The closure of Carillion and the release of the Nation Audit Office’s Report on PFI and PF2 have shone light into Britain’s history of privatisation. For any not aware of this phenomenon, private finance initiatives are a means under which the UK government has been outsourcing its public sector projects to the private sphere. Initiated under Margret Thatcher, and continued through successive Conservative and Labour governments.
PFI has proved a means to which governments can create infrastructure projects at a low initial cost. Often private companies will supply the capital for these projects, with the government paying back the costs, interest and insurance over the following years. There are currently over 700 such deals, with a capital value of 60 billion pounds. As annual charges currently rest at 10 billion a year, even if no new deals are agreed, future charges on these projects will amount to a total of almost 200 billion pounds. This astronomical cost calls in to serious question how the UK government has been arguing that this method is more cost effective than traditional public borrowing. Especially given, that governments are almost always able to borrow at a lower premium than private companies.
The reason for this strategy by both Labour and Conservative governments would appear to be that in terms of an election strategy, it is masterful. Under PFI’s governments have been able to complete large infrastructure projects; such as schools, healthcare and defence without resorting to increased tax or debt.
Yet as the cost of interest payments creep in, future councils and governments will find themselves using increasing portions of resources in order to secure pre-existing agreements. Leaving them with less money to invest in new public spending. Maybe more private finance will be seen as a useful get around to this issue.
As agreements are binding, governments can remain locked into redundant agreements. If no changes are made to its contract, by 2027 Liverpool city council will have made 47 million pounds in payments for Parklands high school; which is currently empty and cost 24 million to build. Despite the huge figures involved in these deals, margins can often be quite low for companies involved. They are pressured to over estimate in order to obtain million pound contracts. With unforeseen construction issues affecting its capital, Carillion’s recent liquidity has sent shock waves through Whitehall.
Perhaps what is more concerning than Carillion’s closure threatening thousands of jobs, public services and infrastructure projects, is that for many the signs have existed for some time. There are numerous reports from councils and business owners in contract with Carillion predicting a downturn in the company. Yet, as the government continued to award contract after contract to the firm, many saw no reason not to continue working with them. This has resulted in what is likely to be a domino effect, with many small and medium businesses defaulting without the government standing by to bail them out.
Assuming we can rule out high level corruption- which with repeated criticisms of lack of transparency in contract handling, we may not be able to do. What remains is a worrying commitment to digging deeper into the already deep hole that is privatisation and marketization in the United Kingdom. Many are beginning to call PFI and Carillion a watershed moment in privatisation. Hopefully the government will take the opportunity to reassess its commitment to marketization at all costs. As avoiding a debate on this subject will only fuel a more radical fire.
Latest posts by Lewis Hales (see all)
- PFI and Carillion: A watershed moment? - January 27, 2018
- Should we be concerned over America’s re-politicisation of aid? - January 5, 2018