Skipper

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.