Sinn Fein, PFI and public sector borrowing…

The Insider in the Belfast Telegraph notes Sinn Fein’s uncomfortable position inside a government that is likely to have to lean on the use of Private Finance Initiatives and Public Private Partnerships. Ideologically, the party is pledged to bring them to an end. Yet PFIs in particular have been brewing up a storm since the House of Commons Public Accounts Committee issued a report in 2003, arguing that they provide “greater certainty on the timing and on the cost to departments”, but:

The NAO census identified that one in five public authorities had already asked for additions or changes to facilities within a few years of letting a PFI contract. Yet in less than half of these cases had the authority attempted to benchmark the resulting price change. A PFI consortium is in a strong position once a contract has been let because it is the contractual supplier for 30 years or more.

A National Audit Office report noted earlier this year that this ‘mis-management’ of value had not noticeably improved:

In fairness to officials, negotiating a decades-long contract with a private company is bound to be a tricky exercise requiring plenty of expensive legal gymnastics. Practice can help. The education department plans to use PFIs to rebuild hundreds of schools across the country, and the contracts have been complicated. Despite that, so many have been signed that the typical school PFI is now negotiated within 25 months, nine months faster than average. But this is the exception rather than the rule: the NAO worries that lessons learned on one deal are not generally applied to others.

In short, PFI has the potential to a powerful instrument for infrastructure renewal, but in circumstances where the value for money returns are hard to gauge, not least because of the much higher cost of private borrowing.

Last year, Labour MP Kelvin Hopkins argued that the public sector could afford to push up its own borrowing:

The latest available international comparisons from the OECD show that Britain has kept government borrowing (at 44% of GDP) well below those of the successful Scandinavian economies (Denmark 53%, Sweden 63%), and even further below those of the major eurozone countries (Germany 68%, France 75%). US borrowing (64%) is also well above Britain’s, and Japan’s (156%) is off the scale. In some of these countries there have been economic difficulties, but none has experienced anything like economic disaster.

Take the example of one very successful country, Sweden. Its gross borrowing in 2004 was 18% of GDP higher than that of Britain, a year during which Swedish real GDP growth was 3.7% compared with 3.2% in Britain. There is no reason why our government could not have borrowed more for public investment instead of straining to keep investment in the private sector.

From which he concludes:

The illogic of private investment being given incentives to replace public investment is compounded by the fact that the cost of government borrowing is much cheaper than servicing private capital investment. The money markets are generally enthusiastic about lending to government because such lending is secure, which is why the interest charged is low. By contrast, private-sector investment always requires a risk premium and profit-taking. If the government is paying the bill, the private sector will seek to pocket as much public money as possible. This has been nowhere more true than in the railway industry, where privatisation has been a financial disaster. Private estimates suggest that the recent cost of track renewals is between four and five times what it was under public ownership.

The Treasury has bragged about its supposed success in keeping down government debt by using private investment to plug the public-investment gap. This is analogous to a householder reducing his or her mortgage by paying off a chunk of low-interest borrowing from a building society with cash borrowed at a much higher rate of interest from a usurious moneylender.

As long as income is sufficient to pay the required return on money borrowed there is no problem. If one can raise such borrowing at a lower rate of interest then that is surely the sensible thing to do. The government has actually done the opposite by restraining public investment at low rates of interest and substituting private investment requiring higher returns. What is bizarre is that the Treasury – which has railroaded this policy through government – has recently been balking at paying the bills for some of the bloated PFI schemes it has itself promoted.

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  • Using PFI is an utterly lunatic way to secure capital investment. It is more expensive than state investment, undermines worker and consumer protections, is generally of shoddy standard and undermines community use of facilities built using it.

    But it also allows Gordon Brown to play with his sums as PFI debts are not counted as loans in the exchequer books. See Private Eye passim as they might say.

    The hook the Shinners are on is a simple one. They can’t raise taxes and they can’t borrow money because the Executive doesn’t have the power to do so and according to the motion debated in the Assembly earlier in the week, unionism wouldn’t let them anyway.

    So, in the absence of those powers, the option facing them is capital investment through PFI, knowing it to be the worst option, or no capital investment. The third option, and I suspect they lack either the imagination or the courage to see it, is to go on the offensive and not sit in their Executive offices waiting to be presented with contracts to sign.

    Start pulling together the various people in the North who would oppose PFI. Other political parties, the trade union movement, community organisations, civil society, people who are numerate and capable of simple addition could be pulled together to form a powerful political bloc against the use of PFI.

    But still, the money has to come from somewhere, and this means giving the Executive the power to vary/raise taxes and to borrow. I was a little surprised to see this so vehemently opposed by the DUP as they can’t get their precious 12.5% Corporation Tax without it.

    It wouldn’t be easy. It might fail and the Shinners would have to end up using PFI anyway or put the Executive at risk. But it would demonstrate a commitment to at least trying to stick to a position that is both principled and common sense.

    Some points on the use of PPPs in the South.

    http://cedarlounge.wordpress.com/2007/06/01/ppps-they-just-dont-work/

  • DK

    The government really needed to ask why companies jumped at PFI. It is because it was money for old rope: Every bit of repair/maintenance work in a PFI school/hospital has to go through the PFI company who get their mark up – for doing nothing but passing the request on to whoever does the job. And these contracts run for decades….

    A most miserable slight of hand to avoid being seen to be borrowing money. Hopefully it is not just Sinn Fein who will resist PFI.

  • joeCanuck

    There seems to be a knee jerk reaction among some people that PFIs are, by definition, bad.
    This is not a sensible reaction.
    We have a fair degree of experience with PFIs here in Ontario over the past 20 years or so. Some have worked out to be bad (toll road charges) but some have worked out very well indeed.
    They are worth considering where a project would not otherwise go forward due to lack of public financing.
    Just take care.

  • Criminelle Assets

    PFIs have been shown to be a bad idea on several counts.

    First, they run for decades, so they appeal to short-term politicians who are happy to have the limelight now and leave the bills for others to pay for years to come.

    Second, they encourage malpractice in the public sector as managers are drawn into cosy relationships with private companies. The result is that public sector managers start to prepare for a cross-over into the private sector (where the money is) and treat their area of management as merely a launch pad.

    Third, private companies have been known to take on projects, eg. equipping and furnishing a new school, only to demand that public sector officials help them to write the orders for equipment. They won the contract, but they did not have the expertise to do the work.

    The history of PFI has been a catalogue of disasters, both in England and in Ireland. It would be very nice indeed if our politicians tried to avoid falling into the same merde.

  • Jamey

    IRA/Sinn Fein are hardly in the position to demand Government finance, as their track record on this issue was to bomb the hell out of Government businesses.

    IRA/Sinn Fein actually set the scene for PFI’s so they’re hardly in the position now to oppose them. Yet more evidence of their hypocrisy.

  • Bob

    Jamey

    IRA/Sinn Fein actually set the scene for PFI’s.

    So Gordon brown introduced this scheme to Britian because of IRA bombing, yeah that sounds right. I somehow doubt the IRA had much infuence on this policy of New Labour. I wonder would you also credit the IRA for the sustained economic growth enjoyed under Brown when he was chancellor. I don’t think i would. Could you tell me what your answer would be to funding departments with sinn fein members at the head? Maybe you think we should forget about them.

  • Mick Fealty

    For the record, PFIs were first set out under the Major government in 1993. The record is patchy (i.e. it has had some successes), mostly because it is a huge and complex instrument. As the NAO report points out, there has been little improvement in their implementation because there is little shared learning between ministers in various departments.

    Calculating such medium term risk is not exactly a core competence of government, though one might argue that it should be.