YP PFI: A Private Scourge On Public Finances

published in the Yorkshire Post 20 March 2012

To sell his government’s austerity policies, David Cameron regularly claims that “we are all in this together.”

But one group of people have never felt the chill of austerity: the PFI companies banking monopoly profits from public assets. Over the next three decades they will collect around £250 billion from British taxpayers from secret deals on Britain’s roads, infrastructure, schools and hospitals. Yorkshire is on the hook for deals worth at least £10 billion.

Over their lifetime, these deals will be vastly more expensive for the taxpayer than conventional public finance.

PFI has been rudely described as the “biggest money-laundering scheme in the world.” It pretends to transfer the cost of a new public asset from the public to the private sector. Under PFI (the Public Finance Initiative) of borrowing to pay for the asset itself, under PFI (the Private Finance Initiative) local or national government commissions the asset but asks a private company to borrow the money to build it. Government then pays back the company over a long period, usually adding guaranteed payments for maintenance.

Since government can borrow more cheaply than the private sector (UK public borrowing is now about half the cost of private) the Treasury traditionally frowned on PFI. This attitude changed in the economic crisis of 1992 and a resulting major squeeze on capital spending, when Norman Lamont was Chancellor (advised by a young David Cameron). PFI took off under Tony Blair and Gordon Brown, who relaxed the rules early after taking office.

Both governments claimed that PFI offered better value for money than conventional public borrowing, for two questionable reasons. First, the private sector would be taking over the risks of big capital projects from the public sector. Second, the private sector was far better at managing these projects than the public.

Under New Labour, the Treasury soon displayed a massive bias in favour of PFI (later re-branded as PPP, Public-Private Partnerships). They produced more and more arcane calculations to claim that it was better value for money than conventional public borrowing. If the calculations did not come out right, they added new numbers to “correct” them. A public-spirited Yorkshireman, Mr J P Heawood, recently exposed one of the worst examples, the York Schools PFI project.

Early critics of PFI, led by Private Eye, seriously challenged its key assumptions. Risk was not being transferred to the private sector, and PFI companies were not always better at building or maintaining public assets than the maligned public sector. PFI often produced inferior design (such as the Yorkshire schools built with no light switches and non-opening windows) and service reductions.

Critics also denounced the secrecy of PFI deals, poor negotiating skills by government departments, and the expensive fees paid to lawyers, accountants and bankers to draw up deals. (The PPP contracts for the London Underground cost £500 million and were twice the length of War And Peace. They still failed.)

More important, critics also showed that PFI and PPP helped to conceal the true state of public finances, by keeping government debt off its balance sheet. In 2009 this prompted the government to produce two different versions of national accounts, like a fly-by-night company with two sets of books.

Last year reports by the National Audit Office, the Public Accounts Committee and the Commons Treasury Select Committee belatedly endorsed virtually all of these criticisms, and added a new one: a high proportion of PFI/PPP payments leak overseas and avoid UK taxation.

The one certainty is that PFI companies are brilliant at making money for themselves. The Treasury gives them two startling privileges. First, they can refinance their own borrowing without passing any benefit to the taxpayer. Second, they can sell their equity shares in PFI projects in the so-called “secondary market” without asking permission and again with no share of the benefit for the taxpayer. (Last year it was revealed that equity shares in Calderdale hospitals had changed nine times since 2002 without official knowledge. The “secondary market” could allow Britain’s infrastructure to pass under Iranian or North Korean control).

As a result, some PFI deals have produced returns on capital of over 60 per cent for the companies concerned. Such eye-watering returns might be fitting for a daring inventor but not for a virtually risk-free investment guaranteed by the taxpayer.

To adapt Winston Churchill, “never in the history of human finance has so much been paid to so few for doing so little.” Shocked by their recent discoveries, a group of 70 MPs have politely asked the PFI/PPP companies to shave their earnings by 0.5 per cent and hand this back to the taxpayer. Guess how many companies have responded? The government has produced an ineffective Code of Conduct on PFI.

Instead of hand-wringing, the government should make a simple change in the coming Finance Bill to give it first refusal of any shares in PFI/PPP projects which companies intended to sell. By thus killing the “secondary market” the government would radically improve its chances of re-negotiating deals to get better value for taxpayers.

Without such a move, present taxpayers will continue to pay over the odds, on terms they cannot even examine, for public assets they do not control – and their grandchildren could still be paying on the same terms long after the actual assets have disappeared.

20. March 2012 by rkh
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