by John Q on April 23, 2005

The latest London Review of Books[1] has a great review article by David Runciman (subscription only, unfortunately). The books covered are Restoring Responsibility: Ethics in Government, Business and Healthcare by Dennis Thompson , NHS plc: The Privatisation of Our Healthcare by Allyson Pollock and Brown’s Britain by Robert Peston.

Of these, I’m most interested in the book by Pollock, who’s been a prominent critic of the Private Finance Initiative, particularly in relation to health care. I think the biggest problems with the PFI are going to emerge ten or twenty years into the contracts, when any safeguards written into the original contracts will be obsolete, and the private party will have an incentive to extract as much rent as possible from the remaining life of the deal.

The whole idea of governments signing these long-term contracts is dubious in many respects. It’s bad public policy for a government to bind its successors in this way. And it’s bad commercial policy to sign 30-year contracts for services where ordinary principles of risk allocation would suggest a term more like five years. The PFI and similar initiatives have already run into plenty of problems, but I think the worst is yet to come.

A particularly egregious example came to light in Australia recently. The late, and not much lamented Kennett government signed contracts giving monopoly rights to operate gambling enterprises to two firms, Tabcorp and Tattersalls.

It now emerges that, if these contracts are not renewed, obscure clauses entitle the monopolists to compensation of up to $1 billion.

fn1. That is, the latest to reach Australia.\



Vance Maverick 04.23.05 at 8:18 am



RS 04.23.05 at 9:11 am



Jayanne 04.23.05 at 12:22 pm

Wales is more heavily “PFI” than England despite being officially lukewarm; this Western Mail story makes some useful points — though it’s on Wales — for people who can’t get the LRB piece:



John Quiggin 04.23.05 at 3:09 pm

Sorry about that! My posting software seems to be playing up. I think the post is fixed now, though the date has been put back


melissa spore 04.24.05 at 9:58 pm

Monday’s Guardian reports that “schools locked into 25-year contracts through private finance initiatives are finding that they cannot rid their menus of junk food despite the government’s pledge.”

I came acroos this just 20 minutes after reading your post.


Ginger Yellow 04.25.05 at 8:30 am

In some ways a 30 year contract makes sense – the asset is after all a long term one. The problem (OK, one of the biggest problems) is that in order to make the PFI concept more appealing to the private sector, the government chucks in lots of low risk, high margin extras like car parks, cleaning, catering and maintenance: so-called soft and hard facilities management. With the exception of life-cycle maintenance, there is absolutely no good reason to contract these on a long term basis, even if you accept the principle of privatising them.


Ginger Yellow 04.25.05 at 8:33 am

There is also the question of inadequate risk transfer, as demonstrated by your Australian example. It may surprise some CT readers to know that if the London Underground PPP goes down the tubes (sorry), Transport For London must pay back 95% of the £4bn plus debt supporting the project.


Ginger Yellow 04.25.05 at 8:55 am

That should be £3bn, not £4bn.


Ginger Yellow 04.25.05 at 9:04 am

For my fourth post in a row, I’ll actually give you something interesting. You don’t have to take my (or Alison Pollock’s, or David Runciman’s) word for it. Here’s Paul Leatherdale, head of infrastructure finance at Depfa Bank, Europe’s largest public sector lender, in a report published today by Standard & Poor’s:
Mr. Leatherdale also points out that PFI is increasingly unlikely to be truly nonrecourse, and points to the ultimate guarantee given by Transport for London (AA/Stable/–) for the £1.5 billion Tubelines PPP (which was refinanced by Depfa). “Most accommodation deals have a cap on performance deductions, and this–combined with market-value based compensation payable by the public sector upon termination of the contract in any default scenario–will see the public sector effectively guarantee 80%-85% of the project,” he explained. “Should the worst come to the worst, the reality is that the public sector cannot just walk away. The notion of ‘nonrecourse’ is not mirrored by the reality on the ground.”


Gregg 04.25.05 at 9:22 am

It certainly remains to be seen whether the increases in operational costs as a result of part-privatisation, with be greater than the increases in capital costs as a result of part-privatisation.


Harry 04.25.05 at 3:06 pm

Can I take the liberty of posting a link to my own overly-long critique of the privatisation of school management in the UK along these lines?


IF no one picks it up I’ll put it to the front, as I’m interested in getting feedback from the economists for a subsequent iteration…


John Quiggin 04.25.05 at 3:35 pm

Harry, I think the best way to go is a post with a summary of the argument, and a link to the main body, as this post is already slipping off the page. For blog purposes, and maybe more generally, I suggest splitting it into two separate papers, one on contracting out and one on vouchers.

On the general issue of the market and schools, it’s a striking fact that, even where markets do exist, it’s quite rare for private schools, universities and so on to go out of business, or even experience radical shifts in relative status. The Ivy League universities of 100 or 200 years ago [I think the actual term dates to the 30s, but the group was well recognised before that] are the high-status universities of today, and similarly for private schools, at least at the upper end of the market.


Abby 04.25.05 at 8:53 pm

There are some newer prestigious schools, particularly of the arty variety. One that I read about in L.A., and in the UK there are a couple of mixed schools, which though nowhere near as Eton do very well. Harrow, I think, is not as well respected as it once was.


dsquared 04.26.05 at 7:10 am

The thing that always strikes me about this whole school choice debate is this; which is more like a British school; a French school or a cake shop? If rather than trying to draw hopeless analogies between education and the retail trade, we look internationally at which countries’ education systems do the best job of producing educated children, you end up with the French, German and Japanese systems at the top. Of these systems, precisely none of them are based on parental choice or competition between different teaching methods and curricula.

They are (it seems to me, as an utterly ignorant outsider with no real idea beyond stylised media factoids) for the most part based on stripping down the task of teaching to a Taylorised process and then shoving the little buggers as full of facts as possible.

My own prejudice in this matter is that Mr Gradgrind was probably the most unfairly maligned character in the whole of literature, and that contrary to the opinions of about a million coffee mugs, children are not candles to be lit; they’re buckets to be filled.


Harry 04.26.05 at 9:31 am

If you’d been in an American school recently, Daniel, you’d know that they resmble cake shops more than French schools. Not very good cake shops, to be sure, but….

Thanks for the advice John, I’ll get on to it.


John Quiggin 04.26.05 at 4:46 pm

Looking forward to this, Harry


Conchis 04.28.05 at 9:36 am

“If rather than trying to draw hopeless analogies between education and the retail trade, we look internationally at which countries’ education systems do the best job of producing educated children, you end up with the French, German and Japanese systems at the top. Of these systems, precisely none of them are based on parental choice or competition between different teaching methods and curricula.”

As another completely ignorant outsider, it strikes me that

a) your sample of countries seems unlikely to have sufficient variation in the independent variable to draw much from this (that is, the “failing” systems don’t look all that much like cake shops either); and

b) to the extent that the failing systems do look like cake shops, they probably do so in large part precisely because they have failed: having both less to lose and more to gain, they’re more likely to experiment with competition.

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