As the Guardian reports this morning:
Labour should take responsibility for resolving “the mess” left behind by private finance initiative (PFI) deals used to fund the building of hospitals under Tony Blair and Gordon Brown, Jeremy Corbyn has said.
In an article for the Guardian, the Labour leadership frontrunner said the NHS is now paying the price for New Labour having been “cowed by the press, and duped by the money men” when it used private finance for building health projects.
I suspect there is not a person in government anywhere who would not agree with that. As I have already said on this blog, People's Quantitative Easing could consign PFI to history. I have been saying so for some time.
[People's Quantitative Easing'] the equivalent of the much-hated public finance initiative. That might dismay you until I remind you of the similarities and differences.
Like PFI People's Quantitative Easing funds essential public investment. Like PFI it does so without increasing the deficit. Like PFI it does so without increasing government debt.
And then there's the key difference. It's at least ten times cheaper than PFI. And it's wholly under state control. And not a single banker gets richer as a result of it.
Some people have said People's Quantitative Easing is just a trick. Maybe it is. But it's a vastly better trick than the PFI one that's been used by Conservative and Labour governments for the last twenty years. What I've done is improve the trick. Now it works. Now it's affordable. And this time there is no rich banker in the middle of. No wonder the FT and all who read it do not like it. This isn't named People's Quantitative Easing for nothing. You are the winners.
That's why I support the idea that Jeremy Corbyn has put forward. It does rather look like another idea borrowed from this blog.
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A great move.
And it will be popular.
Good luck tonight Richard. I think it should be a friendly constructive evening.
And so too is the demise of the ‘household’ metaphor long overdue.
The state – an entity with infinite capacity – could be in deficit every year for a 1,000 years and its financial stance wouldn’t change by one brown penny.
Governments are not households
Well done on helping Corbyn change the debate Richard.
PS Good luck with tonight’s ‘Re-framing’ debate with Ann and Bill (am looking forward to video)
Thanks
It might probably make some sense to provide an indication of how the uses of PQE could be prioritised. There is a risk that giving the impression it can be sprayed at every investment shortfall or failure of the private sector will provide unnecessary ammunition to those who wish to do it down.
On another front, and I know one swallow doesn’t make a summer, this:
http://www.thisismoney.co.uk/money/news/article-3211449/What-Corbynomics-Labour-frontrunner-s-economic-plan-explained.html
from the Daily Mail’s stable of all places presents a remarkably balanced assessment – despite the inevitable and lazy use of a few feeble and irrelevant ‘rent-a-quotes’.
The Daily Mail’s readers aren’t all dyed-in-the-wool, well-heeled Tories – despite the constant stream of anti-Labour bile to which they’re subjected. Most of these readers are consumers and users of the services provided by the modern manifestations of the institutions established originally and collectively by Labour – and quite a few are not best pleased at the outcomes of this mix of outsourcing, privatisation, faux competition and ineffective regulation. The DM has a powerful commercial incentive to understand the hopes, fears and prejudices of its readers. It may that many of them are not as averse to what Jeremy Corbyn is proposing as the right – and New Labour types – would like them to be – and are well aware of how they’re being ripped off by the capitalist fat cats.
Amazing that the Mail managed a fair assessment
Dacre’s clearly losing his touch… his masters won’t be pleased.
Take it as evidence that what Jeremy is proposing in terms of increasing prosperity and reducing inequality is striking a chord in quarters where, without some reflection, one might not think it would.
Hi Richard – are you suggesting that QE is “10 times” cheaper than PFI. On what basis are you making that judgement? Certainly using current Govt borrowing to refinance PFI would provide large savings – but not 10 times
On NHS finance – I have worked with the NHS and the key to stability would be to abolish/reform the internal market and go back to some sort of area funding which would allow finances to be run in districts – rather than having so many wasteful finance functions at each trust and by making PFI a “NHS Corporate cost”
Individual PFI’s distort what is hardly a “market” in the first place. And having all the internal charging regimes is a wasteful way of distributing a limited resource. It should be a service – run on the best commercial terms – but not at the expense of sense.
There is probably a thought to have about running the NHS by a company – with the govt as the major shareholder – like German railways? Only just thought of that!
On QE – I think a simpler explanation is needed to sell the idea wider than core Labour supported BTW
What rate are you suggesting is implicit in PFI?
PQE rate is 0.5%
I bet the difference is at least tenfold in most cases
I’m saying that the Govt can borrow at a rate the market sets and this is below 2% at present – but its certainly not the base rate of 0.5%
The last PFI deal I looked at had a rate of 6%
Using those – over 25 years – a debt of £1m would cost £1.96m to repay at 6% and £1.28m to repay at 2% and £1.07m at the 0.5% for comparison. So no, not 10 times
6% is more than ten times 0.5%
Which was my point
The cost is the interest, not the capital
How does the 0.5% cost of PQE compare to the expected return on the People’s Pension Fund you were discussing the other day?
I thought that the People’s Pension was an extension of PQE (or vice versa) so I’m not clear how the pension fund would achieve a higher return.
The return comes from the user so gilt plus rate is fair
Sorry, but I am genuinely confused by your responses.
On the one hand, you say that PQE is 10x cheaper than PFI.
On the other, that PPF can deliver adequate returns to savers.
I still don’t think you have answered why PPF should be used. Savers already have access to funds investing in gilts, so “security” is available if they want it.
I’m genuinely trying to understand this. My problem may be trying to link together various different blog articles. I’m sure that if we had face-to-face time we could talk it through, but I know that you are in demand and that is unlikely to happen.
The reason I am so keen to be clear on this is that my job is looking at infrastructure investments for annuity funds. As an actuary, I need to be clear on where expected returns are coming from and their certainty (or otherwise). To me, the relationship between PQE, PPF and the various costs and returns just isn’t consistent.
And I am interested in new ideas, but I need them explained properly first. If you were to pitch your ideas to me I would be looking for far more detail and explanation. Again, perhaps the blog format isn’t suiting me and I need to go through your previous posts in more detail.
I’d be grateful for any response you can provide.
PQE is cheap
Cheaper than PFI, by a long way
BUT if the government decided it wanted to provide a secure long term savings mechanism it may decide paying about gilt rate was worthwhile
This would not necessarily burden the projects with cost: the PPF return would be equivalent to an NS&I cost
The projects would pay the lower price
I am mixing objectives here
I am sorry: in blogging I sometimes do try out ideas that I have raced through and I admit the details sometimes get lost
I think that a price worth paying
I also frequently dual task – as I am expecting this idea to do
Thanks. I can appreciate the difficulty of writing speculative pieces at the same time and through the same channel as presenting proposals which are finalised (such as your work with Mr Corbyn).
I skimmed your original paper on PP. It’s an interesting concept, and while I appreciate that the world has changed since 2003 and the idea has probably been refined since then, I did have a few questions off the top of my head which I don’t think the paper fully answered:
Firstly, would there be a secondary market in these funds?
Secondly, infrastructure projects by their very nature are front-loaded and require large amounts upfront. This would suggest that these funds would be best suited to lump-sum investment and regular premium pension saving may be more difficult to accommodate. It may be necessary to have a subscription period for investment in the fund, after which it closes. Such funds aren’t always appropriate for pensions saving.
(PS: apologies if the threading for this comment has gone awry – there isn’t a “reply” button on all comments so I’m not sure exactly where this one will appear!)
I have presented not a single proposal for Jeremy Corbyn
He has sued some ideas of mine
He has never said they are final
Please get facts right
a) there could be a secondary market. I suspect it would be small, but most bonds of this type have small secondary markets
b) that is why I link PQE and PPF – I presumed that was obvious
Apologies on my misunderstanding over your relationship with Mr Corbyn. I have seen you described as his “economics gnu” so I thought you had some formal relationship.
On (a) – if there is no secondary market, then how will people realise their investment if they decide that they want an alternative investment strategy for their pension? I am fully aware of the limited market for existing bonds. As stated above, this is my job.
(b) – no, not at all obvious I’m afraid. If PQE is for the upfront infrastructure then what is the PP fund for? This really isn’t clear to me and I’m still unsure why it would be considered suitable for pension savings.
I said there will be a secondary market!!
The PQE pump primes
The PPF provides the continuing funds
Are you sure you’re in the right job?
Yes, I can assure you I am in the right job. You are an accountant and I am an actuary. We have different specialisms and may be asking questions from a different perspective. The questions I am asking are entirely reasonable. If someone has not articulated their proposal clearly then I believe it entirely justifiable to ask for further details, especially if you are seeking to implement this at a national level.
You said “there could be a secondary market”, and I am emphasising the word “could”. This wasn’t stated in your original paper and I would suggest that your answer above suggests that it hasn’t been given much thought. . It still doesn’t make clear how an individual could transfer their investment to an alternative fund.
Secondly, I still find your response on the supposed suitability of PPF as a suitable retirement savings choice unconvincing.
Now you explain your professional skills all is obvious…
Sorry, but if there’s a profession that has got most things wrong on pensions then yours is it
Followed, I admit, by much of mine
But at least I say so
I don’t believe the personal insult is necessary. I am no more responsible for perceived failings of the actuarial profession than you are for those of accountants. “Sins of the father” and all that.
If you do not wish to answer my questions then that is your prerogative. However you cannot expect your proposals not to be challenged.
Your paper assumes it could attract 50% of the UK savings market. Bold ambitions. I think it fair that such bold ambitions are subject to scrutiny.
You have scrutinised it
I have answered
In fact, reading further, I suspect you are making this up as you go along.
Two days ago you said that People’s Pension Funds would be used to build infrastructure. Now you have changed your tune and say that it will meet ongoing funding. Which is it?
Ongoing means after the ball has started rolling – and it was you who asked for the explanation in those terms
Sorry – you have now just proved you are a time wasting pedant
Please don’t try again
I am with you every inch of the way on the internal market. It was only ever introduced as an ideological sop by Ken Clarke, and has been massively wasteful ever since (and quite rightly NHS Scotland and Wales don’t use it). There was a study (suppressed, natuarally) published about 5 years ago that suggested that the cost of the internal market was up to 14% of the entire NHS budget. Can anyone honestly say that the supposedly discipline of quasi competition has been such as to generate efficiency savings of more than 14%? Not on your nelly.
Sorry, I’m a bit confused by this answer.
If PQE is cheaper than PFI, and Peoples Pension Fund is more expensive than PQE then why not use PQE for everything?
Under MMT you would never issue debt, as Bill Mitchell said tonight
I do not agree: debt can have a social purpose in its own right which is worth paying for
The PPF is such a function: people need to save securely
Is the proposal to buy out existing PFI with PQE as well as replace any upcoming projects? Because am I not right in thinking there are no break clauses so it would be problematic if the PFI providers chose not to sell up?
I am not the author of Jeremy’s plan to buy out contracts
What I do know is that in some contracts (not all) this is possible on occassion
All contracts have break clauses
You don’t buy them up, you tear them up. Don,t forget investments can go down as well as up. No need to make the same mistake as at the end of the slave trade, pay off the slave owners and ignore the damage done to the slaves.
That old chestnut. Neil Wilson commented in The Guardian…
“Contracts exist within the law, and the law is set by parliament. If parliament asserts that the asset is nationalised, then it is nationalised and that is the end of the matter.
How much PFI contractors get in compensation depends entirely upon the mood of the population.
If we decide democratically that they get nothing, then they’d better call in the administrators.
Parliament is above the law – because it is the law. Never forget that.”
It is of course correct to say that Government can nationalise and break contracts with zero compensation. However, this behaviour will be problematic if the country ever seeks private investment in the future. A point Neil Wilson ignores completely (at least in the quote you have given).
I do not suggest no compensation
Euqally, compensation has to take all facts in to account
I think that ignores reality.
Many problems will be caused, some in EU law and some in world competition laws.
You should look at the litigation between Sweden and Germany over their “tearing up” of the nuclear power station contracts.
And then there is the TTIP, and other, agreements being drawn-up between the EU and the USA, in which investor/state litigation, where the investor is the court [effectively] will likely cost billions, and more. Which, if passed without modification, would make the NHS as it is problematic with respect to US health corporations and insurance companies (who could well sue because the gov providing the health payments means their busines suffers)
Also, in the UK, while parliament may make law, it is often courts that interpret it, and not always in a way that parliament likes: http://www.leeds.ac.uk/law/hamlyn/sls.htm
The challenge of TTIP will be staggering
And may require something little short of revolutionary to resolve if it is signed
One timely note of caution on that last point. IF this proposed TTIP trade deal gets passed and that hideous Investor/State Dispute Settlement (ISDS)clause is included – and some foreign corporation is among the NHS or infrastructure contractors, then that company can go off to a corrupt little tribunal and sue your government for passing a law that affects their investment. They usually sue for billions.
That said, here’s the good news:
http://www.independent.co.uk/news/uk/politics/ttip-activists-triumph-as-contentious-us-free-trade-deal-clause-suspended-9976090.html
The last 2 paragraphs are particularly noteworthy, in this context, especially the bit about”expropriation”.
Remarkable,
John M was writing on the exact same topic as I was at the exact same time – except that I got distracted by a small household emergency while I was writing and came back to my comment about half an hour later.
In any case it does appear that The Independent has the scoop on that one:
http://www.independent.co.uk/news/uk/politics/ttip-activists-triumph-as-contentious-us-free-trade-deal-clause-suspended-9976090.html
I love it.
Beware legal ‘experts’ trying to convince us that our hands are tied.
I would wager that the legal profession dominates all other professions in politics.
It is ingrained into lawyer’s brains – and perhaps accountant’s too 😉 – that legal contracts are inviolable. Subsequently that professional view colours many politician’s understating of the degree of action open to government.
However this ‘inside the system’ thinking neglects to account for the fact that the ultimate authority of the land is parliament, NOT the courts nor written contracts. Therefore if it is parliament’s will that that a set of written contracts e.g. PFI shall be null and void, then indeed they shall be. That’s what it means to have the sovereign power to set the law. And quite right too.
Richard himself recently raised a similar case of the BoE’s so-called ‘independence’ not lasting five minutes if it disobeyed the will of parliament.
PS Jim @August 28 2015 at 9:25 am
If foreign investors chose to ignore a market of 60 million people in one of the wealthiest countries in the world that’s their problem, not the UK’s.
For the avoidance of doubt…
https://en.wikipedia.org/wiki/Parliamentary_sovereignty
So the proposed ‘Budget Surplus Law’ won’t be worth the paper it’s written on..
If an act of law ever had “to be repealed” written all over it, this is it.
An accounting impossibility.
PFI has been a disaster and unless something is done will go on inflicting damage in critical areas of public services.
Many hospitals in England are deeply in debt because of PFI as I am sure you know. Northumbria healthcare trust borrowed money from their local council to buy out its PFI contract at Hexham General, don’t know details. NHAParty advocates re negotiation of these contracts money that should go to frontline services and not to management consultants in the internal market. Oh don’t get me started, my wonderful NHS.
State Governments in Australia have inadvertently discovered in interesting way to get rid of PFI (they call it PPP – ‘Public/Private Partnerships’). To begin with it they never used it for hospitals (electorally unacceptable) but they did use it for toll roads (freeways, tunnels etc). The pay-off for the private owners depended on the tolls, and to attract investors these compaines commissioned fraudulent traffic flow estimates that never came true. The shareholders got fleeced, the motorists hated the tolls and the private funding model has become politically unattractive (to say the least).
Certain governments did, nonetheless, find a sliver lining when the private owners became financially distressed. They bought some of the assets back at a minimal price. The private firms were in no position to bargain.
That’s a highly simplified version of the real story but there are lessons in it. If for example, one was looking to renationalise certain utilities (in say 5 years time) they might also notice that there is a slowly emerging off-the-grid revolution occurring around the world. Businesses and households are becoming more self-sufficient as renewable technologies improve (solar, wind, water capture & filtration). If – no, when, a viable and affordable battery is introduced that can efficiently store renewable power it will represent a point of no return for some private utilities.
For a natural monopoly every new customer (or increase in usage)represents a decline in per-unit costs (fixed and average). When self-sufficiency signals a significant and ongoing decrease in usage its pretty much game over. Government policies that support self-sufficiency are also quite popular, All of this ties in neatly with Green investment of course.
My main point however, is to say that, important as they are, resource efficiency and fairness are not the only considerations. A state that is keenly aware of the flaws and vulnerabilities of the monopoly capitalist is one that will be well placed to provide the best possible return for the people.
Isn’t it?
Maybe the Tesla Powerwall (due out 2016) will be such a battery….
The Powerwall looks really promising. Its sold-out and is apparently cost-effective in quite a number of locations where power is relatively expensive. It seems that Daimler/Mercedes Benz are going to market a similar one in competition with Tesla’s. Its due out at the end of this year. These things are sure to get better and cheaper from here on in. The power utilities’ best years are probably now behind them.
Battery technology is key to the future
“debt can have a social purpose in its own right which is worth paying for
The PPF is such a function: people need to save securely”
And if, as you maintain, PQE is not permanent, then you have something for when PQE stops. Mr Peston could really be herding his white elephants without this provision..