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About the P&I Team Briefings Home | Responses | PFI Index | Policy Guide
PICs Briefing - No 36 May 2002
 

PICs : Public Interest Companies

 What are PICs?

  • Public Interest Companies are a new concept for delivering public services, currently being promoted by various individuals / organisations.
  • A Public Interest Company (PIC) exists to provide a specific public benefit. This cannot be changed without direct agreement from the appropriate publicly accountable body, protecting the public's interest in the services provided, and distinguishing PICs from public limited companies and the voluntary sector.
  • PICs can raise finance on the money markets but cannot pay variable dividends to shareholders. This differentiates PICs from Public Limited

Companies (which can raise and pay dividends) and from the public sector (which cannot raise finances on the capital markets). This means a PIC can raise money when it needs to for things like new buildings, but it does not run the risk of conflict of interest between shareholders and the public interest.

  • PICs are independent. The government cannot manage them directly nor interfere with management processes and day-to-day decisions. PICs can only be held accountable for results/standards by government. This makes the PIC different from public sector organisations and allows it to be entrepreneurial and responsive to its users.

Models of PICs:

There are a range of different forms of PICs currently being discussed, but as yet there is no existing legal form:

US Public Benefit Corporations

The standard charity structure in the US - and used for public service delivery - has many features of the PIC.

This PIC model requires money to be raised through bonds rather than payment of variable dividend. This removes the tension between working for the public interest and the need to pay dividends to shareholders. (eg Railtrack)

Charitable status

A PIC could have charitable tax advantages but with much more freedom about the way it finances investment than existing charities. The National Council for Voluntary Organisations welcomes the idea of PICs but believes it is likely to have less of an impact on traditional charities than on trading organisations such as social enterprises

Primary Care Trusts & Foundation Hospitals: In the NHS plan for England Health Minister Alan Milburn proposes hospital trusts that become independent, non-profit organisations. Foundation hospitals will have the "freedom and flexibility to reward staff appropriately", full control over all assets and retention of land sales. It is claimed that this will give greater control to those using them, and mean greater community accountability. The UK Government promises to explore options to increase freedoms to access finance for capital investment. The first NHS Foundation hospitals in England are to be identified later this year. The Scottish Executive has said it won't introduce them north of the border.

Mutuals: arguably a form of PIC, however there is a danger that mutualisation becomes a stepping stone to privatisation, as the wave of financial sector demutualisations has shown.

The NPDO: Non-Profit Distributing Organisation

An NPDO is a form of "Special Purpose Vehicle" (SPV) a body set up to deliver a specific service. The NPDO is independent - not controlled by local authorities (could be a company limited by guarantee), and is responsible for mobilising the finance required for the public investment programme. Unlike a standard SPV the NPDO does not have share capital and does not need to generate a return for shareholders. It does need to generate a surplus to pay off any loans incurred to help fund the capital programme, in the same way as housing associations do.

The Welsh Water body Glas Cymru is a form of NPDO. It has no share capital, its risk capital comprises bond finance and its accumulated reserves. Any financial surpluses generated by Glas Cymru once all other obligations have been met are reinvested for the customers' benefit rather than paid as dividends. However, Glas Cymru is not an operator, it contracts the operation functions of water provision separately following competitive tender, and outsources customer billing and contract management.

The JVC: Joint Venture Company

A JVC is similar to a standard PFI structure, except the Local Authority takes a minority equity stake in the SPV. Through the Articles of Association of the JVC and a Shareholder Agreement, the Council as a shareholder is automatically entitled to a share of any profits. The Shareholders Agreement also deals with issues such as exchange of information between the private sector partner and the Council, the involvement of the Council in the decision making of the SPV and if appropriate, Council representation on the JVC board. The nature of a JVC means that if the Council shares in profit it also shares in the risk.

A number of Scottish local authorities have been looking at the NPDO model as a form of PFI for schools, along with the JVC model. However, UNISON has concerns on how the PIC is able to raise funds if it takes on the risk element of delivering the service. Presumably the PIC has to contract out the delivery of services to transfer the risk to be able to raise capital for the service in the first place. This then raises the usual concerns on contracting out of services.

Community PICs:

T&G's Jack Dromey, speaking from a personal capacity, believes PICs are a model for delivering good quality services putting the interests of the public first. He cites the social economy in Bristol where public services like leisure services have successfully transferred from local authority to community control, without making excessive demands on the taxpayer, nor exploiting the workforce, but vastly improving the local service.

The IPPR think tank considers that there is a role for Community Trusts in regeneration projects, to actively involve local people and make best use of local private and voluntary sector expertise. The IPPR sees Community Trusts as having control of a broad range of assets and the ability to procure new PPPs, incorporated as not-for-profit companies limited by guarantee, controlled by local stakeholders, such as member of the council, residents and local businesses.

Difficulties with Community Trusts are :

  • local authorities/public bodies may be reluctant to transfer assets out of their control.
  • Ensuring local stakeholders are representative and accountable to the communities they are from.
  • PICs could sell their assets to a for-profit company at any point how can we protect the not-for-profit status in law?

The PICs Debate - issues for UNISON:

  • Can PICs truly mix the private funding / money raising element with serving the public interest or is this just a fudge?
  • How do PICs successfully balance the need to raise funds to provide a service, whilst managing the risk of delivering a service?
  • Are there sufficient safeguards to prevent PICs running off with the cash, diversifying their business or awarding "stakeholders" profits? New Economics Foundation believes that there is a gap in the legal forms for PICs.
  • Will trade unions be able to become stakeholders in PICs? Do we want to be?
  • How do we ensure that PICs do not cut pay and conditions for workers?
  • Are PICs merely the least worst option to PFI/PPPs?

 

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Further Information:

Public Management Foundation: www.pmfoundation.org.uk

The Mutual State:
www.themutualstate.org/

New Economics Foundation: www.neweconomics.org

The IPPR
www.ippr.org.uk/topical/

Contacts list:

Dave Watson - d.watson@unison.co.uk

@ The P&I Team
14 West Campbell St
Glasgow G26RX
Tel 0845 355 0845
Fax 0141-307 2572