Perhaps I should spell out in more detail than I did yesterday why PFI amounts to stealth borrowing.
Let us consider the simplest example of a loan. The borrower borrows X for a fixed period, such as ten years. Each year he pays interest. If it was 5%, then that would be X/20, possibly in quarterly instalments of X/80. At the end of the period the “principal” of X is repaid. There are many variants. For example, in the case of a simple repayment mortgage, the principal is repaid over the period of the loan, so that the borrower gets X at the start and makes equal annual repayments, maybe X/7, for 10 years. Each payment can be regarded as a mixture of principal repayment and interest.
The essential point, however, is that the principal X must be repaid on a fixed schedule with additional payments (the interest) to compensate for the period the principal is outstanding.
Now suppose the government wants a new building for its own use. It is estimated to cost £50 million. One possibility is to borrow the money, construct the building and occupy it. Government might be able to borrow money at 5%. So a standard calculation shows that it would pay just over £3.5 million a year for 25 years.
Another alternative is to get a private-sector developer to put up a suitable building on the basis that it will sign a lease for 25 years. The developer can apparently borrow money at 10%. So to service a £50 million mortgage, he would have to pay just over £5.5 million a year. He explains that he needs rental payments of £5.5 million a year. Not being totally naive, the civil servants notice that he will own the building free and clear after 25 years. The developer retorts that is only worth £4.6 million after discounting at 10%. After some haggling, they agree that calculation should be done on the basis of a £45 million mortgage, but with the possibility of upward-only rent reviews every 5 years. So the government ends up paying just under £5 million a year, probably rising later. Moreover, at the end of 25 years it no longer has the use of the building (unless it continues paying rent).
But the deal still has the essential characteristics of a loan: the cost of the building must be repaid on a fixed schedule with additional payments to compensate for the fact that the building was available at the start whereas its cost was repaid over an extended period.
The resulting deal has the following characteristics.
(1) it is essentially the same as borrowing;
(2) however, it is particularly disadvantageous borrowing;
(3) the documentation is certain to be complicated, and most of the fine print will make the deal even worse for the government;
(4) it does not count as borrowing.
In other words it is an absolutely lousy deal, with a huge political advantage. It is based on the cynical assumption that the electorate, the Opposition, and the journalists are too dumb, too lazy or too swayed by fashion:
(A) to spot what is going on;
(B) to extract from the government the detail to show it is a lousy deal;
(C) to explain it clearly, convincingly and loudly.
A PFI deal is similar but the details are more complicated. The building might be a hospital. The private-sector might not just pay for and put up the building, but also operate and maintain it. Because the whole thing is complicated, legions of highly-paid private sector professionals get involved to “advise” the government.
But the whole thing is essentially dishonest (morally), because everyone involved has a hidden agenda – to ensure that the deal looks so profitable to the private-sector “risk-takers” that they will be eager to do it, whilst obscuring the details in so much complexity that it can be presented to the electorate as a good deal, and so that even fairly cynical financial journalists will not easily be able to nail it as a bad deal.
The key to this, as to much else in politics over the last 11 years, has been the absolute incompetence of the official Opposition. It is not so much the initial mistakes – tangling with PFI themselves, thoughtlessly wrapping themselves in the flag at the time of the initial invasion of Iraq – dumb though they undoubtedly were, but the demoralized failure to change tack and attack the government later.
Part of it is the modern nonsense about consensus. The function of an Opposition is to oppose, not to have love-ins with the government agreeing about policy. If it fails in this constitutional duty, then government behaviour will just get worse and worse. It is deeply depressing that the only effective opposition for most of the last 11 years has come from the Lib-Dems and the journalists.
Post a Comment