Today’s Treasury notice that taxpayers’ money (up to £100 billion of it) is going to be used to bail-out Private Finance Initiative (PFI) projects which have collapsed in the credit crunch is really the final insult of New Labour’s ideological obsession with privatising even in the face of economic meltdown. PFI, started by Thatcher, is a colossal scam for subsidising private business at the expense of the taxpayer in the building and mangement of major infrastructure projects (schools, hospitals, prisons, roads, etc.). Now that these schemes have collapsed in the credit crunch, Gordon Brown has chosen to pour billions of public money into shoring up failed private business projects rather than taking them over to be completed, more cost-effectively and more efficiently, by the public sector. There are several reasons why this is daft.

The original argument for PFI was that it relieved the public accounts (the PSBR) of the cost of major new building projects, while enabling the public sector to reimburse the costs via annual payments throughout the lifetime of the project. This argument is flawed through and through.
First, the accumulated annual repayments may well turn out to be far in excess of the original outlay, making it a very uneconomic project overall. Indeed, Alistair Darling realised this and warned at the outset that “apparent savings now could be countered by the formidable commitment on revenue expenditure in years to come”. And that is exactly what has happened. The cost of many PFI projects has exceeded the original outlay often multi-fold. In most cases they have turned out a bad buy, partly because private debt is always more expensive than triple-A rated public debt.
Second, while the original argument stressed the advantages that risk was transferred to the private sector, the current collapse has demonstrated starkly that the opposit is true. When things go well, private businesses privatise the gains, but when the situation goes pear-shaped, as now, the private sector neatly sidesteps the risk it is supposed to have taken on and hands it back smartly to the State (the taxpayer) to socialise the losses.
Third, PFI gives private financiers the whip hand over more prudent NHS managers who may prefer a more cost-effective refurbishment over complete rebuild at vastly greater expense. A classic example of this is what happened at Coventry. The hospital managers wanted a £30m refurbishment, but were brushed aside by the private financiers who installed a wholly new building (with fewer beds) for £410m, more than 13 times as expensive.
And now, to cap it all, when RBS, a huge funder of PFI projects, was bailed out by the State which took over 70% of the equity, all those PFI schemes reverted automatically into the hands of the State. In the face of such a massive beneficial windfall, it takes some doing to turn one’s back on such a consequential uncovenanted gain and then in the teeth of all the evidence, to re-privatise it again. But New Labour is managing just that!

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