Monday, December 11, 2006

 

PFI Chickens Coming Home to Roost


The lead story in The Guardian today is the deficits being run up by a number of recently built hospitals. A major part of the problem seems to be the extraordinary RAB accounting system enforced by the Treasury but an important additional element is the huge monthly repayments on PFI contracts to which these new hospitals(see Lymington pictured) have been committed.

The Private Finance Initiative was originally conceived in one or other of David Willets' alleged two brains. This Conservative egg-head was trying to involve private companies in investing their capital and expertise in public sector projects like hospitals, schools, roads, prisons and the like. The idea was that facilities would be built privately and then leased back to the state; it was a form of 'hire purchase' which let the public have the facilities now and phase repayments over a period of up to 50 years. Lamont and Clarke at the Treasury were interested but insisted the private sector genuinely shoulder the risk as well as ensuring taxpayers received value for money. Faced with such unreasonable restrictions companies stayed away in droves and in 1997 PFI was almost a dead duck. Not for long.

Incoming Chancellor Brown saw in PFI a magic means of delivering the new facilities Labour had promised without increasing government debt beyond his 'golden rule of 40% of GDP. He set Geoffrey Robinson to relax the rules so that the private sector would not be able to resist the offer. This he expertly did, as David Craig explains in his polemic, Plundering the Public Sector. Soon PFI became the only way some areas of the public sector could acquire new facilities as the 'gold rush' got under way. But there were severe problems attached to the scheme:

1. Borrowing for the private sector was typically double that for the public sector where the government is the gauarantor. This means that Robinson had to twist and adjust accounting arithmetic to make PFI projects display an advantage which they never really had.

2. Once PFI appeared a money-spinner lending rates for PFI came down and the companies involved were able to refinance their schemes at a lower rate. Adjusted rules meant they could keep the lion's share of the very considerable resultant profits.

3. To make the scheme attractive repayments were made so generous that companies were guaranteed huge monthly repayments way into the middle of this century- a tab to be picked up not by current taxpayers but by their children.

4. In theory the private sector was carrying the risk and the taxpayer rewarding them accordingly. However with facilities like hospitals the government cannot allow failure so always remains de facto guarantor.

5. Kelvin Hopkins in a recent article points out that the 40% golden rule was arbitrary: countries like Sweden, Denmark and Germany have retained economic stability with public debt far exceeding 50%. Hopkins calls for a return to the cheaper and more simple public borrowing used in the past.

The Guardian article today focuses on the Queen Elizabeth Hopsital at Woolwich where, as one of the first PFI hospitals the 'terms were particularly onerous, locking the trust into repayments at a fixed rate that now looks excessive'. Brown thought PFI could deliver something for nothing- as always on such deals, the chickens eventually come home to roost. Interestingly a senior Labour spokeswoman in 1996 condemned PFI in the following terms:

When the private sector is designing, building financing and running the hospital and employing doctors and nurses, that is privatization and that is what the Conservative government is all about.'

We now see that Harriet Harman(for it was she) was right then and right now but that 'Conservative government' is now a Labour one.

Comments:
Didn't know that Willets had dreamt up PFI. Thanks for the info.
 
"The idea was that facilities would be built privately and then leased back to the state; it was a form of 'hire purchase' which let the public have the facilities now and phase repayments over a period of up to 50 years. Lamont and Clarke at the Treasury were interested but insisted the private sector genuinely shoulder the risk as well as ensuring taxpayers received value for money. Faced with such unreasonable restrictions companies stayed away in droves and in 1997 PFI was almost a dead duck. Not for long"

Granted it's a little simplistic but in essence what your piece is saying is that the fundamental principles of PFI, as conceived by the last conservative government, are sound and sensible although for a variety of reasons there was little take up.

On the other hand New Labour's bastardisation of those principles which allows them to continually boast Labour 'record investment' etc. was actually disastrous and ultimately bad for the public finances.
 
Speaking as someone on the left, I've always thought that the Conservatives missed a trick here. There are good conservative reasons for opposing Labour's PFI schemes. These reasons have nothing to do with an aversion to the private sector. They have to do with value-for-money considerations. The trouble is that the Conservatives shared (well, originated) New Labour's ideology-driven mania for privatisation. The Tories missed an open goal.
 
Cassie
Agree. Though as a Labour Party member it gives me no pleasure to do so.
P'holic
Bit difficult- as with Iraq- to attack a policy you have enthusiastically supported.
 
I don't completely buy the 'PFI is a disaster' line. It seems to me to be no more mortgaging our children's future than was, fo example, Attlee's government issuing bonds (bearing high for the times interest rates) to pay top price for nationalising industries such as coal and the railways. (We are still paying interest on these because Thatcher/Major chose not to use privatisation windfalls to repay national debt but to keep down tax rates - what Macmillan described as selling the family silver to pay for family parties or some such).

The shareholders of these effectively bankrupt companies must have thought Christmas had arrived big style. The reason it was done like that is similar to the reason PFI is done - to appease the City financiers. It is they who love the 40% golden rule.

It is also they who can engineer Sterling Crisis and Runs on the Pound as they did when previous Labour and even some Tory Chancellors stepped out of line.

This may be awful but it's about living with the world as it is. See also my posts on the limitations on the powers of a government.

Without PFI we wouldn't be building so many new hospitals and we would be back to the sorts of stop-go investment projects in the public sector that drove me mad when I worked for the nationalised railways...
 
Live in the real world? Nah. Tried it once; didn't take. Chanting - catechism like - "I'm living in the real world" a hundred times each morning didn't help.

Here in Fantasia it costs the the government less to borrow money than it does private companies; and we would look askance at schemes in which, as David Craig explains in "Plundering the Public Sector": "...no limits were placed on the profits to be made by the private sector if the expensive financing they had built into contracts suddenly became cheaper... (and spurious formulas were devised so that) fewer risks needed to be taken by the private sector, with the public sector retaining more...". The refinancing of PFI borrowings, yielding huge windfalls also looks a bit whiffy (and suggests the government did not cut a good deal in the first place); so does the huge sums made by management consultants for no obvious return.

To those of you in the real world: cordial greetings from across the great chasm.
 
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