A rare outbreak of unanimity on PFI

by John Quiggin on September 19, 2017

I’m doing some work on privatisation and wanted to look at recent UK experience with the Private Finance Initiative. So, I Googled for PFI in the last year (as Google personalizes searches, your mileage may vary). The result is a surprising degree of unanimity. Across the political spectrum, there is agreement that

  • PFI is a disaster, enriching private firms at the expense of the public
  • The other side is (mostly) to blame

Excluding some references to an Indian political group and some data sources, the top hits are, in order:

PFI is bankrupting Britain (Guardian)

Private firms poised to make another £1bn(Guardian)

Hundreds of schools held hostage over PFI contracts (Telegraph)

Costly legacy of Labour’s PFI shambles (Daily Mail)

Tories accused of ‘double standards’ for promoting PFI (Financial Times)

NHS ‘leaking millions’ in PFI contracts (BBC)

{ 14 comments }

1

Francis Spufford 09.19.17 at 10:00 am

Yep. I can’t understand why, now that the Corbyn Labour Party is sufficiently unshackled from the record of the Blair/Brown governments that it doesn’t need to defend it anymore, they aren’t aggressively pushing a bill called something the Health Assets (Fair Return) Measure, which would cap total PFI returns to finance providers at (say) twice the initial capital outlay. Result: instantly improved finances for almost all NHS trusts.

2

Placeholder 09.19.17 at 2:19 pm

@FrancisSpufford
So needless to say he already has one…and three cheers for our responsible, informed, professional, decent, human and moderate establishment media for keeping everyone so well informed about it.
https://labourlist.org/2015/08/jeremy-corbyn-calls-for-a-fund-to-bail-out-nhs-trusts-from-pfi-schemes/

But just because ‘everyone agrees’ to have ‘bad tone’ on PFI does not mean they agree on the reality – the most important agreement their is.

Socialists believe the free market does not improve the NHS. Tories believe Blair is just incompetent and their privatisation is good because they are bunch of SOUND blah RESPONSIBLE blah NONONSENSE blah blah blah with CREDIBLE TERM ECONOMIC PLAN to GET ON WITH IT and take the national debt, WHICH IS A CREDIT CARD which LABOUR HAS SPENT and move it to a DIFFERENT PREMIUM CREDIT CARD that is owned by wealtheir, tory donating SOUND RESPONSIBLE PEOPLE .

And then there’s Yvette Cooper.
“Jeremy Corbyn’s Economics Are ‘PFI On Steroids’.”
http://www.huffingtonpost.co.uk/2015/09/01/jeremy-corbyn-yvette-cooper-economics_n_8072126.html

What do YOU think she’s talking about, John?

3

Waiting for Godot 09.19.17 at 7:38 pm

Unfortunately I am a typical American in that I don’t have a clue about how Brit politics works except that it appears, especially since Blair/Clinton, to reflect the same dynamic of representation of the minority who benefit from empire even in the absence of the same. It appears to me that the Labor Party in England suffers from the same neo-liberal corruption that does the Democratic Party here and is having that same problem in getting rid of the bastards. What am I missing?

4

John Quiggin 09.20.17 at 4:41 am

@2 Certainly a change of words doesn’t necessarily imply a change of heart. But when a Blairite uses the PFI analogy to denounce a left policy, something has clearly changed.

5

Dipper 09.20.17 at 9:03 am

off the top of my head and without spending all day researching this:

Three questions. Is the extra cost justified? Is there an alternative way of funding these? what would the UK be like without PFI?

The extra cost is meant to represent the cost of transferring risk to the providers. However, I found one case of the government successfully transferring risk which was the rebuild of the National Physical Laboratory. However, what seems to happen in PFI’s is that the providers set up a SPV to manage it, so in the event of profit the SPV remits the profit to the investor companies, and in the event of loss the SPV goes bust protecting the investors. It is a common conceit amongst naive purchasers that you can transfer risk to your suppliers, however if you are big and spending a lot of money then ultimately you always end up carrying there risk yourself. Hence aerospace companies and automotive companies are deeply embedded with their suppliers to manage the risks (e.g. they have adhesives experts even though they do not produce adhesives).

George Osborne clearly found an alternative way of funding Hinkley Point C by agreeing to a massive strike price. The strike price is not evidence that nuclear power is expensive, just evidence that Osborne and Cameron were prepared to pay it. And to repeat, in the event of difficulties it is likely the UK tax payer will be still have to pay. It is arguable whether this contract will represent better value than PFI,

Say what you like about Blair and Brown, they did get a lot of schools and hospitals built. Without PFI Brown would not have been able to perform the slight of hand that allowed him to pretend to be prudent whilst in fact running up massive debts that he could avoid putting on the balance sheet. Whatever you think about Brown’s handling of the debt, it is quite likely that without PFI a lot of new schools and hospitals would not have been built.

One of the main cases against PFI is that they allowed suppliers to make large amounts of money out of the government. In order for that to be a valid argument there would have to be evidence that in non-PFI cases suppliers do not extract large amounts of money from government, and there seems to be a lot of evidence (mainly anecdotal) that they can. So I would contend that the problem is not PFI per se, it is governments inability to manage multi-billion pound contracts without getting ripped off.

6

Nick Alcock 09.20.17 at 10:53 am

Well, PFI was always an accountancy dodge, wasn’t it: a way for the current Chancellor (initially Brown, but Osborne jumped in gleefully with both feet in power after advocating against it in opposition) to push expenditure into the future, saving his short-term debt figures, and oh, who cares that the long-term cost is intolerable? We’ll just apply a nice reasoanble fudge figure, let’s make one up, let’s say that we assume a rate of return of 9% on all our other investments, that’s realistic, right? and oh look now the sums work out and PFI is just slightly cheaper than the other options!

Needless to say long-term bond yields are not around 9% and hence PFI has turned into the huge effing boat anchor it was always likely to be. (This is also what has utterly screwed up pensions.)

7

Glen Tomkins 09.20.17 at 1:15 pm

Wait, you mean crony capitalism isn’t the best of all possible political systems? Dictatorship of the Lumpen-Capitalists doesn’t result in a glorious future?

Who could have predicted this outcome?

8

Mat 09.20.17 at 9:43 pm

@John I’m still mulling over a post of yours a while back about the equity premium gap (I think that’s what you called it) and the implications thereof for public economics. As someone who’s just recently moved into an economic department as a cross-disciplinary postdoc and is trying to pick things up as I go along, what hit me like a bolt of lightning after reading your earlier post was the understanding that even under perfect competition all profits are not eliminated – you still have to pay the opportunity costs, or what I like to think of as the minimum wage of capital.
What you pointed out was that, whereas private capital may not get out of bed for less than, say, 6%, public capital will work for relative peanuts. The question that remains is, since this is evidently part of the Econ101 I missed out on, to what extent do (a) academic public economists, and (b) policy makers think along these lines when evaluating privatisation and hybrids like PFI?

9

Cian O'Connor 09.21.17 at 12:56 pm

One of the main cases against PFI is that they allowed suppliers to make large amounts of money out of the government. In order for that to be a valid argument there would have to be evidence that in non-PFI cases suppliers do not extract large amounts of money from government, and there seems to be a lot of evidence (mainly anecdotal) that they can. So I would contend that the problem is not PFI per se, it is governments inability to manage multi-billion pound contracts without getting ripped off.

PFI is just a way for the government to borrow money from it’s suppliers, while keeping it off the books. The advantage for the supplier is that they get to lend money at extortionate rates – both directly, and also indirectly through overpriced service contracts. For suppliers it has the additional advantage that it locks in the rip-off contractually – but the real money is in the guaranteed return on capital.

10

otpup 09.22.17 at 12:33 am

@Dipper, that part of the motivation for the contours of PFI is that suppliers are compensated for taking on risk is striking. In the US, inheritance may be the only more surefire way of becoming wealthy than owning a company that does regular business with federal government. Does it work differently in the UK? Are there substantial risks?Cheers.

11

Dipper 09.22.17 at 5:00 pm

@otpup. I believe that there are several troughs in the UK where if you get your place at the feeding station you can make a fortune. The UK government, spending about 40% of total GDP, is one of them and probably the biggest.

I think the problem for the UK government is that they cannot pay specialists enough to stop them being lured by the private sector, so the government is always facing suppliers with greater depth of specialist and contractual/legal expertise.

Some of the criticisms of PFI e.g. £2,000 for a new sink are nothing to do with the cost of funding, just to do with the nature of the contracts entered into by government which would apply no matter how it was funded.

It isn’t valid to demonstrate that PFI is poor value for money by simply doing a straight PFI/government funding comparison. You have to find a way of measuring whether PFI contracts have less overspend than would otherwise be the case, and whether that justifies the additional funding rate.

12

John Quiggin 09.22.17 at 11:48 pm

Matt @8 The position opposed to mine is that, even though we can’t explain it, the market risk premium must be the right one. That’s what’s built in to policy regimes for PFI public sector comparators and regulated monopolies.

My impression is that this view was (usually implicitly) accepted by most economists before the GFC, but is gradually eroding.

13

Peter T 09.23.17 at 1:28 am

Dipper

There are plenty of specialists happy to work for the government (more secure, often more interesting work, public service and so on). What PFI does, along with outsourcing, privatisation etc, is erode the government’s competence in specialist areas. When the security, control over one’s work, sense of public service has gone, why stay? And without in-house expertise, you are sitting ducks for any claim (something that applies to business as well as government). This is an old, old lesson – most sensible states kept some capacity in key areas in house for just this reason from the 17th century.

14

Dipper 09.23.17 at 6:51 am

@ Peter T

“What PFI does, along with outsourcing, privatisation etc,” Quite. So are the various stories around PFI contracts due to PFI alone? Or a consequence of other policies such as outsourcing, privatisation? And yes, agreed, sensible states do keep key capacity in house.

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