From King Billy to the Glasgow Trams. A brief history of government debt…

glasgow-tramGovernments often need more money than they can extract from their citizens or subjects. Centuries ago, the sovereign relied on loans at interest. This was called ‘usury’, but usury at that time carried no implication of extortionate rates of interest. It wasn’t until Jean Calvin decided that lending money at interest wasn’t a sin that such lending became acceptable amongst Christians. (Calvin thought a rate of 5% per annum was reasonable.)

King William, at the end of the 17th century, raised a loan through the newly created Bank of England to pay for his army in the continuing Nine Years’ War against the Sun King, Louis XIV. These government debts or ‘IOUs’ became the standard way for the government to raise money; the documents were gilt-edged—hence ‘gilts’. The payback time was often very long, and some gilts were ‘undated’. Only recently has the UK government repaid ‘War Loan’, raised to pay for part of the cost of the Great War (The use of debt-finance isn’t limited to government, city corporations have issued similar loans.)

Such debt remains on the government’s balance sheet. Recently, governments have looked to alternative ways of paying for ‘goods and services’. Though ‘Private Finance Initiatives’ have a long history, they were introduced to the UK via fairly recent Australian experience by the Major government. Their use was limited until the naughties, when they became much more popular. This can be associated with ‘neo-liberal’ economics, which includes concepts of privatisation of services, the sale of government assets, market deregulation etc, and which hold that the ‘market is always right’, that such policies will stimulate growth more than previous ones, and that there will be a ‘trickle down effect’ on wealth.

It seems to have been assumed that private enterprise would be more efficient in construction projects, and in the management of them and in the management of services. It was presumably appreciated that business exists to make a profit for its shareholders, but that this cost would be more than compensated by ‘efficiency’. The public sector was seen as inefficient, in need of ‘reform’, and being more concerned with the well-being of those who worked within it than the actual service provision.

The NHS, begun in 1948, took over the infrastructure from voluntary hospitals; these were basically bankrupt, usually operating from Victorian buildings, and sometimes from what were former workhouses. The Royal Victoria Hospital was such a Nightingale building, whose design and can be traced back to military barracks and dormitories. The Belfast City Hospital developed from the Belfast Union workhouse. The first new hospital anywhere in the UK after the NHS was founded was at Altnagelvin, opening in 1961.

So government arranged for major capital projects to be funded privately, with such businesses being paid by the government for their efforts, and with the infrastructure eventually reverting to the government. Similarly, privatisation of services seems to have been based on the idea that efficiency savings would be greater than shareholder payments. That many business executives could ring circles round civil servants seems to have not been noticed; nor that the contracts could run to many thousands of pages, generally to the benefit of the business. PFI contracts are usually for periods of between 20 and 30 years, though they can be longer.

Experience with PFI and privatisation has been mixed. There certainly exist facilities which otherwise would not have seen the light of day. Yet, the BBC reported on Balmoral High School, saying:

 [An] investigation into PFI noted the case of Balmoral High School in Northern Ireland which cost £17m to build in 2002. In 2007 the decision was made to close the school because of lack of pupils. But the PFI contract is due to run for another 20 years, so the taxpayer will be paying millions of pounds for an unused facility.

Hinchingbrook Hospital had its management contracted to a private consortium called Capita. This group recently announced that it was withdrawing from the contract, as the terms of the contract entitled them to do, as, it seems, they had invested substantially, but were unable to make the services run on the payments received, let alone make a profit for their shareholders. At present, Labour who began this particular contract, and the Conservatives who continued it, are more concerned with blaming the other party for this failure, rather than considering why it failed.

What, you might wonder, has this to do with the Glasgow Trams? Their history has been well researched, and forms part of some MBA courses on public services. The story illustrates another problem with PFI.

The Glasgow tram system was once one of the largest in Europe. It was set up by Act of Parliament in the late 19th century which stipulated that the system should initially be paid for, and run, by a business consortium; and that after 22 years the system could to revert to Glasgow Corporation. And this happened; and at the end of the contract, the Corporation took over control of the system. Any infrastructure, whether a private house or a tram system needs maintenance and upgrading. The tram system was indeed maintained initially, but in the later years of the contract, realising that the contract would not be extended, they seem to have placed the need for profit maximisation over investment, the results of which the company would never recover. The Corporation therefore inherited a system which was, in part, decrepit, with rolling stock that hadn’t been upgraded. The Corporation never had the finance to properly upgrade the system, though they certainly tried. Eventually, the system was closed in the 1960s. That decade also saw the Beeching report (‘Axe’) into train services in Britain, the almost complete destruction of train services in N Ireland; the expectation was that the motor car would prevail.

 There are at least three significant problems with PFI and privatisation, even if the debt of PFI doesn’t appear on the balance sheet.

1) The government is locked into a long term contract; thus, if the project fails, private industry, not being altruists, will expect to be paid for the remainder of the contract;

2)  If the business cannot make the contract work, and produce a profit, they can simply walk away;

3) Business has no incentive to maintain and improve the infrastructure after a certain time.

Privatisation and PFI may seem an easy way for governments to achieve short term gains without much pain; but we are leaving our children and grandchildren with a nasty legacy.

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  • Wasn’t the Balmoral High School PFI initiated by the then Education Minister, one Martin McG. Very neo-con.

  • Zeno

    “1) The government is locked into a long term contract; thus, if the project fails, private industry, not being altruists, will expect to be paid for the remainder of the contract;

    2) If the business cannot make the contract work, and produce a profit, they can simply walk away;”

    To be fair though. Only a moron would agree to that sort of deal, I’d go as far to say that is so inequitable that it might not withstand a legal challenge.

  • chrisjones2

    Yeah but we are talking about the Governmnet here