Wednesday, January 13, 2010

PFI Comes Home To Roost

Enron accounting has its price

BOM's friend Ted Bromund of the US Heritage Foundation has an interesting piece highlighting the damaging impact of PFI payments on Britain's already stretched defence budget:
"Labour’s sketchy accounting methods for the cost of these PFI contracts has created another snare for Britain’s defenses... In essence, the Labour government has created another affordability crisis in defense – one that it can now use as yet one more reason to reduce defense spending even further...

Labour has been in power since 1997, and yet it now argues that the MoD has somehow, mysteriously, developed plans it cannot afford to fund. It’s now setting itself up to play the same game all over again: use the PFI contract spending to which it had once agreed to accuse the Ministry of unaffordable future profligacy. That would be a bad move at any time, but it’s particularly unbearable when British forces are operating alongside U.S. ones in Afghanistan."
And today we have a new study examining precisely what the budget pressure might mean for our defence capability. The Royal United Services Institute (RUSI) says:
  • The next six years are likely to see a cut in the defence budget of around 10-15% in real terms, alongside unit cost growth of between 1% and 2% per annum.
  • The number of trained service personnel is projected to fall by around 20%: from 175,000 in 2010 to around 142,000 in 2016.
  • If cutbacks are evenly spread, ground formations would have to fall from 97 to 79, available aircraft (fixed wing and rotary) would be reduced from 760 to 615, and major vessels would fall from 57 to 46.
It's a scary picture, especially if the government remains in denial about the squeeze and continues to over-commit our forces.

But even setting aside the prospective overall budget cuts, how much damage is already being done by PFI?

Next year, MoD's budget (current and capital DEL) will be £45.5bn. Of that, it will have to shell out £1.5bn on paying for existing PFI contracts - the largest amount of any government department, and 3.3% of its overall budget.

To put that in context, 10 years ago MoD's annual PFI bill was running at just £0.2bn, less than 1% of its overall budget. So there has been a considerable growth in the PFI burden - well over 2% extra taken out of the budget to pay the PFI contracts.

And that's the problem with PFI: initially it looks like a terrific wheeze for spending money without having it show up in the government's accounts. Just like those terrific accounting wizards at Enron always promised.

But all too soon, the cost chickens come home to roost. And boy, can they cause problems then.

1 comment:

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