The crossover and interrelationship between the private and public-sectors is a big economic issue. I was reminded of it on Saturday evening as I watched the excellent fireworks display in Battersea Park but from outside the park itself. The reason for this is that it used to be council run and free albeit partly funded by sponsors such as Heart Radio if I recall correctly. But these days like so much in Battersea Park it is run by a company called Enable who charge between £6 and £10 depending on how early you pay. You may note that GDP or Gross Domestic Product will be boosted but the event is the same. However there is a difference as the charge means that extra security is required and the park is fenced in with barriers. I often wonder how much of the charges collected pays for the staff and infrastructure to collect the charge?! There is definitely a loss to public utility as the park sees more and more fences go up in the run-up to the event and I often wonder about how the blind gentlemen who I see regularly in the park with his stick copes.
Private Finance Initiative
Elements of the fireworks changes apply here as PFI is a way of reducing both the current fiscal deficit and the national debt as HM Parliament explains here.
National Accounts use the European System of accounts (ESA) to distinguish between on and off balance sheet debt. If the risks and reward of a project is believed to be passed to the private sector, it is not recorded in the government borrowing figures, and remains off balance sheet. Approximately 90% of all PFI investment is off balance sheet, and is not recorded in National Accounts. Public
spending statistics, such as the Public Sector Net Debt, also follow ESA.
I like the phrase “believed to be” about risk being passed to the private-sector as we mull how much risk there actually is in building a hospital for the NHS which will then pay you a fee for 25/30 years? However we see why governments like this as what would otherwise be state spending on a new hospital or prison that would add to that year’s expenditure and fiscal deficit/national debt suddenly disappears from the national accounts. Perfect for a politician who can take the credit with no apparent cost.
The magic trick for the public finances does not last however as each year a lease payment is made. So there is a switch from current spending to future spending which of course is the main reason why politician’s like the scheme. However the claim that the scheme’s offer value for money gets rather hard when you see numbers like this from a Freedom of Information reply last month.
The Calderdale and Huddersfield Hospitals NHS Foundation Trust entered into a PFI with a company called Calderdale Hospitals SPC Ltd. Prior to May 2002, the all in interest rate in respect of bank loans that the company had
taken from its bankers was 7.955% per annum. After May 2002, when the PFI Company refinanced its loan, it was 6.700% per annum.
As you can see the politicians at that time in effect took a large interest-rate or more specifically Gilt yield punt and got is spectacularly wrong. Even with the refinancing the 6.7% looks dreadful especially as we note that we are now a bit beyond the average term for a UK Gilt. So if a Gilt had been issued back then on average it would be being refinanced now at say 1.5%. Care is needed as of course politicians back then had no idea about what was going to happen in the credit crunch but on the other hand I suspect some would be around saying how clever they were is yields were now 15%! On that note let me apologise to younger readers who in many cases will simply not understand such an interest-rate, unless of course they venture into the world of sub-prime finance or get a student loan.
In terms of pounds,shillings and pence here is the data as of 2015.
The total annual unitary charge across all PFI projects active in 2013/14 was £10bn. The cumulative unitary charge payments sum to £310bn: of this £88 billion has been paid (up to and including 2014/15) and £222 billion is outstanding. The unitary charge figures will peak at
0.5% of GDP in 2017/18.
This is not only an issue on the finance side it is often difficult for the contracts to be changed as the world moves on. Or as HM Parliament puts it.
It can be difficult to make alterations to projects, and take into account changes in the public sector’s service requirements.
Are supporters losing faith?
Today the Financial Times is reporting this.
Olivier Brousse, chief executive of John Laing, which invests in and manages PFI hospitals, schools, and prisons, said PFI had lost “public goodwill” and needs “reinventing” with providers subject to a “payment by results” mechanism where money is clawed back for missed targets.
That is true although he then moves onto what looks like special pleading.
“The market in the UK is going away so we need to get back around the table and agree something acceptable,” said Mr Brousse. “The UK’s need for new infrastructure is significant and urgent. The private sector stands ready to deliver this . . . If the current PFI framework isn’t fit for purpose — then let’s completely rethink it to make it work.”
Indeed we then seem to move onto the rather bizarre.
“The problem with PFI isn’t transparency. It is outcomes,” he said. “I’m a citizen and if a school is built under PFI I also want it to commit to reducing bullying and violence.”
Surely the school should be run by the Governors rather than the company that built it? Perhaps he is trying to sneak in an increase in his company’s role.
There were also mentions of this which as I note the comments to the article seems set to be an ongoing problem whether it s in the public or private sectors.
In August John Laing agreed to hand back a lossmaking £3.8bn 25-year PFI waste project in Greater Manchester for an undisclosed sum. One of Britain’s biggest PFIs, the Greater Manchester waste disposal authority bin clearance, recycling, incinerator and green power station project had struggled to remain profitable. Manchester council said it would save £20m a year immediately from access to cheaper loans and £37m a year from April 2019.
To my mind the concept of PFI conflated two different things. The fact that private businesses can run things more efficiently than the public-sector which is often but not always true. For that to be true you need a clear objective which is something which is difficult in more than a few areas. The two main dangers are of missing things which turn out to be important as time passes and over regulation and complexity which may arrive together. Then we had the issue that whilst it was convenient for the political class to kick expenditure like a can into the future this meant a larger bill would eventually be paid by taxpayers. Even worse they have ended up trapping taxpayers into deals at what now seem usurious rates of interest.
Pretty much all big contracts with the private-sector seem to hit trouble as this from the National Audit Office on the Hinkley Point nuclear power project points out.
The Department has committed electricity consumers and taxpayers to a high cost and risky deal in a changing energy marketplace. We cannot say the Department has maximised the chances that it will achieve value for money.
There is of course the ever more expensive HS2 railway plan to add to the mix.
Thus we see that some of the trouble faced by UK PFI is true of many infrastructure projects. Yet some of it is specific to them and frankly it is hard to make a case for it right now because of some of the consequences of the credit crunch era. Firstly governments are able to borrow very cheaply by historical standards and secondly because adding to the national debt bothers debt investors much less than it once did especially if it is also simply a different form of accounting for an unaltered reality.
One of the arguments of my late father was that the UK needed an infrastructure plan set for obvious reasons a long way ahead. In many ways now would be a good time because the finance would be cheap but sadly we just seem to play a game of tennis as the ball gets hit from the private side of the net to the public side and back again.