18 Apr 2011

The economic argument for PFI has never been worse

The economic argument for PFI has never been worse. The Government can borrow money at under 4 per cent, and private companies can borrow money at 8 or 9 per cent. So why on earth would the government use a method to fund capital investment that has a base annual cost of double that of conventional procurement?

I have been following Private Finance Initiative for a decade. As the Observer’s Economics Correspondent I did a series exposing the daft economics behind it. I often used quotes from a Lib Dem MP called Vince Cable. So I was quite impressed by the Coalition’s savage rhetoric against Gordon Brown’s use of this accounting wheeze to garland the nation with shiny new hospitals and schools that no one had paid for: at vast cost to future generations.

It is rooted in Enron-esque off-balance sheet accounting. It then progressed towards being a method of “risk transfer” from the public sector to the private sector. Except Labour was paying incredible sums for what often turned out to be non-existent transfers of risk.

Not all PFIs were disastrous. But you’d expect them to be incredible – given the private sector genius involved – when set against the long term cost to taxpayers.

So against this backdrop, I did not expect to find (from research for Channel 4 News by Edinburgh University’s Dr Mark Hellowell) that the number of PFI projects reaching financial completion in 2011 has risen. At 40, it is above any year of Gordon Brown’s premiership. The capital value of those projects is nearly £3.7bn, over a billion up on last year. This is the first year-on-year rise in the capital value of financially-completed PFI projects for half a decade. Again, all at a time when the basic economics have never been flakier.

Perhaps the private sector is becoming that much more efficient. Perhaps they are letting their margins be squeezed (anyone noticed a profits warning?). Right now it looks like a whole load of projects being waved through on precisely the same rationale for which the last Government was attacked.

Now, to be fair to the Government, they will argue that they have cancelled a number of projects. They have a PFI hit squad looking at squeezing better value for money, and that they cancelled about £4bn worth of projects. But there can be no doubt that the final green light for these projects has been given by this government. In fact, 61 projects have been signed off by the Osborne Treasury. Of course almost all of these would have been initiated under Labour.

However, is it really the case that “PFI is the only game in town” as everyone connected to the Royal Liverpool Hospital believes? Liverpool was given the go-ahead. Hartlepool hospital was stopped. It is now reapplying to be a PFI. It certainly seems like PFI is the only game in town in Hartlepool. The question, given the change in borrowing costs, is “why?”.