The Trusty Servant

For those who have been asleep or outside the UK, PFI = Private Finance Initiative, PPP = Public Private Partnership.

In the UK the two terms mean essentially the same thing. I am not sure about usage outside the UK. I suspect that PPP is the more generic and earlier term, PFI is a specific technique which first came to prominence in the UK.

Essentially, PFI is the governmental equivalent of the off-balance sheet accounting scams which have flourished in the private sector. It is the moral equivalent of grand larceny. Of course, since governments make the laws it is not actually illegal. Also, it is not directly played for financial gain – politicians are usually more interested in power than money, although of course a successful political career can usually be parlayed into money later.

The story has a few twists. The arch-villain is Gordon Brown. However, the technique was first used by the Tory government. It is said to have been invented by “two brains” Willetts. He has somewhat disappeared from view since he made a controversial speech on grammar schools early last year, although still in the shadow cabinet. But back in the late 1980s he was an ambitious young Tory, looking for a seat. He seems to have come up with the PFI idea whilst at the Centre for Policy Studies, and it was mentioned in a 1993 pamphlet he wrote for the Social Market Foundation.

However, it did not find much favour with the Chancellor, Norman Lamont or his successor Kenneth Clarke. Nonetheless after Black Wednesday – 18 September 1992, when the UK was forced to pull out of the ERM, the precursor to the euro, the government finances were in desperate straights, and a few PFI deals were done, totalling about £2 billion, before the Tories lost the 1997 election.

It was condemned by the Labour shadow cabinet. Part of the criticism was misconceived. For example on 12 March 1996 Harriet Harmon complained in the Commons:

Again, no contract has been signed and the people of Bishop Auckland are still waiting for their hospital. The Tories’ new hospital building programme is a cruel hoax–nothing more than the launching and relaunching of six flagship hospital projects, none of them built. The flow of announcements increases, but the building of new hospitals fails to materialise. The hopes of local people are raised, then dashed.

Where does that leave the Secretary of State? In the PFI process, the right hon. Gentleman has shown himself incompetent. He makes promises, trumpets them on the front pages of newspapers, and then discovers that he cannot deliver because the bankers will not sign the cheques. The whole thing is a shambles.

This is a complaint that PFI is not working – the hospitals are being built too slowly. Others, like Alistair Darling were more perceptive. Speaking a few months before the election he commented:

… this lack of control will become a very real problem within the next two or three years if in fact PFI takes off. Apparent savings now could be countered by the formidable commitment on revenue expenditure in years to come

It is now generally recognized that Gordon Brown engineered the biggest growth in “stealth taxation” in the UK’s history. Instead of funding public expenditure in conventional ways – the usual taxes and government borrowing – he introduced a raft of novel taxes, fees for each passenger’s aircraft journey, licence application fees for mobile phone operators, diversion of lottery revenues etc. But it has not been so generally recognized that he also engineered a massive increase in PFI funding, which might be better described as stealth borrowing.

The basic idea is instead of building a hospital (£100 million), you enter into a contract with a private sector company. It builds and operates the hospital in return for an agreement by the NHS to pay for the services over the next 25 years. This is really just concealed borrowing. But it is also extremely expensive borrowing and a much worse deal for the taxpayer. This was concealed by an elaborate operation initially masterminded by the egregious Geoffrey Robinson. The Treasury PFI Taskforce was set up after a hasty review by a City type carefully selected by Robinson.

Bevies of lawyers, bankers and consultants produced mind-numbingly boring and complicated procedures all designed with a single purpose in mind: to conceal from the public that there was to be massive stealth borrowing in order to overpay for a public works programme which would not have been practical if funded on a conventional basis.

It was inspired, in the same way as Microsoft’s decision to sell software that was both overpriced and shoddy. For armies of consultants, lawyers, accounts and hangers-on were required by everyone involved in the process. The resulting fees were huge (rapidly getting into the billions). The inspired feature was that all these “experts” then had a huge incentive to praise the scheme at every opportunity – just as all the “certified professionals” (certified by Microsoft) who are needed to make Microsoft software actually work, have a huge incentive to praise Microsoft. Indeed, the larger consulting firms would regularly write reports for the government saying how well PFI was working.