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.
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