Wednesday, November 26, 2008

The PFI Bombshell?

The whole point of PFI, if you believe the hype, is to deliver public service by shifting the risk to the private sector and then have the Government simply rent back the delivered project for a specified length of time at a premium rate to reward the private consortium for taking the risk.

So, why is it that no one has yet mentioned in the press that three of the key financial backers in the private consortiums are HBOS, Abbey National and RBS? That's significant because they are all institutions that are now partly in 'public ownership' thanks to an injection fo £50 billion in recapitalisation.

That means that the Government is not only propping them up, but it is also paying them premium rent for projects it got them to build and rewarding them for taking a risk that it is itself now liable for. In fact, the Government is now paying the banks to take a risk which they are no longer taking because all the risk is back in the hands of the Government as a significant, powerful and influential shareholder.

We're not talking about small picking either, they are over 600 signed PFI agreements that the Government has made, and quite a few of them are backed by the banks that the Government has pushed itself to bankruptcy to hold up. Now put this in context with new accounting rules that will be introduced in April 2009 to make PFI be "on balance sheet". At this point, assuming the Government do it, the books will be laid open and potentially the economy will crash even further.

If at this point the scale of the debt is revealed formally, then there is every potential that the Government could default on its payments to the banks for PFI (both the ones it has part ownership of and the ones that it doesn't); if one of those banks was then to collapse, what would happen to the schools, hospitals, defence installations, transport projects and all other manner of PFIs that have been agreed?

Seems to me that we might not just have a "tax bombshell" coming but rather a "PFI bombshell" that could cripple the country in a way not seen for a generation.

UPDATE: The bringing of the PFI debt on to the balance sheet in April would be a very good reason to hold a snap election before the roof falls in. No?


jailhouselawyer said...

In the words of Basil Brush "Boom Boom"!. I know it's no joke. We're bust. It is no good the IMF rules saying a government cannot go bust. In my experience there tends to be an exception to the rule.

Good work Dizzy.

Anonymous said...

Abbey National isn't in public ownership is it?

dizzy said...

Perhaps a bad choice of words on my part:

"Royal Bank of Scotland, HBOS, HSBC, Barclays, Abbey, Lloyds TSB, Standard Chartered and Nationwide Building Society have all signed up for the up to £50 billion of additional financing in exchange for the taxpayer taking permanent internet shares (PIBS), ordinary shares or preference shares."


Mrs Smallprint said...

"Permanent internet shares" ?

I think you've got the net on the brain......

Permanent interest bearing shares.

Dominic Allkins said...

Dizzy, a very good point. We all know that McBroon will do everything he can though to keep it off the books. It just shows the complete fallacy of PFI - that the risk is transferred to the private sector.

WV = buste. Honestly. Do you set these up Dizzy?

Alan Douglas said...

O/T - I've just heard on R4 that it's been a great year for British Fun Guy.

I'd call Broon many things, but "fun" ain't one of them !

Alan Douglas

Anonymous said...

So couldn't the government override the old PFI contracts on terms which afre more favourable to the taxpayer?

Anonymous said...

That story is from the 8th of October. Abbey and HSBC have found more money down the back of the sofa without having to go down the Government PIBS route, yet.

Abbey (Santander) and Barclays have done rights issues on the commercial market I think.

However, there's got to be scope for the Government reducing the unexploded tax bomb of PFI now it has it's claws in the banks, surely? Even if it's not strictly legit. A bit more Italian style politics please.

Anonymous said...

It has not been metnioned because our 'journalists' have long since given up investigating and reporting on stories. Their daily source appears to be government leaks, off the record briefings and ministerial press releases. It is no secret that a number of those you have named are actively involved in the PFI financing market. Of course the Government/Treasury would rather we all forgot about this - the borrowings by the PFI consortia are effectively Government (public sector) debt in disguise. The transfer of risk is relatively illusionary (if there was real performance risk the cost of the borrowing would have been unaffordable). As it is the cost of this borrowing is higher than Treasury Gilts and given the refinancing of the banks by the Treasury now represents very poor VFM. Of course the PM wants to ignore this so he can continued to deny/disguise the true level of borrowing by this bankrupt Government.

Anonymous said...

PFI's are funded by billions of pounds worth of borrowing against taxpayers. PM's are calling for full and thorough investigation into multi million pound management costs to taxpayers.

It'll be interesting to see whether bank shareholders are openly informed about the closed shop labour union profiteering from PFI's. Shareholders are taxpayers as well.

dizzy said...

Ms Smallprint, you're probably right, and it was the middle of the night.

Regarding Abbey, I stand corrected on that part, damn Interweb let me down. The general point however stands with or without Abbey.

Unknown said...

Does the fact that PFI deals will be on balance sheet next year have any bearing on the decision to bring capital projects forward into this year?

Peter Grimes said...

I wrote on Guido's blog and elsewhere some weeks ago that if this 'government' was really concerned to get a good deal from the banks rather than take them over by stealth, it had two alternatives. In return for a 'government' injection, either force the banks to swap the PFI assets they are making so much return from, or offer the PIBS on a 1:3 basis with the new ordinaries. The market would have bought the latter.

But it is clear McBrroon wants control of the means of lending.

Anonymous said...

PFI projects are funded by debt and equity. The debt, as you say, comes from banks, but the equity comes from companies like John Laing, or Serco, or whoever.
The risk transfer is supposed to be to the equity holders, not the lenders - if the owners do a bad job, they should get a bad return on equity. The lenders are not affected unless the project is so bad that it goes bankrupt.
More to the point, it is the equity holders, not the lenders, who make all the decisions in the company.

Anonymous said...

Abbey sold most if not all of its PFI loans to RBS and others when it last got into trouble before the Santander takeover. As for PFI debt obligations, the question to ask is what would happen if the projects were terminated tomorrow? In most cases it would mean the Government would have to pay off 100% of the commercial debt, and probably a chunk of the present value of subordinated debt and equity. The value of that obligation at the very least should be on the public balance sheet.

Anonymous said...

I think you will find Freddy is right.

The Funder puts in its part of the capital to allow the build/ implementation of the service under an agreement with the PFI contractor. The Service Payments, out of which the contractor recovers the cost and pays back its Funder, do not start until the service commences (i.e. the hospital is built and used by the NHS or whoever.

THere might be a Funder's direct agreement with HMG but this generally protects the Funder if the contractor goes bust.

John Pickworth said...

"The bringing of the PFI debt on to the balance sheet in April would be a very good reason to hold a snap election before the roof falls in. No?"

It would also be a good time to be sat at Gate 26 waiting for your flight to depart this hell hole.

James Higham said...

Good to see you're onto this too.

Anonymous said...

It looks like Cable-guy The Vincester is right then and the financial mess is so tangled it may take a decade to work itself out.

Meantime all Gordon and Eyebrows can do is keep spinning the line that things are not really all that bad.

If its any consolaion I hear that things are about to get a whole lot worse across the pond. No wonder McCAin seemed to give up in the last few weeks of the campaign.

Anonymous said...

@Anonymous 15:27 & Freddy.
Yes the service provider and construction contractors put money in as equity, but the amount they put in is dwarfed by the debt financing - this is to make the deal "affordable" given that the projected equity returns are generally much higher that the debt interest. I think the point that the "Ex PFI Project Manager" is trying to make, is that in order to have the debt securitised as an investment grade product (and therefore sold on like mortgages), or bond finance raised, the level of risk has to be contained so that it does not risk breaching the returns required to pay the lenders. In practice the low levels of equity of the represent little more than the capitalised bid costs of the winning consortium.
With the Government having a foot in both camps now - as both the payer for the service(s) and an equity holder in the major lenders, what risk are the private sector PFI consortia now taking?

Alex said...


As Freddy says, RBS, Abbey et al are lenders who report their loans as assets. They do not consolidate their accounts with the government because the government does not hold the requisite equity interest in those companies.

Those loans are to a PFI company typically owned by a non-bank company such as Laing or Innisfree which is independent from the government, so the bank shows a loan as an asset and after the accounting change the government will show the net present value of future PFI payments as a liability.

jailhouselawyer said...

Dizzy: I have found out that there is no DA Notice on this forgot to add the labels, sex, tits and hairy arse...please amend accordingly:)

dizzy said...

I;ve never even thought there would be one to be honest JHL. Seems more likely to me that this si such a web of concealment and complexity that it just won't sell enough papers.

Anonymous said...

If a PFI lender collapsed, nothing would happen to the PFI projects it funded. They would carry on, making debt service payments to whoever bought the debt.

Anyway, the amount of debt held by the PFI banks is relatively small - most of it was syndicated, so the quantum remaining on the balance sheet of HBOS, RBS etc will be limited.

PFI has got a bad press because Government has tried to keep the liabilities off balance sheet – that was clearly an accounting fiddle. However, PFI critics never address the central question – if you want new infrastructure, how do you pay for it? You can raise taxes, cut spending elsewhere or borrow. The first two options are unpopular (or at least have been in the last ten years), whilst the third has the merit of matching payment for an asset over the life-time of the asset. That feels like a sensible approach – otherwise Government spending is going to be incredibly lumpy and hence difficult to manage. It is also one that many critics of PFI adopt in their personal lives – taking on 25 year mortgages to spread the capital cost of a house purchase over a period that is meaningful in the context of an asset that has an extended life.

Once you have decided to borrow, it then becomes a technical issue as to what is the cheapest way of doing so. Clearly HMG borrowing on its own balance sheet results in debt with lower interest rates than debt borrowed by a PFI company. However, the total cost to Government is the cost of the debt plus the cost of the project itself. Historically the public sector has been useless at procuring big capital projects and keeping them on budget (Jubilee Line, Scottish Parliament, Olympics, etc). The key advantage of PFI is that the contractor is locked into a fixed price, and has to deliver to that. At least, that is the theory – however, sometimes the risk transferred is too big for the private sector, and therefore if it goes wrong the risk comes back to Government. The classic example is TubeLines.

But on smaller projects there is real risk transfer – for example when Jarvis was brought down by failed PFI projects the private sector stepped in and worked out a solution. I know that some of the private sector companies that took some of the projects are struggling to deliver the service at the price Jarvis agreed with Government – so HMG actually got a very good (i.e. cheap) deal out of it.

As always in the real world there is not a black and white answer – PFI, used pragmatically, can deliver on-time on-budget projects at a cost that is VFM for Government. Used badly it can result in expensive liabilities coming back onto HMG’s balance sheet. But that nuanced message is not one that any in the media – whether MSM or blogger – wants to hear.

Alex said...

Anonymong @09:02:
We know that the PFI is a very bad way to procure services that are normally bought only by government. The best example is the 14 aircraft fleet of A330 tankers which the RAF is taking on lease. We know that the US Air Force were due to take the same planes at $160m each, yet the RAF is taking the same planes on a 30 year lease for $26,0000m, or 11 times the cost per plane. I know the contract includes maintenance and training and the time value os money, but if the current fleet is anything to go by the planes won't get used much and will last longer than 30 years, the benefit of which will fall to EADS rather than the RAF if they had bought the same planes.

Lola said...

Anon 9.02 and Alex. You're both right. But Brown is wrong not to include the liabilities on the State balance sheet.

I have a hunch that the problem is more fundamental. Some large infrastrucuture projcets can and should be State funded and procured. I actually struggle to think of any. But most should not be in the State sector at all. That is schools and hospitals should be properly privatised and the government should only provide funding to patients to access care. That is the problem with PFI is it is still a Statist solution, and consequently it will never work satisfactorily.

Anonymous said...

is to get the diagnosis correct.

Accept it people, Westminster is controlled by Crooks and liars.