A Valuable Lesson from Mexico: AMLO Government Cancels Extortionate Public-Private Partnerships for 9 Public Hospitals

This will probably not have gone down well with the World Economic Forum, which prides itself on being “the international organization for public private cooperation.”

As many governments around the world, particularly in Europe, are gutting their public healthcare services (Spain and the UK being two prime examples), Mexico’s President Andrés Manuel López Obrador (AMLO for short) appears to be rowing in the opposite direction. A week ago, the soon-to-be-outgoing head of state unveiled plans to buy up nine public hospitals being managed by private consortia, for just 5.74 billion pesos ($320 million). In his customary morning press conference last Wednesday, AMLO said the cost in the PPP contracts was just too much (translated by yours truly):

You have already received significant sums of money over a number of years… We no longer want to continue paying you year after year for 20 years, as stipulated in the contract, because it is too much. It is a very special contract, but now things have changed. When they (former governments) gave you the contract, you were among the favoured ones, but that has changed; now the favoured ones are the children, the Mexicans, the people.

[We said] we are not going to expropriate your hospital, we are not going to leave you with nothing. We are going to carry out an appraisal of what your hospital is worth, with all its equipment, everything,… and we will pay you for it, and you will have money to do other business. And we will pay you right now, in cash, not in small installments. We will pay you and remain friends and in peace.

A 1,700% Mark -Up

The contracts in question relate to four hospitals tied to the Institute of State Workers Social Security (ISSTE), three to the Ministry of Health and two to Mexico’s Social Security Institute (IMSS). AMLO said that if the government continued paying the companies for the remaining duration of the contracts (as long as 20 years in some cases), it would cost the State around 93 billion pesos ($5.41 billion). That’s for nine hospitals that according to government estimates are worth just 5.74 billion pesos ($330 million) — a mark-up of around 1,700%.

“[The companies] tell me they would prefer — and I am taking this opportunity to send them this message once and for all — that we negotiate a reduction in the rate. No, no, no, because, even if we reduce it by half, it is still too much,” said AMLO.

The nine hospitals include three high-specialty facilities, in the cities of Ciudad Victoria (Tamaulipas), Léon (Guanajuato) and Ixtapaluca (Estado de Mexico). The companies affected include the Mexican construction firm GIA, the Mexican financial services group INVEX and three Spanish construction and infrastructure companies, Sacyr, Acciona and Eductrade.

What is perhaps most striking is the price AMLO claims to have secured for the nine hospitals under private management — the equivalent of just one year’s lease fees. It seems that AMLO made the companies an offer they couldn’t refuse, much as he did when he offered to buy up the lion’s share of Spanish energy giant Iberdrola’s Mexican operations earlier this year following two years of intense — and not very cordial — negotiations. At one point, AMLO even threatened to pause diplomatic relations with Spain over the abuses of its energy and infrastructure firms. The final deal gave back to the state-owned electricity company CFE majority control (around 53%) over Mexico’s electricity market.

One of AMLO’s main priorities for his last year in office is to strengthen public health care, with a view to making it universally available.* That puts Mexico at odds with the general direction of travel among OECD economies, with most North American and European governments in an apparent race against time to privatise public healthcare services. Presumably, AMLO’s cancellation of these PPP contracts will also not have gone down well with the World Economic Forum, which describes itself as “the international organization for public private cooperation,” especially if other governments get similar ideas.

PPP (or PFI): A Largely British Invention 

The modern incarnation of the public private partnership (PPP), known in British English as public financial initiative (PFI), is widely considered to be the brainchild of the UK conservative governments of Margaret Thatcher and John Major — with plenty of input from the private sector, including, of course, the City of London. It essentially involves a consortium of private companies financing, building, maintaining and operating some element of a public service for an extended period of time (normally 25 to 30 years).

Once operational, the lead contractor leases the public service to the public body with a very high mark up while financial institutions cream off much of the money for simply arranging the loan deal. The attractions for both companies and banks are clear: a single contract provides the companies involved with a more-or-less guaranteed income stream for decades, usually underwritten to a large extent by the government itself. Companies can also lobby politicians to ensure that governments adopt PPPs, and renegotiate them whenever necessary during the long years of the contract.

The modern concept of PPPs did not exist before the 1990s but concessions for public works and services have been around for centuries, as explains a 2013 paper by Public Services International (PSI), the global union federation for workers in public services,

The principle was that the private company agreed to invest its own money in return for which the state guaranteed a monopoly to the company on supplying that service in the area covered, and so the company could expect to get a return on its capital by charging users. Concessions were often used in the 19th century to develop water, gas, and electricity systems, and railways, which involved high capital investment. But they were unable to deliver the required scale of investment for universal services at affordable rates, and so were generally replaced by public ownership using public finance.

For governments like the UK’s, PPPs, or PFIs, had an obvious benefit: they allowed ministers to harness large sums of private capital to invest in public projects, such as roads, new schools and hospitals, without paying any money up front — and thus keeping the level of current public debt lower than it would otherwise be. This meant that governments could continue spending without breaking neoliberal fiscal rules limiting public borrowing. It also meant they could hide the true extent of public debt through accounting trickery similar to that which put paid to Enron. The PSI report:

PPPs originated as an accounting trick, a way round the government’s own constraints on public borrowing. This remains the overwhelming attraction for governments and international institutions.

But it is also a dangerous way of kicking the can down the road. By early 2017, the UK government had already coughed up £110 billion in fees and interest. Between April 2017 and the 2040s it is expected to pay investors and companies another £199 billion for existing deals. That works out at a total outlay of around £310 billion for 700 projects worth a measly £60 billion.

Early Worries

Even in its early years, concerns were already being raised about the long-term impact of PFI on departmental budgets. In 2019, cabinet papers from 1995 — just three years after PFI was launched — were published showing ministers’ concerns. From the FT:

Sir George, now Lord Young, feared PFI would offer “false comfort” by easing short-term cash flow problem, but did not take into account future costs, which could result in a “very substantial reduction in programme outputs”.

He said the Treasury’s approach failed to recognise that the ministry’s budget would be taken up by PFI payments, which would increase from £130m to £285m a year by the end of the 30-year contract period.

An unwillingness to allow for rising costs, he wrote, meant that if action was not taken there would soon be no room for new projects, either conventionally funded or under the PFI.

These concerns were swept aside by Prime Minister John Major’s unfettered enthusiasm for the new financing model. When Tony Blair’s New Labour government came into office, in 1997, it expanded the use of PFI across all government departments. In short order, PFIs were being used to pay for just about everything, from roads to bridges, to schools, to hospitals, prisons, sports stadiums and military training facilities. In other words, both parties have their fingerprints all over the PFI crime scene. As Prof Helen Colley notes in a letter to the Guardian, the impact on the NHS has been devastating.

PFI continues to consume vast proportions of NHS budgets – in 2019, the Institute for Public Policy Research estimated that £13bn of “investment” would cost the NHS £80bn in repayments, but inflation is now sending this figure soaring. PFI delivered substandard buildings that are already crumbling. And it drove changes in terms and conditions of employment that have decimated NHS staff. If the NHS is in a death spiral, PFI is the vampire sucking it dry, and New Labour invited it into the house.

In the late ’90s, the PFI model began to be exported all over the world, including to Latin American countries like Chile, Peru and Mexico. As Building Magazine noted in 2001, “Despite the mass of controversy around PFIs in the UK, other countries all over the world are keen to get in on the act.” And UK banks, construction companies and consulting firms were keen to share their expertise and knowledge, at a fee of course.

Today, 22 years later, public services in many of those countries are being squeezed due to a host of reasons, including the compounding debt accumulated through two decades’ worth of PPPs and PFIs. In the UK, the interest rate on PFI deals can be as much as 2 to 3.75 percentage points higher than the cost of government borrowing, according to a 2018 parliamentary report.

The report also flagged the high number of “high profile cases where the equity element of PFI contracts have been sold to offshore investment funds that pay little or no corporation tax in the UK.” Professor Dexter Whitfeld, director of the European Services Strategy Unit, told the authors that “offshore infrastructure funds owned around half of the equity in PFI and PF2 projects, with the five largest offshore infrastructure funds making profits of £2.9 billion in the period between 2001–2017, and paying less than 1% in tax on their PFI profits.”

As inflation and interest rates have soared, the cost of servicing PFI projects has also increased. As the Guardian reported last year, four NHS trusts are now paying more than half of their total annual PFI unitary payment on interest alone to private companies. David Rowland, the director of the Centre for Health and the Public Interest, said:

“For those trusts with a PFI hospital, the high costs of these schemes will continue to be a major drain on their budgets. This is at a time when they are making planned cuts of £12bn a year and expect to have to meet an additional £6bn of costs next year due to inflation.

The UK government finally called it quits on PFI and PF2 in 2018, meaning there would be no more fresh deals in the future, though debts remain outstanding on hundreds of completed projects. The catalyst was the unexpected collapse of the UK infrastructure group Carillion, whose downfall was partly due to problems with PFI contracts with hospitals in Birmingham and Liverpool. As I noted in an article for WOLF STREET at the time, the dramatic change in policy was largely due to external pressure from the opposition benches:

The opposition Labour Party (then led by Jeremy Corbyn) responded to the Carillion scandal by pledging in its manifesto that it wouldn’t sign up to any more PFI contracts. The Conservative government just stole that idea, while also rejecting Labour’s much more dangerous proposal to review all existing PFI contracts and bring the worst offenders back in house.

As Mexico’s government appears to have done.

A Stark Contrast

Through PFI and PF2, successive British governments allowed bankers, construction companies and financial consultants to gorge on inflated interest rates and fees for run-of-the-mill infrastructure projects for decades, while saddling the State with crippling long-term debts. Rather than helping to fund large infrastructure projects, which are still predominantly financed with public funds, PFIs and PPPs  “select a small number of the most profitable projects, and persuade governments to prioritise spending on these projects, even if this distorts the development of public services,” notes the PSI report.

By 2018 even the chairman of state-owned Royal Bank of Scotland Howard Davies was denouncing PFI as a “fraud on the people” — one which the bank he headed up had hugely benefited from. Asked about the demise of Carillion on BBC One’s Question Time, Davies questioned the rationale of handing over big projects to private firms, whose borrowing costs would be higher than the government’s, as the UK government had been doing, largely at the behest of private sector companies and banks, for the best part of three decades.

Unlike in Mexico, the current and last four Tory governments have promised to honour all existing PFI deals. When then-Chancellor of Exchequer Philip Hammond dropped PFI funding in 2018, he was at pains to underscore the government’s unwavering commitment to public private partnerships (PPPs) as a whole. This hardly comes as a surprise given the extent to which the Conservative Party is beholden to the financial services industry, with close to 50% of Tory funding coming from City “donors”.

“Despite the pressure on NHS trusts to make cuts, under the 25-year-long contract, PFI companies and their shareholders have been given a watertight guarantee that they will receive payments and a return on their investment,” Rowland says. “In short, expenditure on staff, equipment and other capital projects can be cut by a trust, but not their PFI payments.”

The contrast between AMLO’s Mexico and Sunak’s Britain could not be starker. In Mexico, the AMLO government claims to have canceled public-private partnerships for nine public hospitals by simply offering to pay just over 5% of the outstanding debt and fees owed to the companies involved. In the UK, meanwhile, some hospital trusts are now discovering, to their dismay, that they still have to pay their PFI providers — which in some cases have already collected repayments of up to 10 times the original building costs — a fee or market value for the hospital if they want to take full control of the building when the contract ends.

 

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* This article is not meant as an appraisal of AMLO’s record on healthcare during his five years in government. That would need a whole article of its own. But for what it’s worth, in my view he has made some good calls, including allowing the Social Security Institute (IMSS) in Mexico City to deploy ivermectin in its fight against COVID-19 as well as his determination to expand public healthcare coverage while most other governments are doing the opposite. But he has also made some bad ones, including moving a little too aggressively in restructuring Mexico’s public health system as well as his government’s mismanagement of medical supplies during the COVID-19 pandemic. In fact, Mexico had one of the highest excess death tolls during the first two years of the pandemic.