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Tuesday, 26 June 2012

What we can learn from Sarf Lundun

Recently the Parliamentary Treasury Select Committee found that ""PFI should be brought on balance sheet. The Treasury should remove any perverse incentives unrelated to value for money by ensuring that PFI is not used to circumvent departmental budget limits. It should also ask the OBR to include PFI liabilities in future assessments of the fiscal rules".

By October 2007 the total capital value of PFI contracts signed throughout the UK was £68bn, committing the British taxpayer to future spending of £215 bn over the life of the contracts. The global financial crisis which began in 2007 presented PFI with difficulties because many sources of private capital had dried up. Nevertheless PFI remained the UK government's preferred method for public sector procurement under both Labour and the present coalition. In January 2009 the Labour Secretary of State for Health, Alan Johnson, reaffirmed this commitment with regard to the health sector, stating that “PFIs have always been the NHS’s ‘plan A’ for building new hospitals … There was never a ‘plan B’".

However, because of banks' unwillingness to lend money for PFI projects, the UK government now had to fund the so-called 'private' finance initiative itself. In March 2009 it was announced that the Treasury would lend £2bn of public money to private firms building schools and other projects under PFI.

Labour's Chief Secretary to the Treasury, Yvette Cooper, claimed the loans should ensure that projects worth £13bn — including waste treatment projects, environmental schemes and schools — would not be delayed or cancelled. She also promised that the loans would be temporary and would be repaid at a commercial rate. But, at the time, Vince Cable of the Liberal Democrats, subsequently Secretary of State for Business in the coalition, argued in favour of traditional public financing structures instead of propping up PFI with public money:
The whole thing has become terribly opaque and dishonest and it's a way of hiding obligations. PFI has now largely broken down and we are in the ludicrous situation where the government is having to provide the funds for the private finance initiative.
In opposition at the time, even the Conservative Party considered that, with the taxpayer now funding it directly, PFI had become "ridiculous". Philip Hammond, subsequently Secretary of State for Transport in the coalition, said:
If you take the private finance out of PFI, you haven’t got much left . . . if you transfer the financial risk back to the public sector, then that has to be reflected in the structure of the contracts. The public sector cannot simply step in and lend the money to itself, taking more risk so that the PFI structure can be maintained while leaving the private sector with the high returns these projects can bring. That seems to us fairly ridiculous.
In an interview in November 2009, Conservative George Osborne, subsequently Chancellor of the Exchequer in the coalition, sought to distance his party from the excesses of PFI by blaming Labour for its misuse, despite it still bearing all the hallmarks of the policy devised by his own party. At the time, Osborne proposed a modified PFI which would preserve the arrangement of private sector investment for public infrastructure projects in return for part-privatisation, but would ensure proper risk transfer to the private sector along with transparent accounting:
Labour's PFI model is flawed and must be replaced. We need a new system that doesn't pretend that risks have been transferred to the private sector when they can't be, and that genuinely transfers risks when they can be . . . On PFI, we are drawing up alternative models that are more transparent and better value for taxpayers. The first step is transparent accounting, to remove the perverse incentives that result in PFI simply being used to keep liabilities off the balance sheet. The government has been using the same approach as the banks did, with disastrous consequences. We need a more honest and flexible approach to building the hospitals and schools the country needs. For projects such as major transport infrastructure we are developing alternative models that shift risk on to the private sector. The current system – heads the contractor wins, tails the taxpayer loses – will end.
Despite being so critical of PFI while in opposition and promising reform, once in power George Osborne progressed 61 PFI schemes worth a total of £6.9bn in his first year as Chancellor. The truth is the coalition government have made a decision that they want to expand PFI at a time when the value for money credentials of the system have never been weaker. The government is very concerned to keep the headline rates of deficit and debt down, so it's looking to use an increasingly expensive form of borrowing through an intermediary knowing the investment costs won't immediately show up on their budgets.
So what do we learn from South London NHS?  First of all that PFI is expensive, cripplingly expensive.  Second that it doesn't transfer any risk At all.  None, whatsoever.  A private sector gopher may be replacing all the light bulbs at £200 a pop, if you'll pardon the expression, but there is no real transfer of risk because the public sector always needs the service, so when the public sector service recipient goes tits up, who steps in?  Answer: you the tax payer, because the contingent liability loses its tingency (making the con very visible).

So why does the government persist in keeping PFI liabilities off the government balance sheet?

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