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Wednesday, 4 March 2009

So is this on balance sheet yet?

The Government will lend £2bn of public money to private firms building schools and other projects under the Private Finance Initiative (PFI). There have been concerns that projects like the M25 widening scheme would be held up, as firms faced difficulties raising money due to the credit crunch.

So the government funds the equity in the SPV’s, and is party to a contract that would put the assets of the books in the private sector. So who holds the risk. Either the government as funder of the SPV or the government as the end user.


Demetrius said...

Am I being simple? When we were building schools the local authority borrowed the money to do it within limits determined by the Government at ordinary rates of interest. The architects had to be paid, and the builders, but not an army of consultants, financial advisers, and other various intermediaries, creaming their fees and expenses. We managed to build a number a year dealt with by quite a small number of people and basic pre-computer administrative mechanisms. Schools had been built in this way, firstly by voluntary societies, later by local authorities, for a century and a half. What is going today is utterly insane. What is the point of loading and reloading the debt to the taxpayers of the future at levels that are historically astronomical?

Anonymous said...

Do these things keep you awake at night, me too. Since the notion of public/private finance initiatives all those years ago, I felt there was something flawed about the system and my fears have subsequently been realised. Build for Britain should be our mantra. Designed, built, paid for and administered by us. Not in a xenophobic sense but in the sense that we may take pride in our buildings. Alex, try recounting Bush Gaffes at night, you go to sleep giggling. Have a good one dude

Alex said...

No, I don't worry about it. I have seen so many examples of government incompetence that I have come to expect it.

Some examples from PFI:

The UK government has been talking about buying inflight refuelling aircraft to replace the Vickers VC-10's and Lockheed Tristars they took from BEA and BOAC (pre-BA) in the 1960's and 1970's. After 10 years, they appear to have fixed on Airbus A330's, but instead of buying them for $130 million + spare parts each, which would be the list price, they have manage to concoct a 30 year PFI arrangement at some thing like $1.5 billion per plane. These planes hardly get used. They have had the old planes for 40 years and they weren't new when they took them, so this is a ttal waste. they should be buying some old planes and converting them.

The London Underground was supposed to be maintained using a £17 billion 30 year PFI scheme. The deal took 5 years to negotiate and consultants and lawyers were paid hundreds of millions in advisory fees. The whole scheme fell apart after about 2 years and the main contractor Metronet went into administration becuase they were paid too little to meet their obligations.

Alex said...

Demetrius said...
"Am I being simple? When we were building schools the local authority borrowed the money to do it within limits determined by the Government at ordinary rates of interest."

True, but the contractors were paid on a cost plus basis or similar so the government usually pcked up the tab fr any overruns. The idea behind the PFI was supposed to be to shift a lot of the risk onto the private sector.

The trouble was that the public sector are not very good at cuting commercial deals, and so the risks end up in the hands of the public sector, so the government should end up accounting for the PFI deals as asset acquisitions - except that defeats the whole purpose, so they change the accounting rules so they can pretend these are just contracts for the supply of services (e.g. making a school or hospital available) to limit the impact on government borrowing statistics.