The Treasury’s Cunning Plan

There is a concept in the delivery of public services whose time has come and gone. That idea is the Private Finance Initiative.

I have no objection to the public sector choosing the most efficient way in each individual case to procure buildings. Whether it is more efficient to buy, build, or rent, matters not a jot to me, I am ideology-free. I care only about the bottom line.

The Private Finance Initiative – private companies handling the whole construction process for public buildings, including borrowing the construction costs, and then renting them to the public sector, had some advantages when dreamed up by John Major’s Government, and enthusiastically adopted by Tony Blair’s.

It provided greater certainty on costs at a time when confidence in public sector procurement skills was low; it made it possible to spend more on new buildings without ramping up current public sector debt (especially important at the time when it looked like the Government wanted to join the Euro), and it allowed the public sector to focus on the services and outputs, rather than the infrastructure and inputs.

Despite this it was never clear that, in a critical mass of projects, these advantages justified the loss of flexibility and the need to deliver long-term profits from the public purse to the private company which came as a result of PFI. Now, a more serious flaw has emerged. PFI relies upon the private sector borrowing money – something it is very hard for a lot of companies to do right now.  If companies go bust, then the risk can very easily fall straight back onto the public sector in an unpleasant way.

As an example, while the UK Government can currently borrow money for 10 years at an interest rate of around 3.5%, the borrowing of reasonable-sized companies is costing them upwards of 7%. On a £50m project, this £1.75m per year difference, and the impact it would have on revenue budgets, cannot be ignored.

Because of this, a large number of PFI projects no longer stack up, and the realisation of this has caused a rapid slowdown in public sector construction projects at precisely the same time as the private sector suffers from the recession. So much for the stimulus. Given that the Government are now keen to spend money frantically to keep the economy going, and public debt is of no concern to them in the short-term, one might expect them to rip-up the rule book and fund these projects through direct borrowing, right?

Wrong. The Treasury has a cunning plan. Council pension funds will be used to pay for the completion of these projects, at a fixed rate of return. It is not clear why the Government cannot simply borrow this money on the open market as it does much other spending, or indeed print it as appears to be the new plan, thus leaving Council pension funds to invest in the most sensible way for their members. That may be by lending to the Government, or it may not.

In principle, though, the Treasury have had a stroke of genius, they just don’t appear to realise it. There is one thing which Governments can almost always do more efficiently than private companies – borrow money. For PFI to be a good economic model, it required a particular set of circumstances to hold in the wider economy. Insofar as they ever did, they no longer do.

So, two cheers for the new Treasury model – public sector buildings built with public sector money, using high-quality procurement to harness the private sector’s skills in construction and project management, and the public sector’s skills in coming up with the cash. Now we just need to get rid of all the bureaucracy of lending it to ourselves to pay for building and renting back the results. We should rebrand while we’re at it.

Let’s call it the Public Finance Initiative.

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One response to “The Treasury’s Cunning Plan

  1. Vindico had an even better idea in the comments here.

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