The Guardian has reported:
Labour would bring PFI contracts, and the workers they employ, back under the control of the state, the shadow chancellor, John McDonnell, has announced.
Labour's manifesto included a pledge not to sign any new PFI (private finance initiative) deals, but McDonnell received a standing ovation at Labour's conference in Brighton on Monday when he went further by announcing: “We'll bring existing PFI contracts back in-house.”
This was always one of the goals of People's QE, which was one of the core pillars of Corbynomics. Two years ago this was at the centre of Corbyn's appeal when he became party leader. As its author I am delighted to see that it still survives. And I wholeheartedly support this use of it.
When saying so I also note that the Nuffield Trust that said the cost of doing this would be the gross revenues of the contracts is talking utter nonsense: the compensation due is at most for the discounted value of the contracts taking into account the inherent risks within that income stream.
Thanks for reading this post.
You can share this post on social media of your choice by clicking these icons:
There are links to this blog's glossary in the above post that explain technical terms used in it. Follow them for more explanations.
You can subscribe to this blog's daily email here.
And if you would like to support this blog you can, here:
Buy me a coffee!
Richard, nice to see that Jez is returning to some of the ideas that helped win him the leadership. Maybe John McDonell will revise his opinion of the author of many of those ideas – one R. Murphy – having slagged him off in a speech in parliament last year.
“When saying so I also note that the Nuffield Trust that said the cost of doing this would be the gross revenues of the contracts is talking utter nonsense: the compensation due is at most for the discounted value of the contracts taking into account the inherent risks within that income stream.”
Absolutely right. And that means it is not even a cost. It is an investment in an asset that yields a revenue stream, and it might even create value for the taxpayer if it is well managed. In fact there is no “cost” of nationalising any public utility: it is an investment in a relatively safe asset.
Agreed
I take it you have a view on the thoughts of Colin Talbot.
From The Guardian:
“What irritates me most about PFI is not the mistakes that were made around it, but the complete (wilful?) ignorance of many of its critics in understanding what most PFI deals were.
They are frequently critiqued as PFI project X — e.g. build a hospital — will cost 10 zillion times what the cost of the hospital through direct state spending.
The misunderstanding, or “wilful blindness”, is quite simple — the PFI contract was not to “build a hospital” but to “build a hospital, do all the maintenance on it and provide all sorts of building and back-office services for (usually) its lifetime.”
The main bit of the “massive costs” of PFI therefore come from maintenance and service contracts for the life-time of the building.
Were these often over-priced — yes. Were they often badly designed — yes. Were the interest charges on the original capital build over-priced — often.
But what many comparisons of PFI and non-PFI costs do is ignore the fact that maintenance and services would have had to be paid for anyway. They compare apples and oranges by ignoring this. Certainly this is the case for many of the ‘politically motivated’ attacks on PFI.”
I agree
And that is my point
Only the profit margin in those supply contracts needs to be bought out, not the gross sum
And what if the profit margin is negative.
This is not a pedantic point, as I’m aware that most PFI contracts are profitable for the contractor otherwise they would not take them on. They aren’t daft.
But some of them, particularly but not exclusively post-2010, have been negotiated by hard ballers in the public sector who had figured out how to get decent value for the money being printed to fund them. Take the company that built walls for Scottish schools which turn out to badly erected – the contractor has to fund the repairs.
In 2015 UKIP policy was to review PFI contracts that were bad value by looking if any corruption occurred during their negotiation. In 2017 Labour simply wants to buy out all PFI contracts regardless of value.
I heard nothing about regardless of value
It was not said
A move in the right direction, that’s for sure. However, I fear the trouble with the Labour Party, under its current leadership, is that while they see the prevailing economy is not performing to the max and delivering equitable results, they are still intellectually stuck in a post-Keynsian mindset – hence afraid of (viz. the bogeymen of inflation & MSM annhilation) cutting loose in order to implement the systemic policy changes necessary to enable the country to realise its full potential. Maybe Bill Mitchell’s presentation tomorrow will give them some ammunition and encouragement. Hope springs eternal.
I agree with your concern
I doubt Bill would dislodge it
But I can hope
@John D,
I’m sorry if this seems pedantic but I think that you might have meant “New Keynesian mindset”. A Post-Keynesian mindset would be a fabulous improvement.
Oops! Thanks Marco. You’re right ofc. More Keen – less Krugman. Need to re-read posts before hitting ‘send’.
🙂
There is a big difference
I’m a lowly, lonely Labour member trying to persuade colleagues to adopt policies the public can first understand, get attracted by and then be willing to vote for. Where can I find the instruction booklet for dismantling PFI contracts and other privatisations, please? I never needed persuading that making profits from health or natural monopolies in public services is morally bad and, probably, often financially and structurally inefficient. But the lack of concise arguments to rebut charges that buying out the current contracts would bankrupt the country leaves us ‘Lefties’ floundering.
There is no such easy guide that know of Paul
I’d like to write it but am up against it on other schedules
But I will try to write a bog if I can for the morning
Erratum: I believe Bill Mitchell’s presentation was this afternoon not tomorrow.
It was
4pm
McDonnell’s team would not have been there….
No sign of McDonnell of course, but a good talk, Q&A, and a decent turnout of around 80, I would estimate.
Bill mentioned that the first International MMT Conference which just concluded in Kansas drew an audience of around 250 – economists, academics, and just interested parties, so that’s encouraging.
And I think Prof Mitchell is up in London launching his new book tonight (Tuesday), for those who couldn’t make it to Brighton.
Details on his blog.
Thanks
I must admit the Kansas conference looked good
I applaud the initiative but we must be ready for the blowback.
There will be a number of complexities and quite a lot of legal and accounting work associated with buying out PFI contracts.
Firstly there must be thousands of contracts spread across a range of public sector bodies each having their own constitution – agencies, NDPBs,independent trusts, Departments etc..
Secondly the range of services supplied under these contracts is wide – the operation and maintenance of buildings, machinery and plant, estate management, generation of energy, etc..
Yes future projected income will be more than sufficient to cover the associated supply cost but the transfer requires some thought. I would work on the basis that each public sector body reverses its procurement logic and establishes within its purview the operational basis that would have been necessary had the original procurement followed a conventional, non PFI, pathway. This assumes that the body that houses and benefits from the PFI asset is in the best position to manage its continued operation.
Operational cost would be added to the expenditure of the public sector body but, of course, the PFI payments would be removed. This would produce both positive and negative impacts upon the operating position of the public sector body, depending upon the circumstances ( the original term and the nearness to the end date for instance would be a key factor) and here the government would have to guarantee an agreed outcome.
Lots of work for the Civil Service, will there be any spare capacity given Brexit? Is this possible under the existing state aid rules?
This is why Corbyn does not want the single market
Hi Richard, another theme was renationalisation. Do you think this promise will encourage the existing owner companies to increase investment?
Companies are rarely valued on the basis of their assets but on future earnings
So they would only get a return if they invested well
There is a certain irony here. PFI was a Conservative invention, but embraced by the innumerate Gordon Brown ( as Chancellor of the Exchequer lol ) wholeheartedly for ten years as though it were manna from heaven, so hooray for John McDonnell in going in the opposite direction.
I agree with that, John, but with the proviso that (innumerate or not) it was not Brown’s innumeracy that persuaded him to employ PFI it was cynical short termist political expediency.
The result is the same.
Surely, Gordon Brown’s employment of PFI was to avoid contravening the EU’s Stability and Growth Pact rules that the deficit should be no more than 3% of GDP? That was the foundation underpinning his ‘prudence’.
To some extent true, no doubt
I wasn’t aware of anybody at the time saying how Brown was to get the money to build/rebuild all those schools and hospitals. Certainly none of his economic advisors, chaired by Balls/Miliband.
I met the shadow Labour team in 1996 and was asked for tax advice, and offered it
In 1997 when I realised PFI was to continue, and I was asked for advice on various aspects of it, my enthusiasm for team Blair rapidly faded
For those who have time there is a very interesting (and long) read from Matthias Matthijs and Mark Blyth about why bad policies (i.e. Stability and Growth Pact (SGP)) persist over time.
https://www.cambridge.org/core/journals/perspectives-on-politics/article/when-is-it-rational-to-learn-the-wrong-lessons-technocratic-authority-social-learning-and-euro-fragility/976C56459E4C7D3EAB536CD3CB1B5AAA/core-reader
About the SGP he writes:
The SGP was criticized, however, at its inception from an unexpected corner. Romano Prodi, then president of the European Commission, put it bluntly in an interview with Le Monde in October 2002: “I know very well that the stability pact is stupid, like all decisions which are rigid. The pact is imperfect. We need a more intelligent tool and more flexibility.” Prodi’s comments followed earlier remarks from then-EU Trade Commissioner, Pascal Lamy, that the Pact was “crude and medieval.”
Worse than that I’m afraid – PFI was actually invented by Mussolini!
I wonder how many PFI projects involved the Treasury lending money to financiers in the first place thus rubbishing the bringing private money into public projects argument.
Clearly I don’t understand the intricacies but the whole PFI deal has always seemed wrong to me.
http://webarchive.nationalarchives.gov.uk/+/http:/www.hm-treasury.gov.uk/d/ppp_tifu_letter_050509.pdf
There is no doubt the government ended up owning many PFI funders e.g. RBS
one of the major problems of the early PFIs is that the banks / markets from whom the company borrowed the money charged ridiculously high interest rates which the company then renegotiated down immediately after signing in recognition that a contract with a government was actually very low risk. Eventually the Treasury cottoned on and clawed some of this fortuitous profit back, but is was an absolute scam.
The other cost that is not factored in is that in order to do a PFI build you had to design and cost an NHS funded option that the PFI one was then compared against. (Occasionally it was shown the PFI deal would be so bad the Treasury would fund) I did this for a community hospital and my team (architect, QS, solicitor) all said we could have built the hospital twice over for the time wasted in all of this.
PFI also often forced the complete rebuilding of a hospital when the original idea was to replace some part of an existing hospital only – PFI does to want to take on any existing building with some degree of unknown maintenance issues etc.
The third aspect that was ridiculous was that due diligence was done on the companies that formed part of the SPV – there was usually separate companies for the design / build, maintenance and provision of cleaning / catering services . However, once signed these log term elements could be sold on to other companies without any input / agreement from you the funder!
Don’t forget Carol that New Labour also got into power because it promised to keep to Tory spending levels in its first two years – can you remember the Public Sector Borrowing Requirement (PSBR)? You can’t just blame PFI on the EU.
New Labour was obviously trying appeal to Tory/swing voters.
I can’t see how to reply directly to Glen Frey, but he seems to be arguing that it’s OK to use PFI to build schools which fall down provided the financier pays for the repair costs. As the grandfather of 2 pupils at Oxgangs Primary School in Edinburgh, I beg to differ. This is the most notorious example of a school built under a PFI contract, where a very large wall fell down and could easily have led to loss of life. Many other public buildings built under PFI in Scotland have now required repairs, and it’s generally accepted that building standards were flouted.
Gordon Brown promoted PFI and was joined in this by the Labour administration in Scotland, who threatened dire consequences if Scottish councils failed to adopt the scheme. On the question of the EU’s Stability and Growth Pact, I note that the UK has been subject to this procedure since 2008, and was (formally) due to correct it’s “excessive deficit” by financial year 2016/17 (LOLZ).
I can smell the stench of Labour hypocrisy from up here in Scotland, especially with Leonard calling for the SG to buy out Labour’s PFI deals. (if only we had our own currency) Next they’ll be saying they’re going to repeal their anti-union legislation.
Chomsky says Sanders is considered left wing because the political compass has moved so far to the right. I think something similar is happening here.
When I was young and impressionable I voted for Harold Wilson. Sorry, but I can’t trust Labour any more.
G Hewitt, yes the political tectonic plates have shifted.
Republican Richard Nixon was all set to roll out Universal Basic Income provisions while he was in the White House (according to Rutger Bregman in his book, ‘Utopia for Realists’) I don’t think most Democrats would support that now let alone Republicans – though it makes sense even in , or especially in, a capitalist market economy.
You refer to voting for Harold Wilson. I would suggest that even Edward Heath, at that time, was further to the political left than many of the Blairite New Labour team.
I’m dismayed by the current Labour Party’s failure to see the SNP as allies rather than foes. Refusal to cooperate in/with the Progressive Alliance at the recent General Election gave the election to the Tories yet again by default.
Sorry Richard. That’s probably well off topic, but it would be a rather different discussion surrounding PFI if John McDonnell was chancellor rather than making conference promises he may never get to renege on.
Over the years I worked on a lot of outsources and some privatisations and along with PFI, they amount to much the same thing. This was in different sectors, from different perspectives (suppliers, customers and consultants) and for all sorts of services. That includes trying to bail out situations that had gone wrong.
Regardless of sector, too much of the time it was about getting assets/capital off the books (to improve return on assets, reduce PSBR), staff off the headcount (not always to organisations who would undermine their pay and conditions) and getting a payment in return that improved short term return. Directors bonuses would increase and by the time the increased cost and degraded service hit the organisation, those directors would be gone. Any problems would be blamed on the supplier.
That said, there are situations where it is genuinely the right thing to do. Where the supplier has a real expertise or technology or economy of scale that does not exist internally, then it is the right thing to do. It’s then a question of knowing how to manage the contract effectively, something organisations in all sectors have been bad at.
As a result, I don’t think we have to worry about undoing thousands of contracts all at once. There are contracts that are conspicuous rip offs, with poor service delivered at excessive cost, perhaps natural monopolies. Start with them and build up the expertise. There will be others that need managing properly. I’m not sure many people are suggesting that the NHS has to make all the products that it needs itself but I suspect that suppliers, notably the drugs industry need tough management. Others may be perfectly fine.
So I am more optimistic that done selectively in a phased manner, building up the skills and capacity, it’s quite possible.
Of course for those whose economic model seems to be something like East Germany in the 70s, and I fear that Corbyn’s team includes some of those, this may not be nearly far enough. For them there is no role for business and the private sector. However, that model was as destructive in its way, economically, socially and environmentally, as the neoliberal form of capitalism that we have to get rid of now.
As for the EU, as has been said before, most of the worst of the privatised monopolies are state owned in European countries already. It’s debatable as to whether they really would object to UK monopolies such as the railways being taken back into state ownership.
Wise words Robin
I believe in the private sector. In the right place
Most PFIs do not meet that criteria. I guess a few might.m
“Off balance sheet”, “creative accounting”, “financial engineering” – ways of trying to fool the people. I agree there is a place for both Private & State, provided there is proper regulation and oversight of both, so that the private doesn’t rip us off (socialising the risk etc) and State isn’t an inefficient leviathan. Mazucatto’s “The Entrepreneurial State” deconstructs many of the simplistic views of State vs Private.
I suspect you are right about PFIs as they were almost entirely about financial engineering. A close friend led the campaign against the Skye Bridge project which was an obvious rip off that was eventually bought out. Bizarrely I also know the banker who led the financiers – quite unapologetic.
For the rest, I’d argue for a more selective, considered approach which is much more likely to be deliverable without massive disruption, both financial and to the services being delivered
I remember being at University in the early 1990’s and reading a PFI prospectus that said ‘companies and investors must be prepared to take a more realistic view of returns on such projects’.
It seems that this has not turned out to be the case. The emphasis on delivery in New Labour may have meant that long term cost was put second to being seen to make progress.
As Robin says, a lot of what we live with lacks balance of some form or other.