Saturday, 20 August 2011

Getting there eventually

It took a while, but the real cost of PFI has finally been recognised by an all-Party committee in the House of Commons.  It is, as many of us were saying all along, an expensive way of borrowing money, became little more than a device for keeping debt off the balance sheet, and should be scrapped.  And some of those who were egging the Welsh government on to not spurn this source of investment capital should feel more than a little egg on their own faces.
No surprise that the CBI want to keep the system; after all, the organisation’s members benefited from it by making greater returns on investment than would otherwise have been the case.  It’s a little misleading to suggest though that this was the only way of attracting private finance to invest in infrastructure.  After all, much of what the government borrows to invest directly comes from private finance – it just doesn’t pay as well.
The other argument for PFI was that it enabled the government to reduce its financial risk.  There is, indeed, an argument – in principle at any rate – for paying a higher effective rate of interest if the project is lower risk, or even risk-free.  It’s a calculation which is complex, but a transfer of financial risk to someone else can justify paying a greater return to them.
The problem with PFI though was that there was little or no transfer of real risk.  The customer – us – remained exposed to most if not all of the risk, and at an often increased level of risk due to the higher cost.  The suppliers of capital, meanwhile, found themselves with a fairly low risk cash cow.  Why wouldn’t they want to keep that system going?
The question now is what happens next.  Will the government do as it has been advised, and buy its way out of these contracts, or will they remain a financial milestone for years to come?

5 comments:

Glyndo said...

I never saw PFI as being inherently bad. It is a means of raising money, whilst keeping the figures off the Governments books. This may be deceitful, but it isn’t bad as such.
The problem, in my opinion, was in the negotiations. A Private company’s existence is, in part, linked to their negotiating skills. Therefore, they tend to be good at it. They are out to maximise their profits, what a surprise. Who can blame them? Some people seem to think that because they are dealing with public monies they should put aside their strategies and skills, bunkum.
Public service employees are not exactly renowned for efficient purchasing, and their continued existence is fairly safe. I say that with a little trepidation, because we mustn’t criticise our selfless public servants, but I believe it to be true. They’re just not very good at this are they?
So when we have a situation where one negotiates with the other, we land up with contracts heavily weighted in favour of the private companies. Well, who would have thought it?
People then get all het up and say, PFI is bad. For some reason they don’t say Health Boards, Councils or Government are crap at setting them up. PFIs are simply a convoluted form of borrowing, a means of getting around a problem.

Stands back and waits.

Spirit of BME said...

Mr Dixon,
You are right you did spot this at its birth, I remember the debates.
The question is what came first –the politicians PFI scheme or the Banksters “off book trading”?

Siônnyn said...

The history of PFI so far has been that the alleged benefits have been totally illusory. The benefits have been privatised, but the risks have been brought even more firmly into the public domain. Additionally, the idea that the public obligation would not be on the balance sheet has been shown to be completely fraudulent and dishonest,

Only and idiot could continue to think that this was a good way to finance public works. Can there really be any such idiots still in public office?

John Dixon said...

Glyndo,

I don't entirely disagree with your comments. I certainly agree that PFI is, esentially, just a different way of borrowing, although its exponents have at times tried to pretend otherwise. But it's an expensive way of borrowing; there are cheaper alternatives available to government.

And I also agree that one of the main reasons that it is so expensive is down to the way the deals have been negotiated. But I suspect that there is something pretty inevitable about such an outcome; and if that problem is unfixable, the method of borrowing is always going to be a bad deal.

Welsh Agenda said...

Glyndo,

I agree that many of the individual contracts agreed by the public sector negotiators were heavily biased in favour of the private sector 'partner.'

In many cases however the negotiators were under presure from senior civil servants and politicians to concede key points.