Why did PFI spread like wildfire?

26th June 2012

One of the issues facing the UK as it goes forwards is the state of the UK public finances. Having discussed a shadowy institution yesterday let me bring another one immediately into the discussion which is the private finance initiative or PFI. This is the way that private finance was brought into the public sector. Unfortunately for the UK taxpayer the terms are usually shocking and sometimes worse. This has been highlighted in the news this week by the problems with the South London Healthcare Trust which when it started life 3 years ago inherited a £2.5 billion PFI contract. Frankly this whole particular scheme looks unviable and the worrying aspect is that it is far from alone.

Why did PFI spread like wildfire?

This bit is easy. It allows politicians to spend at no apparent cost as private finance replaces public sector finance. So they can splash the cash and look good and kick the repayment can into the future. The problem is that the can is often very expensive and is tied up in long-term contracts some of which are so onerous they should be illegal.

There were warnings about this but they were ignored. Professor Allyson Pollock summed up another problem well in a 2004 interview with the journalist Ian Fraser:

"There is plenty of talk of risk being transferred to the private sector, but when things go wrong the public sector invariably ends up bailing out the private sector……The idea that PFI is a partnership between government and business looks a hollow joke, as private finance gets repaid while the public sector carries the extra cost of keeping services going and communities suffer,"

There are estimates that the PFI debt is around £250 billion and that the assets it has paid for being worth much less than that. However it is my opinion that because these have been held "off balance sheet" we simply cannot be sure of the exact size of the problem. Here there are a lot of similarities with our problems with our banks.

Just in case you thought that lessons might have been learned a 25 year £113 million PFI scheme to build housing in Brunswick Manchester has just been announced. I wonder how much that will end up costing….

The UK economy is a problem

It does not help that the UK has had relatively slow economic growth over the past couple of years. Coming out of a severe recession one would normally expect a much better performance. Unfortunately the latest two quarters have in fact shown negative growth and the jury is out for the rest of 2012. These pose problems as we anticipate lower tax revenue and higher government spending due to this.

However in a far away land where the Office for Budget Responsibility lives we will as if by magic transform into this:

"We forecast growth of 2.0 per cent in 2013 (revised down from 2.1 per cent in November), picking up to 2.7 per cent in 2014 and 3.0 per cent in the final two years of the forecast."

I do like the idea that there is some significance in reducing a forecast from 2.1 to 2%! To be fair I did point out that they lived in a far-away land! But the major point is that the growth forecasts which drive the UK public deficit forecasts have about as much credibility as claiming that the UK football team controlled the midfield against Italy on Sunday night.

In other words it looks like there will be trouble ahead.

What do they expect?

Continue reading…

 

More on Mindful Money:

To QE, or not to QE, that is the question

Cyprus formally requests bailout

Pass the debt parcel – Are we burdening future generations?

The Financialist

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