The Insider in the Belfast Telegraph notes Sinn Fein’s uncomfortable position inside a government that is likely to have to lean on the use of Private Finance Initiatives and Public Private Partnerships. Ideologically, the party is pledged to bring them to an end. Yet PFIs in particular have been brewing up a storm since the House of Commons Public Accounts Committee issued a report in 2003, arguing that they provide “greater certainty on the timing and on the cost to departments”, but:
The NAO census identified that one in five public authorities had already asked for additions or changes to facilities within a few years of letting a PFI contract. Yet in less than half of these cases had the authority attempted to benchmark the resulting price change. A PFI consortium is in a strong position once a contract has been let because it is the contractual supplier for 30 years or more.
A National Audit Office report noted earlier this year that this ‘mis-management’ of value had not noticeably improved:
In fairness to officials, negotiating a decades-long contract with a private company is bound to be a tricky exercise requiring plenty of expensive legal gymnastics. Practice can help. The education department plans to use PFIs to rebuild hundreds of schools across the country, and the contracts have been complicated. Despite that, so many have been signed that the typical school PFI is now negotiated within 25 months, nine months faster than average. But this is the exception rather than the rule: the NAO worries that lessons learned on one deal are not generally applied to others.
In short, PFI has the potential to a powerful instrument for infrastructure renewal, but in circumstances where the value for money returns are hard to gauge, not least because of the much higher cost of private borrowing.
Last year, Labour MP Kelvin Hopkins argued that the public sector could afford to push up its own borrowing:
The latest available international comparisons from the OECD show that Britain has kept government borrowing (at 44% of GDP) well below those of the successful Scandinavian economies (Denmark 53%, Sweden 63%), and even further below those of the major eurozone countries (Germany 68%, France 75%). US borrowing (64%) is also well above Britain’s, and Japan’s (156%) is off the scale. In some of these countries there have been economic difficulties, but none has experienced anything like economic disaster.
Take the example of one very successful country, Sweden. Its gross borrowing in 2004 was 18% of GDP higher than that of Britain, a year during which Swedish real GDP growth was 3.7% compared with 3.2% in Britain. There is no reason why our government could not have borrowed more for public investment instead of straining to keep investment in the private sector.
From which he concludes:
The illogic of private investment being given incentives to replace public investment is compounded by the fact that the cost of government borrowing is much cheaper than servicing private capital investment. The money markets are generally enthusiastic about lending to government because such lending is secure, which is why the interest charged is low. By contrast, private-sector investment always requires a risk premium and profit-taking. If the government is paying the bill, the private sector will seek to pocket as much public money as possible. This has been nowhere more true than in the railway industry, where privatisation has been a financial disaster. Private estimates suggest that the recent cost of track renewals is between four and five times what it was under public ownership.
The Treasury has bragged about its supposed success in keeping down government debt by using private investment to plug the public-investment gap. This is analogous to a householder reducing his or her mortgage by paying off a chunk of low-interest borrowing from a building society with cash borrowed at a much higher rate of interest from a usurious moneylender.
As long as income is sufficient to pay the required return on money borrowed there is no problem. If one can raise such borrowing at a lower rate of interest then that is surely the sensible thing to do. The government has actually done the opposite by restraining public investment at low rates of interest and substituting private investment requiring higher returns. What is bizarre is that the Treasury – which has railroaded this policy through government – has recently been balking at paying the bills for some of the bloated PFI schemes it has itself promoted.
Mick is founding editor of Slugger. He has written papers on the impacts of the Internet on politics and the wider media and is a regular guest and speaking events across Ireland, the UK and Europe. Twitter: @MickFealty
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