18 Apr 2011

The economic argument for PFI has never been worse

The economic argument for PFI has never been worse. The Government can borrow money at under 4 per cent, and private companies can borrow money at 8 or 9 per cent. So why on earth would the government use a method to fund capital investment that has a base annual cost of double that of conventional procurement?

I have been following Private Finance Initiative for a decade. As the Observer’s Economics Correspondent I did a series exposing the daft economics behind it. I often used quotes from a Lib Dem MP called Vince Cable. So I was quite impressed by the Coalition’s savage rhetoric against Gordon Brown’s use of this accounting wheeze to garland the nation with shiny new hospitals and schools that no one had paid for: at vast cost to future generations.

It is rooted in Enron-esque off-balance sheet accounting. It then progressed towards being a method of “risk transfer” from the public sector to the private sector. Except Labour was paying incredible sums for what often turned out to be non-existent transfers of risk.

Not all PFIs were disastrous. But you’d expect them to be incredible – given the private sector genius involved – when set against the long term cost to taxpayers.

So against this backdrop, I did not expect to find (from research for Channel 4 News by Edinburgh University’s Dr Mark Hellowell) that the number of PFI projects reaching financial completion in 2011 has risen. At 40, it is above any year of Gordon Brown’s premiership. The capital value of those projects is nearly £3.7bn, over a billion up on last year. This is the first year-on-year rise in the capital value of financially-completed PFI projects for half a decade. Again, all at a time when the basic economics have never been flakier.

Perhaps the private sector is becoming that much more efficient. Perhaps they are letting their margins be squeezed (anyone noticed a profits warning?). Right now it looks like a whole load of projects being waved through on precisely the same rationale for which the last Government was attacked.

Now, to be fair to the Government, they will argue that they have cancelled a number of projects. They have a PFI hit squad looking at squeezing better value for money, and that they cancelled about £4bn worth of projects. But there can be no doubt that the final green light for these projects has been given by this government. In fact, 61 projects have been signed off by the Osborne Treasury. Of course almost all of these would have been initiated under Labour.

However, is it really the case that “PFI is the only game in town” as everyone connected to the Royal Liverpool Hospital believes? Liverpool was given the go-ahead. Hartlepool hospital was stopped. It is now reapplying to be a PFI. It certainly seems like PFI is the only game in town in Hartlepool. The question, given the change in borrowing costs, is “why?”.

12 reader comments

  1. Ray Turner says:

    Might be more accurate to say the economic argument for PFI has never been good…

    It was just a sleight of hand, some creative accounting by an imprudent Chancellor who wouldn’t listen…

    PFI = Permanently Fleeced Investment…

  2. StuartM says:

    You can’t blame Osborne for this. He may have had an expensive education but he has never had a job (except a brief time as a political researcher) and business and finance are outside his experience and training. It is unfair to expect people without training, without knowledge, without experience to appreciate the implications of things like PFI and thus the chances of them making a sensible (or justifiable) decision are “random”

  3. Gerry says:

    This whole business of ‘off balance sheet’ accounting needs to be given a lot more publicity, surely? Worth a C4 Dispatches outing, at least.

  4. Saltaire Sam says:

    The dilemma the government has is that their basic mantra is private = good, public = bad, so while they (rightly) want to criticise labour for PFI, all their instincts think it is the right way to go.

  5. Tom Wills says:

    Is it too generous to the government to say their only motivation for PFI is to keep capital investment off the balance sheet? What about the profits delivered to their pals in the private sector?

    1. sue_m says:

      Not just pals but paymasters since big business lines the party coffers.

  6. Philip says:

    There was a point to PFI if the private sector generally accepted the risk – but in practice it virtually never happened. Otherwise it was a wheeze (started by Thatcher by the way) to keep down the short term cost of public expenditure while building up massive future obligations, which will be coming home to roost over the next 20 years or so. While I can see a good argument for some things the public sector did being done by the private sector (e.g. IT, running car services, property management, etc), selling off the “family silver” as a way of getting it cheaper was typical British Government short-termism. Short termism has bedevilled British political decision making for generations – & it clearly isn’t stopping any time soon.

  7. Andrew Dundas says:

    According to the Fraser Institute in Scotland, our land of shrewd bankers and accountants is the home of four out of ten PFI schemes in the UK. Moreover, the Fraser Institute adds, many of those do not comply with the Treasury criteria for inflation accounting, with disasters ahead!
    So, like the RBS and BoS debacle, this is ‘another fine mess you’ve got us into’.
    The reason why PFI was favoured is because owners of property are more likely than public sector bodies to take account of long-term maintenance when they build. Which is where most public buildings fail (or soon fall down as in the case of the Forth Road bridge!)
    So what’s really needed is a PUBLIC Finance Initiative where a public corporation owns and runs buildings for the NHS, education etc. Such a property corporation could raise funds in the money markets, and ensure its rented out buildings were as efficient to run as any PFI. Without the higher interest charges.

  8. Gareth says:

    Can you publish the details of this research? It looks like the number 40 has come from… counting rows in the spreadsheets published by the Treasury.

    If you read those spreadsheets it looks like the number of *new* PFI projects put out to tender since May last year is… a whopping 3. Three.

    This contrasts with 16 put out to tender in the 2009/10 financial year. So the story here is…

    “Coalition fails to cut all of the PFI projects put out to tender by Labour.”

    1. Andrew Dundas says:

      Hello Gareth,
      Fraser of Allander Institute published their report on PFI at end of February (Volume 34 No 3) by Margaret & James Cuthbert on page 53, and it’s freely available from their web site.
      A number of topics are covered in the report of which Scottish PFI is but one.

  9. CWH says:

    It is not just the PFI contracts and their costs but the dripping roast that is the service contracts which are put in place once the building – school, hospital or whatever is completed.

    The cost of these contracts must be paid before any staff salaries so, for example, in hospitals it leaves the management of the hospital no option byut to make frontline staff redundant because they must pay the, inflated, service/maintenance costs. Dispatches on CH4 did a programe on this issue a couple of years ago.

    This has happened in PFI hospitals in Scotland.

    As to the off-balance sheet issue, that was one of the attractions for Gordon Brown but I believe the EU put a stop to it and said they had to be shown on the balance sheet.

  10. Barbara Robertson says:

    Is it possible to compare the PFI contracts of former projects with the newer ‘cleaned up’contracts?.

    £300 to change a lightbulb is obviously ridiculous but it would be interesting to know the differences between the old contracts and the new and evaluate the differences.

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