Monday, 2 March 2009

Darling gearing up for the great PFI bailout

The Daily Mail reports that Darling is about to set up a quasi-bank to finance cash strapped private finance initiative (PFI) projects.

Although the details of each PFI are often complicated, the basic idea is simple enough. The government encouraged private sector firms to build schools, hospitals and roads. In return, the government agreed to pay an regular user fee, which allowed the private sector firm to recoup the construction costs.

These payments are scheduled to continue for decades. This has allowed New Labour to accumulate new infrastructure without any immediate increase in the public sector debt stock. In other words, PFI generated liabilities without formally creating any debt.

Recently, the scam has run into trouble. The credit crunch created financing difficulties, with many uncompleted developments running out of cash. This has forced Darling to use public money directly to prevent projects from collapsing.

Apart from being devious, PFI is fiscally dangerous. Since the government is contractually obliged to pay for the services offered by PFI schemes, it makes it extremely difficult for the government to cut expenditures in the future. Thus, PFI guarantees huge future increases in taxes.

PFI is pure New Labour - "give it to me now, and I'll pay for it later". As a consequence, Brown and his mates are now accumulating future liabilities at such a rapid rate that the long term financial viability of the UK government is now in doubt.


Anonymous said...

Ah, but will Harriet Harbinger say that these debts will not be found payable at the court of public opinion?

Mark Wadsworth said...

Tee hee, as I've said before, Labour overpaid on these PFI projects to get them off the government's books, and now it's giving them interest subsidies as well.

Anonymous said...

Your concept of PFI is clearly at odds with the fundamental underlying raison d'ĂȘtre. You state that the U.K government will have a long term liability to service the debt. In any event if the project is legitimate then the debt must be serviced regardless of who underwrites the loan. If the U.K government was in danger of bending under the liability then they would be quite capable of delaying debt service regardless of the provider. The State of California is currently defaulting on similar agreements due to their deficit. PFI has a strong future particularly in developing countries.

Electro-Kevin said...



Anonymous said...

I'm actually undecided about PFI.

I used to be sure that it was unethical manoeuvring to avoid putting debt on the balance sheet... now I'm not so sure.

If a massive bust was expected - and the government has the guts to nationalise near-complete projects... then it is conceivable that the public gets much-needed infrastructure at a minimal price. Of course, this assumes that the government was both forward thinking and public spirited... both of which are a stretch of the imagination.

Anonymous said...


PFI blurs the distinction between what is a public investment and a private one.

If the government built a hospital by issuing a bond, we would know the value of the liability since it would be in the public debt numbers.

On the other hand, with PFI, all we have is a stream of payments, which looks like a bond but doesn't appear in the stock of public debt. To put it mildly, PFI lacks transparency.

Whether the government can honour its stream of PFI payments depends on its overall stock of liabilities.

In isolation, PFI may not cause any problems. However, this government is stacking up frightening stock of future liabilities; including pension liabilites (particularly within the public sector); banking sector clean up costs, and new debt arising from huge future fiscal deficits.

You say, "If the U.K government was in danger of bending under the liability then they would be quite capable of delaying debt service regardless of the provider." Yes, I agree, and if I were a PFI provider, I would take your comment very seriously indeed.

BTW, thank you for a very thoughtful comment. It was very much appreciated.


Anonymous said...

I always found that the most important part of "Why PFI is bad" is that it costs more, much more, to build e.g. a hospital by PFI than the more "traditional" issuing government bonds to pay for it. This is principally for 2, perahaps 3 reasons:
1) There must be a large profit incentive for the private company to be interested, and these projects inherently bleed cash in awarding these profits, straight from the taxpayer.
2) The company limits itself to fullfilling it's terms in the minimal possible way, and often not at all, as it is not in the end interested in getting customers in but in keeping its government subsidy. This creates large problems in the future if certain obligations aren't spelled out (look at the collapse of Metronet and the effect on the tube if you don't believe me!)
(3?) The only supposed advantage of PFI is that companies "compete" for the contracts and thus drive costs down. In reality these contracts are almost never competetively awarded, and go to one of the few huge "specialists" in the area that are seen as capable (but aren't, look at NHS IT projects at the moment).

(4?? --apparently the government might need to throw more cash than even the above 3 reasons imply if it all goes tits up, like this article points out here)

Mark Wadsworth said...

What Anon says. It is bound to end up costing more.

As to funding such projects - if we scrapped as many taxes as possible and replaced it with Land Value Tax, then this would be a useful hurdle rate - if the extra LVT is more than the cost of the project, it's worth doing, else not.