the market have come to dominate the public sector. But behind all the talk of efficiency and delivery, we have witnessed the ascendancy of the philistines. It's not too late to act, and there are some encouraging signs that thought is being given to the issue of quality in public sector buildings.

In education, for instance, the government has announced a £2bn programme, Building Schools for the Future, that makes the right sort of noises. According to the No 10 website, the scheme will mean that within 15 years every child will be educated in a 21st century environment. The idea is that schools will be "rebuilt, remodelled or upgraded to provide flexible, inclusive, attractive learning environments that teachers want to teach in and pupils want to learn in. Schools will have high-quality facilities and integrated IT to help deliver personalised learning tailored to the needs, interests and aptitudes of every child". So is what the prime minister is calling "the greatest school renewal programme in British history" too good to be true?

According to architects it is, because of the fundamental incompatibility between the vision of Building Schools for the Future and the harsh reality of life under the PFI. The government sees no such incompatibility. It says a new body, Partnerships for Schools, will develop "innovative and effective models to streamline procurement" and create long-term public-private partnerships to deliver the government's vision.

If that sounds like PFI by any other name, that's because it is. "Partnerships for Schools will work with LEAs, helping them to select a private sector partner to form Local Education Partnerships that will bring together the best private sector expertise to construct, maintain and operate the new facilities, supporting headteachers in creating new schools and allowing teachers to focus on what they do best."

All this brings a hollow laugh from those with hands-on experience of life under PFI. There is currently much talk about the possibility of Labour urgently needing to find a way of reinventing itself in office after seeing its majority sliced in the election. But so far, that's all it has been: talk.

If the government is really ready to change course, there would be no better place to start than with a radical rethink of the PFI. Britain is an immeasurably wealthier country than it was when loving attention was paid to the detail of schools, health centres and public housing of the 1930s. The government is forever boasting about how the UK is now the fourth biggest economy in the world, so there is no obvious reason why we can no longer afford what was deemed essential for the public realm then.

Ministers argue that initiatives such as BSF are vital if Britain is to develop a workforce with the right skills and knowledge to meet the challenge of globalisation. They have backed that analysis with serious amounts of cash. The difficulty is that the PFI will frustrate, rather than help bring about, the government's lofty aims. If the architects were working for the schools rather than the money men, there would be a real chance of success. But that means breaking the habits of a lifetime and removing the financial and ideological shackles binding local government.

Accountants: a threat to democracy. The tax avoidance industry has a veto on what services the government can provide
Prem Sikka,The Guardian, Monday September 5, 2005


The tax avoidance industry is on a collision course with civil society. Elected governments take months and years to develop tax laws, but in pursuit of private profits accountancy firms can undermine them within hours of a chancellor's budget speech.
An accountancy firm partner was bold enough to state recently: "No matter what legislation is in place, the accountants and lawyers will find a way around it. Rules are rules, but rules are meant to be broken." Evidently, what ordinary people regard as antisocial and corrupt is a matter of pride in accountancy firms.

With the aid of accountancy firms, numerous corporate transactions are manufactured for the purpose of avoiding taxes. KPMG has admitted selling "unlawful" tax avoidance schemes that effectively deprived US public funds of billions of dollars. The firm has been fined nearly $500m as a result. Several of its ex-partners face the prospect of criminal prosecutions. Other big US accountancy firms, Ernst & Young, PricewaterhouseCoopers and Deloitte also face financial penalties and threats of prosecution.

The same firms also peddle a range of avoidance schemes in the UK, which are estimated to cost the state £100bn each year in possible tax revenues.

KPMG developed a VAT avoidance scheme for a company operating 127 amusement arcades in the UK. The company employed 600 staff, but under KPMG's scheme a complex corporate structure was created to show that it was controlled from the Channel Islands, and claim that, despite trading here, the business was not really established in the UK.

Such an arrangement enabled the company to claim a deduction for the VAT on its UK purchases but not pay the VAT collected on its sales to UK Customs and Excise authorities. The scheme increased the firm's earnings by about £4.2m - about the amount needed to provide 2,500 NHS hip replacements.

The ensuing court hearing learned that, in common with its US practices, KPMG cold-called the amusement arcade operator to sell the scheme. The firm produced a 16-page booklet that listed 83 detailed steps necessary to make it work. The firm suspected that Customs might regard the scheme as "unacceptable tax avoidance", but nevertheless sold it. Following a UK court defeat, KPMG and its client took the case to the European court of justice. A preliminary decision by the EU advocate-general has declared the scheme to be "unacceptable".

With advice from Ernst & Young, directors of a major phone company paid themselves in gold bars and fine wines to avoid paying UK income tax and national insurance contributions (NICs). No sooner had the government plugged this loophole than the firm devised another scheme, which enabled its clients to pay directors salaries and bonuses through an elaborate offshore "employee benefit trust" and avoid UK income tax and NICs. The scheme is estimated to have been copied by 500 companies to avoid paying an estimated £1.5bn in taxes and NICs. The House of Lords has now ruled that the scheme was unlawful.

In another Ernst & Young-inspired scheme, high-street retailers such as Debenhams issue credit-card receipts with small print claiming that there is a 2.5% handling fee, even though the price charged to customers paying in cash or through credit card is identical. The rub is that the retailers charge customers VAT at the rate of 17.5% on the whole price but only want to pass over VAT on 97.5% to the authorities. They claimed that 2.5% is not liable to VAT because, under EU law, banking charges are exempt. The scheme, copied by over 70 major retailers, has been declared unlawful by the court of appeal.

The UK government levies puny fines on the tax avoidance industry. Accountancy firms face a fine of £5,000 for failing to register their avoidance schemes with the Inland Revenue. This amounts to just 30 seconds of income for some of the big accountancy firms.

The government continues to award lucrative public contracts to the big accountancy firms. Their partners advise government departments on legislative design and enforcement. There has as yet been no public investigation into the tax avoidance industry.

Major casualties of the tax avoidance industry are ordinary people, who are forced to pay higher taxes while corporations and the rich avoid theirs. Individuals on the minimum wage have to pay income taxes, but some 65,000 rich individuals living in the UK are estimated to have paid little or no income tax. The top fifth of earners pay a smaller proportion of their income in tax than the bottom fifth. Corporate tax payments now account for just 2.5% of national income, the smallest share ever.

Unless stopped, the tax avoidance industry will destroy nation states and the very idea of democracy. Without adequate tax revenues no government can deliver its legislative programme, provide public goods or redistribute wealth.

We can be persuaded to vote for governments that promise to invest public revenues in education, healthcare or public transport. But the tax avoidance industry exercises the final veto by shrinking the tax base and eroding tax revenues.

Prem Sikka is professor of accounting at the University of Essex: prems@essex.ac.uk

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