The collapse of the UK construction firm Carillion has left the UK policy of PFI (public finance initiatives) in tatters, while exposing everything that has been wrong with the government’s long standing policy on financing infrastructure projects.
Since the Thatcher era, the government (both under new labour and the Tories) have used PFI to fund public infrastructure projects. The logic is that rather than the state putting up its own cash, instead they rely on the private sector to fund projects, with the state paying it off in instalments. This avoids the need for the government to issue bonds and increase the public debt.
Now as anyone who has ever taken out a loan will know this is a very silly way of financing a project. The state will nearly always be able to borrow money more cheaply than a private firm. And it is always desirable to reduce the length of time over which you pay back any loan. Case in point, I’ve recently been looking into overpaying my mortgage and doing so will save me tens of thousands over the lifetime of the mortgage (so much so I wish I’d started doing it earlier!).
Indeed financing projects via PFI’s is 40% more expensive than doing it via public finance. And furthermore, those debts are still technically the responsibility of the taxpayer to honour. The estimation is that the UK’s liabilities on PFI contracts amounts to £200 billion. To put that in prospective, that would meet the funding costs of the NHS for a 1.5 years. Its about four times more than the net cost of leaving the EU. So its not really reducing the public debt, much like tuition fee’s its just hiding it at great expense and passing on the costs to the next generation. In essence, its another example of inter-generational theft.
The other problem with PFI’s has been that the construction companies have been behaving quite recklessly. They’ve often drastically under priced jobs in the hope of undercutting the competition, gambling that they’d be able to outsource the job, squeeze subcontractors or using the small print of the contract to deliver the building in a substandard condition. The end result has been building projects that have consistently been delivered late, cost a lot more than planned and generally have not been up to the standards expected (having high maintenance costs for example).
And privately run public services have been more of the same. For example the firm running the Newcastle metro was actually budgeting for the cost of fines as it was cheaper to just pay the fines than run the service properly. In essence many of these companies have been playing the same game as the banks prior to the financial crisis, making reckless bets thinking the gravity train would run forever and anyway we’re too big to fail the government will have to bail us out if the balloon goes up.
The reasons for Carillion’s collapse are multiple. There are reports of them taking massive losses on contracts in the middle east. Also the brexit effect has to be considered. The sudden jump in inflation has pushed up the cost of everything, making the cost of delivering on a project much more expensive. That said, a well run company should have priced the job with enough of a contingency to allow for that. I know some in construction who are feeling the brexit pinch alright, but they’re at least still covering their costs. There worry is more the long term implications it brings (what happens when the economy slows down and the order book runs dry and they can’t hire experienced Polish brick layers anymore to complete the contracts they’ve still got).
However it seems Carillion were throwing caution to the wind and inevitably they just pushed to hard and got caught out by circumstances. And with building sites at a halt, subcontractors not being paid, it has left an awful tangled mess for the government to sort out, as well as dealing with the public anger over fat cat bosses awarding themselves massive bonuses as their firm failed. And the government doesn’t really have a choice but to act, as there’s a risk that the collapse of this firm bringing down other firms too, the impact on the wider economy to consider and the simple reason that they can leave public services unfulfilled or expensive building projects incomplete.
Again, this highlights the short comings of the PFI process, if not the fallacy of the entire neo-liberal economic model. Even if private firms could deliver services for less than the costs of the public sector (and they can’t), what do you do when a company supplying a public service fails? Inevitably the government has to step in. So all PFI’s (or privatising public services) amounts to doing is privatising profits for the few while socialising the risk for the many.
Carrillion’s collapse is essentially a re-run of the events leading up to the banking crisis (on a smaller scale). When you ignore the lessons of history, you are doomed to repeat them.