Friday, February 09, 2007

What sort of idiot would use PFI?

The Private Finance Initiative (or Public Private Partnership) is, quite possibly, one of the most idiotic policies for public spending ever designed. Worst Tory policy ever, and shocking that Labour continued - and expanded it - frankly. Now I'm no economist, but even I can tell a bad deal when I see one. Take for example, the A19 Dishforth to Tyne Tunnel - no I hadn't heard of it either until today.

The PFI contract was awarded in 1996 to Autolink Concessionaries Ltd, a consortium of three companies comprising of Amey, Sir Robert McAlpine and Taylor Woodrow. The road opened to traffic in 1998 and had a construction cost of £29.4m. The PFI Contract for Autolink continues until 2027.

Here comes the kicker. In 2005-06 alone, the taxpayer paid out on that PFI contract a sum of £24.4m. That's £5m short of the contruction cost in just one year of a contract that's been running for 11 years and has 20 years to go.

Sure, the people in the North-East got a road tunnel which I have no doubt is an absolutely vital and well used road link. But can it really be considered value for money at the rate that the taxpayer is paying Autolink for having built it?

The end game is that this road will actually cost the taxpayer an order of magnitude more than its actual construction cost by the time the contract ends, and this road is by no means alone. Over £200m was paid out in 2005/06 on PFI road contracts for just over 10 road projects, all of which have at least another ten years to run on them.


Anonymous said...

Not quite - the actual Tyne Tunnel was opened in the 1960's. All we got was a bit of running repair on the bits of road that already existed between Dishforth (in N Yorks) and the Tunnel itself.

To be fair, it's always being dug up, so they're giving us a lot of new tarmac each year for our money.

(oh, and some big shiny blue signs telling us who the money is going to...)

dizzy said...

What's this then?

Anonymous said...

What's your proposed alternative to PFI?

dizzy said...

Why do I need to have one? But seeing as you ask, the obvious thing is to spend money when you have it, and not have a policy that is essentially like going to a loan shark.

Anonymous said...

"Why do I need to have one? "

I never said you 'need' to have one (you can obviously do as you wish!).

I just noted you never offered a reasonable alternative beyond your attack on PFI.

dizzy said...

note with the implication that it was the best you could have.

The obvious solution is to spend mmoney when you have it and to only use public borrowing in relation to public spending within your means.

The PFI is a bit like doorstep credit.

Serf said...

PFI was supposed to share risk with the private sector. Which might have worked.

Instead it is the most expensive form of borrowing that the government has devised. Gordon loves it though as it keeps liabilities off the balance sheet.

Anonymous said...

"dizzy said... what's this then?"

Sorry. I was only trying to point out that this isn't even a new highway, it's a widening of the original 1960s/70s dual carriageway and then a longer term pot-hole mending deal.

ziz said...

So where do you think the dosh is coming from to build the nuclear power stations that British Energy (60% owned by you and me)HAVE GOT TO BUILD (and pretty pronto too).


Alastair Darling , The Secretary of State for Trade and Industry has announced Jan 22nd that he has appointed Dr Tim Stone as senior advisor on the "arrangements for the costs associated with potential nuclear new build decommissioning and waste management" (sic) . This is done under the stated need in the Energy review Report - Paragraph 5.141 of the report stated that "Government intends to appoint an individual with senior management or financial experience.... etc, etc," He has been appointed as senior advisor to both the Secretary of State for Trade and Industry and to the Chief Secretary of the Treasury and will initially devote one/two days a week to this role for a period of one year.

That's Tim Stone, Chairman of KPMG Corporate Finance, and Global Infrastructure and Projects Group. The Group specialises in advising asset owners, government bodies, contractors and infrastructure funds on the financing of major projects worldwide across a wide range of sectors.

In addition to his role as an expert non-executive director of the European Investment Bank, he is a member of the advisory board of the Department of Health's Commercial Directorate (which includes involved in many major acute hospital transactions, road and IT PFI deals, including the hugely unsuccessful NHS £3.2bn national IT program - KPMG meanwhile advise many firms participating in these deals. Dr Tim Stone is the Ministry of Defence’s adviser on the ‘Future Strategic Tanker’ PFI scheme. This is the gorundbreaking scheme for aerial tankers s from Diego Garcia in the Indian Ocean to bomb targets in distant Iraq/ Iran by refuelling them mid-air supplied and partly staffed by private (for profit) firms.

Paragraph 5.96 of the report set out that "Any new nuclear power stations would be proposed, developed, constructed and operated by the private sector, who would also meet full decommissioning costs and their full share of long-term waste management costs".

Dr Tim Stone's views on financing nuclear power in the UK can be seen here(pdf alert) ... Page 8 "There are easier places (than the UK) to make money in the nuclear industry…. ….. unless the regulatory regime makes it more attractive for the private sector and financiers" - in a report to the Westminster Energy Forum who will be holding .....

Nicholas Neveling, Accountancy Age 26th October 2006

KPMGleads $5.4bn watershed deal - Building a presence as lead advisers on the biggest deals has always been a struggle for the corporate finance arms of accounting firms, but all that could change after a $5.4bn (£2.89bn) deal closed by KPMG Corporate Finance last week

The firm acted as lead adviser for Japan’s Toshiba Corporation on its acquisition of Westinghouse from British Nuclear Fuels plc. The deal is thought to be the largest involving an accounting firm as lead adviser.

Finally ...want to know more about "Private Investment for Public Success" a handy "e- pamphlet" produced in November 2006 by Alan Milburn, Time Stone et. al for the Public Network

dizzy said...

errrrrr...... i know

Anonymous said...

Just becuase a risk doesn't necessarily materialise doesn't mean it is not carried by the private sector. The PFI market cuts both ways, some are making handsome profits, while others are struggling because they have been overcompetitve in bidding (like Jarvis).
PFI does have its flaws - in the early projects bank debt was expensive and return on equity high - but now these are much lower. PFI is attractive because the alternative would be to have public sector workers which proved to be highly inefficient (due to the pension benefits a public secotr worker costs £21 an hour compared to a private cost of about £15), or place pure construction tenders out to market which precludes private sector innovation.
What you also fail to see is that construction is only a part (albeit the highest capex) of concessions which are usually over 25-30 years and incorporate mainatenance with saftey and other performance benchmarks (such as avialiability ie. full unitary charge only if all lanes open all of the time).
I think PFI does have flaws but the model is always being improved, it's easy just to jump to the Guardianistas drum beat but its worth considering the whole market and what's the altenative. (You also have an NPV equation - ie what's the worth of having key infrastructure now, rather than save then spend). Oh, and off-balance sheet is a straw man because as an overall proportion of public borrowing it is so small as to not effect the future of PFI projects. (THe Treasury and NAO have said time and agian (if you beleive it) that PFI will be made on purely a value for money assessment).