The Guardian has this morning reported that PFI could eventually cost £300 billion for assets worth vastly less than that.
This is, of course, scandalous. It shows the absurdity of the state running away form its responsibilities. PFI is an indication of the exisetnce of a cowardly state of the sort I describe in the Courageous State (see right).
And there are altenatives, of course. Many have put them forward; I will concentrate only on those I have been involved with.
In 2003 I wrote about People's Pensions Colin Hines and Alan Simpson. We argued for a real alternative to PFI, based on a completely rervised pension system.
And there are local authority bonds - something Colin and I have worked on for a decade.
And there is green quantiative easing.
These are real, viable, alternatives that would ensure the finance for and benefit from funding public infrastructure could be captured for widespread and public gain, at considerably lower cost.
Now is the time they were comprehensively embraced. But this week we had more conventional QE. The prospects aren't good and the Tories have nowhere to hide. They can't blame Labour when they are continuing New Labour's mistakes.
As with banking, all got this wrong. It's time now for that to be admitted and for change to happen.
Thanks for reading this post.
You can share this post on social media of your choice by clicking these icons:
You can subscribe to this blog's daily email here.
And if you would like to support this blog you can, here:
Two main things were going on with PFI – the government was raising finance for infastructure projects that didn’t go through the traditional markets so that the markets would not be spooked by higher levels of public debt. This may have not been very courageous – but I’m not sure that raising finance through traditional lower cost methods would have been an option either. If you want to raise very much needed finance for infrastructure markets – I am not sure that I have much problem with a little uncourageous subterfuge to fool markets which are dominated with people who are notorious in their inability to take a longer view than where there next bonus is to come from. Seems a better course to me than a courageous failure.
The other thing was that happened was that we taken for a ride by the financiers, who used the naivety of many public servants with regard to negotiating project finance (not surprising given their lack of previous recent experience perhaps). There is always a problem when you ask people who are not experienced in raising finance or who don’t understand how to appraise whether or not a project is viable or giving the best return. This clearly happened with PFI – I am not sure how you would stop a repeat with local authorities or green investment banks if they are populated with those who are similarly naive.
Why do we need to assume people are now as naive?
And where they, anyway?
Or where they complict, by choice or methodology?
The deals which I have seen suggest that they were being naive.
Yes I hope people have learned through experience – but understanding investment appraisals and project/finance structures are things that need genuinely need special skills. This is a genine point that opponents and those who want to maintain the status quo will raise – it is isn’t addressed there will be a problem in establishing credibility and gaining public support. I do believe that people with the necesary skills and motivation exist – but finding them and putting them in place will be a challenge.
I don’t see why, as has been previously characterised in other strings, the choice has to be simply between rapacious financiers ripping off the public purse or naive civil servants incapable of getting a good deal. This ideologically simplistic ‘either/or’ is at the heart of many contentions between left and right commentators here. Surely it isn’t beyond the wit of a courageous state when setting up large infrastructure projects to use ‘hired guns’, savvy financiers to be on the public’s side. This would of course presuppose inexpert civil servants relinquishing the micro-management of deals and a courageous government being prepared to offer the appropriate reward to attract in such ‘hired guns’ to advise on project to project specifics. Governments readily hire-in high-profile ‘advisors’ when they see a need to bolster their ideologies e.g. Sir Digby Jones, Lord Sugar, et al. and inappropriately as a form of cronyism when heads of HMRC or Members of the MPC are being appointed, but not when it comes to the basic mechanics of specific deals. It seems to be a sort of political myopia or preferment on both sides. We the public need real applied expertise on our side, not the simplistic choice of either the giving of free rein to civil service amateurism or the wholesale surrender of social provision to the markets, (accompanied by the endless award of political/ideological trophy posts). It’s that politically naive bipolarity that produces the alternating cycles of public investment disasters we repeatedly get.
Well said
The point was they kept the debt off the pubic finance’s books, and a price had to be paid for that. Everyone closely connected to the deals knew they were bent. The real choice at the time was bent deals (as with the fiddling of LIBOR in 2008) or no new schools or hossies. As was the case with LIBOR in 2007/08, the real economy wasn’t strong enough to support honest dealing.
Alan
I don’t disagree with what you say – but it needs to be made to happen, and there has to be some discussion and thought as to how. The history of such initiatives is paved with such good intentions followed by glorious failures just because there has been a lack of attention to such details. Why isn’ the Co-op wiping the floor with all the other UK retailers when it doesn’t need to pay a return to equity shareholders?
Perhaps one thing a Labour Government shoud do when elected would be to employ as politcal advisers those with the necessary skill and expertise rather than young politicos who have never held a real job.
Belgraviadave
I still think that if the deaols had been negotiated by someone who knew a bit more about finance, then they would have been lot cheaper for the public purse. It is worth noting that some of the deals are being held by companies incorporated in Jersey, and some of those are even listed on the UK Stock Exchange – how on earth was that allowed to happen?
The conventional QE last month had King vote for it, with the governor in the minority, which he hates. The inflationistas seem to have faded away,
I know that Krugman has called the proposed Tory project (June 15, 2012) ‘Crony Keynesianism’. The battle is to make sure this is seen as stimulus not alternative austerity.
The extent to which modern Conservatism should be seen as an ideology rather than a form of statecraft I think has been proved by the Coalition’s cuts to the armed forces and police on the premise that the economy demands it. Thatcher fattened the police and was gentle with troop numbers, but this changed economic environment has asked questions of her heirs that she herself never needed to answer, and the New Right has cobbled this together as a response. As Enoch Powell said in Dublin in 1946, most men’s lives are lived in their imagination.
Those same public servants now enjoying employmeny elsewhere…..like finance companies et-al ?
It is not possible to believe that this was attributable to naivety: everyone knew this was a stupid idea which would cost too much. Now it is true that what “everybody knows” can be wrong. But things are not very often totally counter intuitive, and this was not. “There are some ideas so wrong that only a very intelligent person can believe in them”. Or a very greedy one perhaps
Fiona – agreed. I’ve often said to colleagues that if 5-year olds had had the vote at the start of the PFI circus, back in about 1990 or so (when Thatcher saw how well it worked for the ultra-Left Brent Council that sold off its lamp-posts in an ALMO/PFI deal – an idea Major enthusiastically ran with when he became PM) – if 5-year olds then had had the vote AND they could have understood what it would mean for them 20 years down the line, then PFI would never have got off the ground.
It is indeed a truly silly idea – way too expensive, wildly inefficient (promises of “under budget and ahead of time” were not always fulfilled), operating on “three card trick” financing of deliberate complexity (consider the London Underground nonsense), and in some cases results in the PFI contractor inheriting the assets (at least with a house mortgage the house one day becomes your own!).
Now here I won’t spring to the defence of Gordon Brown, who could so easily have exposed this for the sham it is, yet meekly followed the neo-liberal nonsense on which it was based, because it allowed the sums to be kept off the balance sheet, despite the much greater true cost of such schemes.
Alas, Gorden even allowed the dishonest and bogus “cost benefit analysis” methodology to be used which managed to make PFI deals look better value for money than straightforward capital financing via taxation, when the opposite was actually the case. If the Tories want to accuse GB of derelicition of duty there, by all means let them, as the target is valid, but then they will have to explain why Osborne has signed £17billion worth of PFI deals since becoming Chancellor – almost all surely very poor value for money if properly costed.
Clearly it does it not make sense to engage in Gordon Brown Enron style off balance sheet fiddles (aka PFI). But the absurdity is even more fundamental. That is, it does not even make sense for governments to borrow to fund infrastructure projects.
That is, they might just as well fund infrastructure from taxation.
See paper entitled “Debt financing of public investment: On a popular misinterpretation of “the golden rule of public sector borrowing”, by K. Kellermann, (2007), European Journal of
Political Economy, 23 (4): 1088-1104.
http://econpapers.repec.org/article/eeepoleco/v_3a23_3ay_3a2007_3ai_3a4_3ap_3
a1088-1104.htm
Why?
What is wrong with borrowing?
Borrowing makes very good sense for a micro economic entity, i.e. a household or firm. Such micro entities often just don’t have the cash to fund an investment, so they HAVE TO borrow.
Government is totally different: it has a near infinite amount of cash at its disposal. It can raise taxes or just print money (inflation permitting).
I wrote a paper going thru the various alleged reasons for government borrowing here:
http://mpra.ub.uni-muenchen.de/726/
None of these reasons stand inspection.
The ACTUAL reason for government borrowing is that it enables politicians to buy votes: voters attribute tax increases to politicians, whereas they tend not to attribute the interest rate increases that stem from government borrowing to politicians. (Or if government borrowing does not raise rates, then there is a quantitative effect: funds just aren’t available to borrow, as would seem to be the case at the moment with small firms seeking funds.)
Also, Milton Friedman advocated a “zero government borrowing” regime. See p.250 here:
http://nb.vse.cz/~BARTONP/mae911/friedman.pdf
Sorry: that’s the economics of paranoia. At least you credit it to its primary source
Since all good public investment increases land values, the sensible thing is to fund it from land rent (annual land value taxation). You then have a virtuous circle of increased public expenditure => increased land values => increased revenue => increased expenditure. (The Jubilee Line Extension: cost £3.5bn, increase in local land values £13bn.)
I have never understood how moving things off balance sheet in this way would have ‘fooled’ the market. Everyone knew what was being done, and everyone knew that in practice the government would be the guarantor of last resort – so how did it differ from conventional finance?
It was more expensive…!
Long ago I was involved in local authority and health building programmes and the business of what could be afforded etc. Necessarily, trying to get the costings right was an imperative. When PFI first started, it might have had a purpose in very limited and particular cases where the financing did not fall easily into the usual categories . But to apply it more or less across the board and then tie in maintenance and other financing contracts and charges was little short of either lunacy or gross corruption of financing. My recommendation would be to default and to rewrite the whole lot to affordable rates as soon as possible. It has become a nasty racket to buy votes with money we do not have and never will.
Demetrius
The way it worked was that we, the taxpayer, were only “de-risked” in the sense that we could no longer be aware of/vote on said risks.
As we’ve seen with Nursing Homes, with breast implants, with banks, it was always understood that if (when) it all went wrong, the plebs could carry the can.