Wednesday, July 08, 2009

Giving Privatisation A Bad Name

Don't judge privatisation by the results of PFI

We've blogged the disaster of PFI many times. In principle, it sounds like a great way for taxpayers to get better value for money, but in practice, it's been an horrific saga of overpaying, perverse incentives, and downright failure.

An interesting paper by Ted Bromund of the US Heritage Foundation takes a close look at how it's been used by the Ministry of Defence. And as you'd expect with that particular money-pit, it's not a very pretty picture.

Ted gives a good account of the dismal story for his US audience, who apparently still harbour some delusion that Labour's use of PFI was for genuine efficiency reasons. But he also draws out some broader conclusions that are well worth summarising:
  • Risks cannot be wholly transferred to the private sector - that's because in some areas - certainly defence, but also key infrastructure - outright failure is not an option for government.
  • Contracting out should promote efficiency and improved quality, not hide spending - Labour's Enron approach to PFI has been costly and inefficient, and PFI contracts have also been used to meet top-down targets for "staff cuts".
  • Contracts with the private sector require effective government contractors - as we've seen over and over again, the public sector simply does not have the staff to negotiate and manage cost effective contracts.

But the Big Point we should take from Ted's paper is this:

"Contracting out [such as PFI] is not privatization because it does not reduce the government’s responsibilities: it increases them.

The government must decide what it wants to buy, negotiate the contract, and then—like any other buyer—ensure that the other party fulfills its side of the bargain."

So let's just take that in.

When government enters into a PFI deal, it is not offloading its reponsibilities. Instead, it's delegating some operational authority, while retaining the overall responsibility for delivery to the final customers (ie us taxpayers). It is also adding a new responsibility to manage the PFI contractor. It has not privatised anything, any more than a company does when it hires contract cleaners.

Compare that to real privatisation. With real privatisation, the government takes itself out of the loop altogether.

For example, let's say Gove really does take us down the school voucher route. He dishes out the vouchers, and then he sits back. The privatised schools are now responsible directly to parents for providing good education, not the government. It's just like... well, it's just like the existing private school system.

That is completely different to a local council entering into a contract for a new PFI school. With real privatisation, the Simple Shopper is no longer intermediating his hopeless bungling presence between the customer and the supplier.

Unfortunately, the manifest failure of PFI under Labour has got real privatisation a bad name. It has allowed the left to claim that the fault lies with greedy private sector providers - the very same people who would run privatised schools 'n' hospitals.

Ted's risk transfer point is also a crucial one. There is absolutely no point in taxpayers paying a private sector provider to assume risks it is not capable of assuming. As we saw with the Metronet disaster (eg see this blog), thinly capitalised PFI contractors can prove to be very expensive if they collapse.

And even where a private sector counterparty does have deeper pockets, they are useless if the terms of the contract allow it to walk away when the going gets rough (as National Express has just done with the East Coast rail franchise).

Whether for PFI or private rail franchises, the Simple Shopper's inability to manage contracts has done serious damage to the cause of privatisation.

Somehow we've got to find a way of explaining that such bungles are nothing to do with real privatisation.

PS Talking of risk transfer, today's waffly proposals on bank regulation leave me feeling distinctly queazy. What the banking crisis has put up in lights is that we taxpayers are currently guaranteeing the banks without limit. And like St Vince says, we're taking these risks of catastrophic failure even though it's the bankers who take the upside. So just why aren't we separating the high street banks from the casinos, Glass-Steagall style? Yeah, sure, if we had superb regulators and superhuman bank boards we wouldn't need to. But we don't. And we do.

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