A Brief History of Modern Corruption: Public Private Partnerships and the Rule of Law

In this article I will outline the evolution of corruption in the polity, from the PPP model introduced in the early 1990s to the rise of vast global investment firms like Blackrock, and their influence on decision-making that is in favour of private gain rather than public interest. Whereas the rule of law is in the interests of the majority of the population, and is therefore easy to preserve in a reasonably uncorrupted democracy, the rule of law is not in the interests of people who seek to corrupt the polity, or who have corrupted the polity, for private gain. This means we can expect to see the weakening of the rule of law in line with the rise of corruption.

The two main characteristics required for corruption to take place – a high degree of personal discretion over decision-making, and a high degree of public obscurity around the decision-making process – undermine the rule of law, and are combined to a great degree in the model of Public Private Partnerships[1]. However, as Rahel Schomaker at the German Research Institute for Public Administration points out, there is also an inherent corruption in the PPP model, in that it removes a certain amount of money from the public sector that would otherwise be retained in the public sector, and transfers it to the private sector as profit. This can not be said to be in the public interest[2].

Yet PPPs have become increasingly common ever since their creation under John Major’s Conservative government in the UK in 1991[3]. PPPs were established as part of the politically neoliberal programme beginning in the 1980s, with policies of privatisation and deregulation pursued by Reagan and Thatcher, and promulgated in other countries around the world via the IMF, World Bank, and ECB, among other international financial instutions (IFIs). The IFIs introduced new fiscal rules for governments which prevented them from borrowing more than a strictly limited amount relative to their GDP. But governments still needed to be able to invest in their public services and assets, and needed to go beyond these new borrowing limits to do so.

To avoid breaking the rules, therefore, they needed to get the investment from a private source. They would then agree to pay back the money over several years. They were allowed to register this as ‘private borrowing’ rather than ‘public borrowing’, which meant they were still within the rules. This was the financial incentive: the political incentive lay in the fact that services could appear to still be in public hands, while in fact, their public sector ‘owners’ were now little more than commissioning agents.

In the UK, the New Labour government under Tony Blair’s leadership embraced the use of PPPs, despite a growing public sense that these were ‘privatisation by the back door’ and represented a poor deal - a criticism raised against PPPs in many countries (for example, with the introduction of PPPs to provide waste collection, as well as water services, in South Africa [4]). In 1997, a PFI (Public Finance Initiative) office was set up within the UK Treasury to support and promote the use of PPPs. This unit was mainly staffed by banking executives from the City (London’s financial centre)[5]. This unit became the model for PPP units established by other governments around the world. PPP units now exist everywhere.

Shomaker argues that the inherent nature of a PPP arrangement makes it uniquely amenable to corruption (due to its use of discretion in decision-making at multiple stages of the project life-cycle and the lack of transparency, at the administrative levels, once the use of a PPP has been agreed in principle), which means that private partners can be chosen to deliver public services at not so much natural as somewhat inflated prices, and on terms which remove risk from the private provider while placing onerous terms on the public partner (such as guarantees of usage). In this way, the public must not only lose a primary amount of income from its public funds (given that the private provider, unlike the public sector, demands some form of profit for its activities), but, secondarily, is often forced to pay out large additional sums.  The fact that the private partner which profits from the arrangement may be incompetent (having been chosen through a process that is easily corruptible) is an additional burden for the public to bear.

At each of the three stages of a PPP - pre-level (negotiating for a PPP to come into existence); ex-ante (negotiating the terms of the contract itself); and ex-post (re-negotiating, or extending the life of, the contract) – there is scope for corruption, with high potential rewards for the private interest involved.

Initially, if the private interest seeking profit from the public sector must lobby to make a PPP possible in the sector in which it seeks to be active, the activity takes place on the political level: politicians, who have some degree of discretion over the outcome, are courted by the private interest. Mechanisms might include direct donations to the politician, gifts in kind (such as holidays), or an agreement that lucrative work or share options are to be arranged by the private interest, either for the present time or to be given in future to the politician once he or she has left office. We are all aware of the ‘revolving door’ by which politicians have routinely taken up lucrative work, after leaving office, with private firms who profited from their decisions while in office; other conflicts of interest exist where, for example, politicians with close family ties and/or financial stakes in private service providers may be influential over decisions regarding opening up the relevant sector to private service providers.

The second level of corruption will take place at the administrative level: this covers topics around the contract itself, and its terms. Unfortunately, the terms of these contracts are often kept secret on the grounds of ‘commercial sensitivity’.

The reason PPPs represent such great value for the private interest may be obvious: the model allows for the private interest to operate a guaranteed contract with a guaranteed income, underwritten by the state (the highest possible security, as the state is backed by its central bank), and, while this contract guarantees a minimum income, it also is fluid enough that it can accommodate enormous rises in payments as the term of the contract progresses, or as the contract is renegotiated in the future. Further, a contract can be managed so that there is little or no cost to the private partner for its failure to fully deliver the services.

By the early 2000s, PPPs were being used around the world to provide previously publicly-owned and -run utilities such as water and power. The contracts had long periods of around 25-30 years.

At the same time, the development of the software ‘Aladdin’ (used to calculate risk and hence the best places to put money, for investors) was leading to the inordinately rapid growth of investment firm BlackRock (which had developed, and now owned, the software). As well as growing its own business, BlackRock purchased other investment firms, along with stock in around 5,000 companies, including sizeable holdings in most major publicly-traded corporations.

The US Government called in BlackRock to oversee the spending of the Federal Reserve following the 2008 financial crash, including the purchase by the Federal Reserve of investment products provided by a branch of BlackRock. BlackRock staff were seconded to important positions in the US government.  It has been called ‘the fourth arm of government.’ Heike Buchter, financial journalist for Die Zeit, has written about the firm.

The outsourcing of a government’s financial decision-making to private investment funds such as BlackRock may be the ultimate form of PFI. A government may, as a result of this scenario, enter into agreements for BlackRock to invest funds on its behalf and/or borrow funds from BlackRock.

What appears to be the case is that important decision-making positions within a government or a public sector body can now be occupied by people who are working for private interests.

As well as placing staff in governments, BlackRock also offers paid positions to numerous politicians, in the US, the UK and Europe, and South America. Mexico is a case in point: under former president Pena Nieto’s administration, BlackRock was able to sign lucrative, multi-million dollar PPP contracts. Senior positions within BlackRock Mexico were awarded to people like the former undersecretary of finance, and the former regulator of the national bank. The PPP deals were for national infrastructure: road-building, prisons, hospitals, and energy projects.

It is the case that so-called democracies have routinely failed to enact the will of the people with regards to public ownership of public services. In the UK there exists majority support for public provision of: healthcare, water, rail (infrastructure and services), mail, energy, bus transport, prisons, council services, and social care. Only 28% think it is appropriate for private companies to run prisons. In social care, 61% think private care providers prioritise profit over delivering a high quality service.

Besides offering bribes, private interests wishing to exploit the polity for private gain may also use persuasion: this includes think tanks, as well as media outlets. It can be very difficult for a politician who promotes taking public services back into public ownership to get elected, as can be seen in the media portrayal of Jeremy Corbyn in the UK following his election as leader of the Labour Party. Corbyn’s Labour Party departed from the neoliberal consensus, and planned for the public ownership and management of public services following the end of PPP contracts in the 2020s and 30s, and no further privatisation of the NHS (National Health Service). Following a voluble media campaign which portrayed him as an agent of economic chaos, a Communist, a national security risk, and an anti-semite, Corbyn’s Labour narrowly lost the UK elections in 2017.

Having seen that the use of ever-larger contracts between the public and private sector are integral to the financial welfare of large private interests, we can begin to grasp why it is that the rule of law is increasingly coming under attack. Both internationalist, liberal governments, and nationalistic, right-wing governments, have had little option but to open up their public services for bids from the private sector, and this is taking place at a point in time when private interests are uniquely powerful and advanced in their use of technology. BlackRock now has $10 trillion in funds under its management, and the profits of the big food and energy corporations, as well as big tech, all soared over the last two years. Excess corporate profits have been driving at least half the recent inflation in Australia, the US and the UK, according to a report from Oxfam.

Private interests benefit from decreased public spending in the areas which are least open to commercial profit opportunity (whether PPPs or more simple contracts), and increased public spending in areas which are most open to commercial profit opportunity (whether PPPs or more simple contracts). They further benefit from the relaxation of environmental standards and employment rights. Because such moves may be neither logical nor popular, this makes the removal of as much decision-making as possible from areas of public scrutiny and into the realm of unchallenged decision-making – that is, an administrative arena with as little oversight as possible, and as much leeway for individual discretion as possible – of benefit to private interests.

We have recently witnessed damage to the rule of law in precisely these areas where we might expect to see it in a polity that has been corrupted by private interests: areas that result in an increase in individual discretion and obscurity around decision-making.

In the UK, there has been a decrease in the number of Acts brought before Parliament, and at the same time, an increase in the use of Statutory Instruments (S.I.s). S.I.s are ways to bring secondary legislation. They were intended to be used in order to carry out decisions already decided by an Act, but are increasingly being used to make decisions, instead. Instead of being open to scrutiny and debate in Parliament, these decisions are being made out of public view (See p.25 of Client Earth's report 'Summary of threats to the rule of law in the UK.'

During the Covid crisis, we saw, in many countries, a lack of transparency and an increasing level of individual discretion over decisions concerning payments to private interests. Contracts with vaccine manufacturers were kept hidden from the public on the grounds of commercial sensitivity. In the UK, test centre contracts worth tens of millions of GBP were awarded to private firms Serco, G4S, and Mitie, with no competitive tendering. Serco’s contract was later renewed without any further scrutiny, or, again, going out to tender. Large investment funds own significant stakes in outsourcing firms like Serco: BlackRock holds the largest stake (See P.153 Serco 2019 Annual Report and Accounts.) More than £1 million GBP per day was spent on private consultancy services for the national test-and-trace system, mostly from Deloitte.

In Scotland, the tiny firm Continuum, which had previously sold tartan souvenirs and golf items, was awarded a £47 million contract to supply surgical face masks. Its company secretary had previously been charged with running a brothel, and fined.

In a crisis, normal procedures for scrutiny can be circumvented, and secondary legislation can be used even for actions with far-reaching consequences, such as nationwide lockdowns - removing the details of such legislation from the forum of public scrutiny (Parliament) and placing these in the hands of a few individuals, instead.

While Covid-era lockdowns were extremely damaging to small and medium-sized businesses, large corporations and big tech all saw their profits soar, as consumer incomes were artificially maintained by furlough payments, while big supermarkets were allowed to stay open, and people spent more time online, using retailers like Amazon, and producing more online data about themselves (a valuable commodity from which big tech companies such as Google make profits). Spending was funnelled towards big private interests. Overall, the lockdown policies had the effect of inflating a debt balloon, to be underwritten by the state, which lifted the profits of big tech firms at the same time as threatening the longer-term survival of SMEs.

Many states declared a State Of Emergency in response to the Covid crisis. Given that such declarations suspend a state's ordinary laws and rights, and grant authorities increased powers, their proper use is central to concerns around the rule of law. Improperly used, they may enable lawmakers to take steps that are to the detriment of the public good and in favour of private interests, due to the increase in both individual discretion over a decision, and obscurity around the decision-making process. Further, they greatly curtail civil liberties, a central pillar of the rule of law[6]. At the same time, such declarations are often not really required in a pandemic, because when public health is seriously endangered, human rights law is already permissive, allowing for a wide range of measures without declaring an SOE[7]. Magnus Lundgren, author of ‘Emergency Powers in Response to COVID-19: Policy Diffusion, Democracy, and Preparedness’ in the Nordic Journal of Human Rights (2021), found that weak democracies were more likely to declare an SOE than robust democracies and further, found that declaring an SOE was not associated with achieving lower pandemic impact / fewer Covid deaths. 

At the same time, many states were implementing measures to curtail freedom of speech. Perhaps the most notable example has been the USA, where the now-released ‘Twitter files’ show routine collusion between social media (Twitter and Facebook) and a political administration to suppress publicly-expressed opinions that the government considered undesirable. Even statements that were admitted to be true were suppressed as ‘misinformation’. This included concerns about the effects of lockdown policies, and concerns about the ability of the novel Covid vaccines to halt transmission, and about their side-effects on overall health[8].

Private profit-seeking activity is an integral part of the marketplace and of our social life (beyond those situations such as public services where natural monopolies exist). Without it, we would lose an important plank of personal freedom, as well as of the economy, and there is always a place for private profit-making in any area that naturally involves consumer choice. But when private profit-making activity gains power over polities, then inevitably, corruption will follow. And with this will come the decline and eventual failure of the rule of law. Thus in order to restore and preserve the rule of law, it is essential to keep private profit-making activity in its proper place.

Money was made to be the servant of humankind, and not the other way around.

[1]       Hall, D (2014) Why Public Private Partnerships Don’t Work Public Services International Research Unit, University of Greenwich https://www.world-psi.org/sites/default/files/rapport_eng_56pages_a4_lr.pdf

[2]      Schomaker, Rahel. (2020). Conceptualizing Corruption in Public Private Partnerships. Public Organization Review. 20. 10.1007/s11115-020-00473-6. https://www.researchgate.net/publication/339586286_Conceptualizing_Corruption_in_Public_Private_Partnerships

[3] UK Government, Department of Health and Social Care promotional material: Healthcare: Public Private Partnerships (2013) https://www.gov.uk/government/publications/public-private-partnerships/public-private-partnerships

[4] South African Labour Bulletin https://www.southafricanlabourbulletin.org.za/wp-content/uploads/2021/11/Local-government-privatisation-through-the-back-door-by-Maria-van-Driel_0.pdf

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Hemson, D. and Batidzirai, H. (2002) ‘Public private partnerships and the poor - Dolphin Coast water concession’ Series Editor: M. Sohail. WEDC, Loughborough University

[5] Allen, Grahame (2001) ‘The Private Finance Initiative (PFI)’ Research Paper 01/117, House of Commons Library, London https://researchbriefings.files.parliament.uk/documents/RP01-117/RP01-117.pdf, p.12

[6] Bingham, Tom (2011 [2010]) The Rule of Law, chapter 7 (p.66-84), London, Penguin Books

[7] Lundgren, Magnus et al. (2021) ‘Emergency Powers in Response to COVID-19: Policy Diffusion, Democracy, and Preparedness’, Nordic Journal of Human Rights  p.306  DOI: 10.1080/18918131.2021.1899406

[8] https://cnsnews.com/commentary/tyler-oneil/not-just-misinformation-emails-white-house-facebook-admits-suppressing-often