Thursday, June 04, 2009

Meanwhile, Back In The Real(ish) World...

I assure you - I'm a real financial wizard

The long and expensive saga of PFI continues...

The story so far (see many previous posts gathered here):

Once upon a time, PFI was meant to save taxpayers money. The idea was that by leasing schools, hospitals and roads from private sector providers, we'd benefit from their superior efficiency in designing, building, and operating such facilities. It would be so much cheaper than the traditional approach of hiring a firm of builders and extending the mortgage to pay them.


Except that PFI hasn't quite worked out like that. For a start, the public sector (aka the Simple Shopper) has proved to be total pants at negotiating good deals with private sector operators (aka the Sharks). And also, although private suppliers ought to be cheaper because they are more efficient, the cost of their funding is always higher than that obtainable by the public sector directly (in the gilt market). So net net, they might not be cheaper at all.

PFI was introduced by the Tories, but the problems multiplied hugely under Labour. That was because Brown and Balls twisted PFI into an Enron-style off-balance sheet borrowing scam, geared primarily to keeping official debt within their spurious fiscal rule targets. To that end, they put huge pressure on local councils and health authorities to fund projects via PFI, rather than via direct borrowing. Costs naturally soared.

Then in 2008, this entire charade hit a major problem. The near-collapse of our banks meant that private sector funding for PFI suddenly dried up. Banks were no longer willing to provide the debt finance essential to virtually all PFI deals. Scores of projects were threatened with the axe (see this post).

Big spending Labour couldn't have that, so back in March, Darling acted (will he still be Chancellor by the time I finish this?). He established a publicly owned bank, snappily named
The Infrastructure Finance Unit, or TIFU, to provide government funding for PFI projects that could no longer access commercial bank finance "on acceptable terms"...
Now read on...

TIFU did its first deal in April. It funded Britain's biggest waste project, in Manchester (yes, yet another one of those costly composting/recycling jobs forced on us by EU landfill regulations).

The precise terms under which the deal was done have not been revealed, but we do know that TIFU will be providing £120m of the project's total £640m capital value. However, that is in addition to some £180m coming from the European Investment Bank, and another £40m from local councils round Manchester. So overall, there will be £350m of taxpayer funding, which is over half the total.

Taxpayers should be choking: WTF is the point of a PFI deal where we are having to stump up over half the cash ourselves?

And what about the blockbuster PFI deal to widen the M25?After massive wrangling, that deal finally closed (ie got signed) in May. Amazingly, it did not in the end require any capital injection from TIFU at all.

How come? Simple - the terms of the deal were sweetened so much that the commercial banks, who had been threatening to quit, scrabbled back on board.

Once again, taxpayers should be choking. The all-in cost over 30 years has cranked up from £5bn to £6.25bn - a 25% rise. But on top of that, we'll be getting considerably less for the money, with the widening scaled back drastically. So the true cost increase is even higher.


The official line is that our busted banks have increased the risk margins charged on all forms of lending. In the case of PFI projects it seems their typical margin has gone up from less than 1% pa, to something more like 3% pa (ie they now charge something like 3% pa over their cost of funding).

But that can't be the whole story. Banks may have increased their risk margins across the board, but they won't have forgotten that PFI loans are still ultimately a claim on the public sector - the most secure borrower there is. Given the current low level of market interest rates, increased margins should not have increased costs by well over 25%. Also, at a time when contractor costs in general have fallen, shouldn't we actually be seeing a smaller overall bill?

The obvious explanation is that we're now being legged-over even more comprehensively than usual.

Now, as we've said many times, we cannot and should not blame the PFI providers. They are commercial operators just trying to earn a perfectly legitimate crust. It's not their fault that the Simple Shopper is such a dumbcluck pushover.

No, the underlying problem here is that the government is absolutely committed to PFI: committed at virtually any price.

There are no less than £8bn of PFI deals in the pipeline, scheduled to close over the next 18 months. And we currently have a government desperate to avoid further pratfalls pre-election. In the circs, there's no way they're going to scrap their promised new hospitals, or add yet more construction workers to the dole queue.

Well, OK, you say, why can't they go ahead with the projects, but simply switch back to traditional gilts funding and at least save us some money?

Nice idea. Excellent idea.

And in the case of the 2012 Olympic Village that's pretty well what they have done.

As BOM readers will recall, while never a standard PFI deal, the Village was supposed to be largely funded by the private sector on normal commerical terms. We never thought that was realistic, even before the banking crisis, and sure enough, no commercial developer has been prepared to take it on, except on truly outrageous terms.

Of course, we wouldn't have started from here in the first place (ie we would never have bid for the 2012 Circus at all). But fair play - the government did at least have the sense not to accept those outrageous terms. Instead, the whole shebang will now be funded by us (either from within the formal 2012 budget, or as borrowing from the EIB and various commercial lenders).

So if they did it with the Village, why not do the same for all those stalled PFI projects, thereby avoiding all the extra leg-over costs?

Two reasons. First, it would mean long and electorally awkward delays, as each individual PFI deal got unpicked and painstakingly restructured along traditional lines. And second, it would bring all that borrowing directly and visibly onto the government's official balance sheet - which is the very thing this bunch of card-maxxing shysters have been working so hard to avoid.

And just to underline that very point, the Treasury is about to announce the most flagrant Enron accounting outrage ever. According to the FT (and others), they are to fiddle their way round their own promise to clean up PFI accounting:

"In spite of the widespread expectation that almost all PFI projects would go on the books as the Treasury fulfils a longstanding promise to move the public sector to international financial reporting standards, the Treasury has now issued all-but-final guidance to Whitehall departments indicating that, while they will count on departmental accounts, a different accounting standard will apply for the Treasury's budgeting purposes.

That will be based on the European accounting standard that is applied by the Office for National Statistics to the national accounts. It has the effect that many projects will continue to count as off-balance sheet."

This latest con is apparently known as "decoupling", which just has to be a bad joke. Because these days, HM Treasury - our once proud guardian of fiscal rectitude and the national purse - seems to inhabit a world which is almost entirely decoupled from reality.

Taxpayers really should be jumping up and down and screaming about all this. In fact, things are so bad, we find ourselves agreeing with George Monbiot.

While everyone's attention is distracted by the Westminster soap opera, the PFI money fire is once again threatening to burn down vast swathes of our future prosperity. The other George will need to start beating out the flames on Day One.

And to think - once upon a time, PFI seemed such a wonderful idea.

PS The other day we reported on a Tyler foray into the first-time buyers property market. We wondered WTF Northern Crock is offering the market leading mortgage deal - given that it went bust, and it therefore doesn't have any money to chuck around, and any money it does have rightfully belongs to us, etc etc. Well, it turns out their offer is bogus. Or more precisely, when our first time buyers attempted to lay their actual hands on an actual mortgage, they suddenly discovered they would need a deposit of 40%. Two points here. First, is 40% something your typical first time buyer can rustle up? Even with the Bank of Mummy and Daddy's 24/7 special loans service, it sounds like a stretch. And second, how come our buyers only discovered the catch after they'd been given an "agreement in principle" with a much lower deposit, an agreement that had been negotiated by no less an expert than the Artful Dodger himself. Anyone would think the Crock didn't really want to lend. Anyone would think it is trailing attractive loan offers merely to placate Comrade Stalin, who announced back in February that his bank would resume mortgage lending on 90% loan to value ratios to help hard-working families and first time buyers etc etc... even though he must know that in the real world there's no actual money.

Can someone just remind me - what does the Real World actually look like?

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