How Government Squanders Billions

(Independent) – ON THE FACE OF IT, it does not sound like a good deal: decide what you want, find someone to supply it, then sign a contract that binds you into a legal straitjacket for decades, during which you pay them 37 times what the item is worth.

Such a deal makes even less financial sense in a country still struggling to escape the effects of the worst slump since the Great Depression. Yet this is what the Government’s promotion of private finance initiatives (PFIs) to pay for public services has foisted on the taxpayer.

In the final part of The Independent on Sunday‘s investigation into government waste, an analysis of the latest Treasury statistics reveals a largely hidden debt mountain of hundreds of billions of pounds.

The taxpayer is, in effect, locked into making enormous annual payments for 667 school, hospital and other public-sector programmes with a capital value, or price, of around £55bn. The good news is that more than £37bn has been paid. But the overall bill for the contracts is more than £262bn, and this will not be fully paid off until 2047.

And that is not all. With a fresh catalogue of further projects valued at £11bn – in capital costs alone – currently under negotiation, Britain’s liability for PFI projects since 1997 could exceed £300bn.

The PFI – the brainchild of the former Conservative chancellor Norman Lamont – was seized upon by Tony Blair in 1997, when he swept into power with a New Labour government determined to show that it could be the party of business. The Government committed itself to keeping the proportion of public debt to gross national product (GNP) below 40 per cent. Financing investment through PFI – with costs kept off the balance sheet – was seen as a way of achieving this, and led Alan Milburn, then health minister, to declare that PFI was “the only game in town”.

PFI works on the principle of private firms building various forms of infrastructure – whether roads or bridges, schools, hospitals or prisons – then charging the public sector for using them over lengthy contracts that can run for more than 30 years.

But it has left a legacy of debt that will last a generation, according to unions who have slammed what they say is a credit-card approach to buying-in essential services. Calling for an end to the use of PFI to pay for public sector projects, Brian Strutton, the GMB’s national secretary for public services, said: “PFI is building up a legacy of high-interest debt that will last for decades. The public is paying over the odds on PFI projects, with debt ratios in most areas at over 500 per cent. This is like paying for schools and hospitals by credit card.”

Experts joined the attack on the Government last night.

Jean Shaoul, professor of public accountability at Manchester Business School, said: “They’ve mortgaged the future in the most profligate way… we have a government that acts in the interests of a financial oligarchy. Using the private sector as an intermediary to raise finance to build hospitals and to run them is extremely expensive and far more expensive than if the Government were to do it itself.”

A case in point is the Norfolk and Norwich University Hospital, where the PFI consortium made tens of millions on a deal described by the Commons’ Public Accounts Committee as “the unacceptable face of capitalism”.

Firms have also made millions in profit by putting up the money for IT programmes that have become so expensive the Government now frowns on PFI being used to fund them. To take only one case: payments for the Crown Prosecution Service’s Compass IT system come to £670m over the 10 years of the contract, 37 times the £18m capital value.

And the nature of PFI deals means that payments still have to be made even if the project is abandoned. Balmoral High School in Belfast closed six years after it was built, when pupil numbers halved. However, the Northern Ireland Department of Education owes the contractor £370,000 a year for the next 18 years.

Making changes to PFI-funded buildings and projects can cause costs to spiral. A 2008 National Audit Office report found that £180m a year is paid out for contractual amendments. And it highlighted extortionate charges for routine maintenance – such as £302 for an electric socket to be fitted, £47 for a key, and almost £500 to fit a lock.

Peter Dixon, chief executive of University College London Hospital – which pays some £43m in PFI charges a year – says that inflation is a real fear. “If we run into a bout of inflation, because all these payments are index-linked, then we are in trouble, all of us.”

He described the arrangement as “expensive and inflexible”, but added: “For the past 12 years the only way you were going to get a brand new hospital was by the PFI route… people knew they weren’t cost effective but it was the only way they could get funding.”

But a Treasury spokesman said: “PFI has a good record of delivering to time and budget, and represents good value for money over the whole life costing by telling us what it will cost to build and manage our assets.”


Recession Lingers As Economy Contracts

(Reuters) – THE ECONOMY CONTRACTED IN THE THIRD QUARTER of this year, quashing hopes the downturn was ending and instead marking the longest recession on record.

The pound plunged more than a cent against the dollar and government bonds surged as traders and analysts bet the Bank of England was more likely to expand its quantitative easing program of buying up debt market assets to secure a recovery.

Friday’s figures are also a blow to Prime Minister Gordon Brown’s Labour government, trailing in opinion polls and hoping for recovery to take hold well before an election due by next June.

The Office for National Statistics said the gross domestic product fell by 0.4% between July and September, meaning the economy has contracted for six successive quarters for the first time since records began in 1955.

This was much worse than analysts’ expectations of a 0.2% rise. Not a single analyst out of the 35 polled by Reuters before the data had predicted a negative reading.

‘Third quarter GDP is awful, with no positive news within the report,’ said James Knightley, economist at ING.

‘More worryingly from sterling’s perspective is the fact that the UK may be the only major economy to have contracted in the third quarter.’

Japan, Germany and France all pulled out of recession in the second quarter and economists expect the United States to have returned to growth in the third.

The data will pose a major challenge for the Bank when it reviews its growth and inflation forecasts in early November and analysts remain divided over whether the bank will expand its £175 billion quantitative easing scheme.

August’s forecasts showed the Bank would meet its inflation target over the medium term; but this was based on an annual economic decline of only 4.6% in Q3. Friday’s figures show a 5.2% fall, only marginally better than the record 5.5% annual fall registered in the second quarter.

‘It’s fair to say that these figures might be an argument that the Bank of England will be using to expand QE… It clearly tilts the balance in favour of those who wish to expand the program,’ said Commerzbank economist Peter Dixon.

Chancellor Alistair Darling said he still expected growth to return by the turn of the year, reiterating a forecast made in the budget in April. Darling will update that forecast in the pre-Budget report due in the next few weeks.

‘We’re facing the worst global financial crisis and recession in 60 years,’ he said. ‘That’s all the more reason to continue the action the government is taking. To remove it now would be madness.’

But Darling’s Conservative counterpart, George Osborne, said Germany and France’s better economic performance showed government policy had failed.

‘We now know that Gordon Brown’s recession plan has not worked, and this news has destroyed Labour’s claim that Britain was better placed than other countries to weather the storms.’

The ONS said there had been a peak-to-trough GDP fall of 5.9% during the current recession, compared to 6.0% between the second quarter of 1979 and the first quarter of 1981 — a period when there were some quarters of growth.

The quarterly decline between April and June was unrevised at 0.6%.

Analysts had been pinning their hopes for recovery on months of survey evidence that had pointed to a sharp rise in confidence and activity in the services sector, which makes up three quarters of Britain’s economy.

But services contracted by 0.2% over the quarter, with the distribution, hotels and catering sub-sector leading the decline with a 1.0% quarterly drop.

Economists had already expected industrial output to be weak, following a sharp monthly drop in August, and the GDP data bore this out. Industrial production fell by 0.7% over the quarter, taking its annual decline to 10.4%.