A “fraud on the people.”
By Don Quijones, Spain, UK, & Mexico, editor at WOLF STREET.
The UK government has finally called it quits on its much-abhorred Private Finance Initiative (PFI), which for over two decades allowed bankers and financial consultants to gorge on massively inflated interest rates and fees for run-of-the-mill infrastructure projects, while saddling taxpayers with debts they will struggle to repay.
“I have never signed off a PFI contract as chancellor and I can confirm today that I never will,” said UK Chancellor of Exchequer Philip Hammond during his 2018 budget address. “I can announce that the government will abolish the use of PFI and PF2 for future projects.”
The United Kingdom is widely considered to be the birthplace of the modern incarnation of the public-private partnership (PPP), in which private firms are contracted to complete and manage public projects while financial institutions and their investors cream off much of the money for arranging the loan deal. At the behest of City of London-based firms, the model has been exported the world over. Now, two and a half decades later, the UK has become the first country to officially jettison it.
A major factor in the government’s decision was the collapse in January of 200-year old UK infrastructure group Carillion, whose outsized role in delivering public services earned it the moniker “the company that runs Britain.” The firm’s sudden demise exposed the PFI sector as a form of giant ponzi scheme, while also laying bare the abysmal quality of auditing by the sharply conflicted Big Four accountancy firms.
The main party in opposition, Labour, responded to the scandal by pledging in its manifesto that it wouldn’t sign up to any more PFI contracts. The Conservative government just stole that idea, while also rejecting Labour’s much more dangerous proposal to review all existing PFI contracts and bring the worst offenders back in house.
For good measure, Hammond also reiterated his government’s unwavering commitment to public private partnerships (PPPs) as a whole, which hardly comes as a surprise given that his political party is more beholden to the financial services industry, with 50% of Tory funding coming directly from City “donors”.
As the Treasury’s own Interim Response to the National Infrastructure Assessment, published on Monday, attests, the government remains wedded to the notion of private finance funding public projects:
“The private sector has a critical role in delivering our infrastructure and investing to meet future challenges. Almost half of the investment in our £600 billion infrastructure pipeline is projected to come from the private sector.”
Indeed, PFI and its later incarnation, PF2, were already out of favor in Whitehall long before the government announced its decision to scrap them. The number of projects being launched through PFI had already plummeted from a peak of over 60 projects a year a decade ago to no new PF2 contracts at all in the last two years, suggesting that even government ministers had finally realized that they — or at least the electorate they were supposed to represent — were on the wrong side of a ludicrously unfair deal.
The interest rate on PFI deals can be as much as 2 to 3.75 percentage points higher than the cost of government borrowing. On some projects, returns to investors can be more than 25% a year.
Even without entering into any new PFI-type deals, the government has already coughed up £110 billion in fees and interest and will have to pay investors and companies another £199 billion between April 2017 until the 2040s for existing deals, which Hammond has already said will be honored. That works out at a total outlay of around £310 billion for 700 projects worth a measly £60 billion.
Even the chairman of state-owned Royal Bank of Scotland recently denounced PFI as a “fraud on the people” — one which the bank he heads up has hugely benefited from. 65% percent of the British public seem to agree with him and want it banned, while earlier this year a damning parliamentary report into the government’s use of PFIs concluded that it could clearly “get a much better deal” for taxpayers, assuming it wanted one:
“After more than 25 years since the first PFI contracts, the Treasury has not attempted to quantify the benefits of using PFI. This is despite the Treasury telling the previous Committee in 2011 that it would introduce benefits realisation assessment into its value for money guidance, for PFI projects that are underway.”
For the UK Treasury, PFI and PF2 had one obvious benefit: they allowed ministers to harness large sums of private capital to invest in public projects, such as roads, new schools and hospitals, without paying any money up front — and thus keeping the level of current public debt lower than it would otherwise be.
The British government has for decades been using financial chicanery to keep many of its current liabilities off-balance-sheet. In 2011, the Parliamentary Treasury Select Committee urged the Treasury to bring PFI onto the balance sheet, thus “ensuring that PFI is not used to circumvent departmental budget limits.” It was ignored. And just as happened with Enron, by doing so the government could be storing up serious expense and cash-flow problems for the future. By Don Quijones.
In the Italian government debt debacle, the French megabanks are on the hook. Read… Why’s France so Worried about Italy’s Showdown with Brussels?
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Margaret Thatcher first starved British Rail, then John Major privatized it and after a series of disasters, they decided privatization was a bad idea.
Chris Grayling has been trying to privatize it again and his reasoning is as ludicrous as that of his Tory predecessors.
They serve the same shyte sandwich over and over and over.
It was never ‘privatized’ because privatization means it’s run as a business wherein the business meets all the overheads.
What the UK ended up with was the neoliberal nirvana of privatized profits (no money returned to the state) and socialized expenses (the UK taxpayer pays billions per year to fund the maintenance of the rail network; in return it gets sky-high rail fares geared to state-guaranteed over-inflation price rises ad infinitum).
Thus providing the perfect example of the reason we have to suffer austerity whilst stockmarkets soar.
‘Free market’ capitalism, massively subsidized by the much-hated state [but only hated when it comes to paying taxes – perfectly OK when it comes to bolstering the value of my stock portfolio).
Fat Cats always find a way to get their hands on our money.
Hence the need for a good spring mattress for getting a good nights sleep.
These days they want you to buy one of those horrid things made out of foam packing material, which can make it rather difficult to open a traditional account.
It would be great if Britain could get back to innovating and leading the world in something other than financial shenanigans… but then again, maybe it wouldn’t.
I’d like to submit that the fundamental issue isn’t that of public vs. private, but one of market structure. Namely, a competitive market can serve the public interest if carefully regulated, but monopolies rarely if serve the public interest very well. A government monopoly, subject to political pressures, inevitably performs poorly. A private monopoly, inevitably sets prices too high AND extracts hidden rents.
Hmmm, so I wonder what the next rip-off scam is going to be now that they can’t run this one anymore?
This “fraud on the people” is only the latest in a long series going back to 1215, when it was decided the aristocracy had the right to profiteer without interference from the Crown and commoners would shift for themselves as best they can. The real purpose of the Magna Carta has been hopelessly misconstrued.
Members of Parliament were not paid until 1802. Instead, MPs were expected to compensate themselves by selling out their constituents. As you could expect, getting a salary didn’t change the tradition.
The City of London has its own MP, who doesn’t vote, and is only there to remind the government not to mess with the City of London. Brexit is giving the pirates apoplexy, which I think is kind of cute.
To this day the Crown, under British law, technically owns one-sixth of the world. Even titled lords hold their lands in fief, but at least they’re compensated to keep it off the market, unavailable for agriculture or housing, out of taxes paid by Her Loyal Subjects. Your taxes at work, supposedly. Naturally HRH gets a piece of the action.
Observation of Guy Fawkes Day is expected to pass in respectful and dignified remembrance. Brits aren’t French, after all.
My local hospital cost 300 million to build – PFI it will cost 2.1 billion in repayments. Absolute fraud and the government should be looking at all legal means to get out of these current contracts.
It must also to retrieve the difference obtained by fraud and initiate prosecutions. Getting out of these contracts should be just the beginning.
Sounds like the old Monty Python “Dennis Moore” sketch: “He steals from the poor, and gives to the rich!”
Of course, the real reason these public-private partnerships are so popular is that they avoid waste. If the government runs a project, all the taxpayers’ money goes to providing services – and none goes to the more noble purpose of lining politicians’ pockets. In a public-private partnership, taxpayer money can be routed to private industry – who can put it to good use by making donations to politicians’ election coffers, and hiring retired politicians as lobbyists! Some of the money is wasted on actually making taxpayers’ lives better – but much goes to the politicians and their friends.
(/snark, if you didn’t guess)
Agreed: PFI, PF2 and big-4 auditors don’t work.
However, having government do it is not the silver bullet that cleans up the mess. Government projects are just as likely to be over-budget and the financing amounts to more debt added to already over-the-top national debt.
Once it becomes a “government project” there’s very little accountability.
“The UK government has finally called it quits”
” which for 2 decades allowed banks & financial consultants to gorge … Bla, bla, bla,”
Am I stupid
You see I would expect that the government played some role in “HOW & HOW MUCH” the deal was going to cost & make sure that strict guidelines were in place, so as to not allow the weak to cave in to corruption.
Therefore I must assume that the UK government were a party to the gouging for their personal gains.
Dear God – we are talking about 20 years – was everyone deaf, dumb & blind for the duration ??
The finger is pointed away from themselves & they all cry out loud,
“Look what they have done”
” Look, they did it to us”
“We are the long suffering victims – only”
Another example how conservative governments are fiscally irresponsible not responsible we need labor back to fix the mess of these idiots can go in there and ruin it again and I know wolf you support the right wing it take a look even Harper in Canada he left a massive debt after Credit Unit balance the budget and we call him a smart operator an absolute moron and we have another one in the white house right now cutting off taxes for the rich while everybody else suffers Obama was the greatest president they ever had too bad he never had the house and the Senate
The “partnership of government and business” is a new term for an old, old condition. We often fail to realize that the point of much of Big Government is precisely to set up such “partnerships,” for the benefit of both government and business, or rather, of certain business firms and groups that happen to be in political favor.
Kings in that early modern period, as in the case of all governments in any and all times, were chronically short of money, and the sale of monopoly privilege was a favorite form of raising funds.
A common form of sale of privilege, especially hated by the public, was “tax farming.” Here, the king would, in effect, “privatize” the collection of taxes by selling, “farming out,” the right to collect taxes in the kingdom for a given number of years.
Think about it: how would we like it if, for example, the federal government abandoned the IRS, and sold, or farmed out, the right to collect income taxes for a certain number of years to, say, IBM or General Dynamics? Do we want taxes to be collected with the clan and efficiency of private enterprise? Considering that IBM or General Dynamics would have paid handsomely in advance for the privilege, these firms would have the economic incentive to be ruthless in collecting taxes. Can you imagine how much we would hate these corporations? We then have an idea of how much the general public hated the tax farmers, who did not even enjoy. the mystique of sovereignty or kingship in the minds of the masses.
@DQ I am confused. The UK government is walking away from PFIs but remains “committed to PPP as a whole”. How? In what form if not PFIs?
Meanwhile in Australia, our lovely government has decided that all motorways and hospitals will be delivered by PPP’s.
It will be different here.