John McDonnell
caused a stir yesterday with his pledge to bring Private Finance Initiative (PFI)
contracts back in house. Commentators who bandy about huge sums of
money to pay for this commitment are missing the point.
The shadow chancellor said
in his conference speech that Labour had already pledged not to sign any new
PFI deals. He then added: “We will go further. I can tell you today, it’s what
you’ve been calling for. We’ll bring existing PFI contracts back in-house.”
Unsurprisingly, this was
immediately welcomed by UNISON, who campaigned against PFI from the outset,
whichever government (Tory, Labour and SNP) used the scheme. Dave Prentis
tweeted, “At long last! Our party sees sense on PFI”.
Let’s start by
understanding what a PFI scheme is. Instead of borrowing in the normal way,
public bodies contract with a consortium of private companies known as a
Special Purpose Vehicle, to design, build and operate a public asset - typically
schools, hospitals, roads and waste treatment works. The Tories invented the
idea, Labour developed it and the SNP use it in Scotland to this day – albeit renamed
as NPD or Hubcos. Instead of meeting the borrowing and running costs directly,
public bodies pay an annual fee to the contractors.
The scheme has been criticised
on many grounds and in the early years the main driver was keeping capital
projects off the public sector off the balance sheet. Particularly important in
Scotland because of the block grant and led to the saying ‘it’s the only game
in town’.
The main problem with PFI
is that the private sector can’t borrow as cheaply as the public sector, and of
course take a profit. Government can now borrow very cheaply indeed and this
had led to calls to refinance such projects. PFI schemes are notoriously
secretive, but we know that they are paying interest rates of 7%+, at a time
when public bodies could issue bonds at a little over 1%.
UNISON Scotland set out in
our ‘Combating Austerity’ plan how this can be done and save millions of pounds
of austerity cuts in the process. The Public Accounts Committee at Westminster,
hardly a bastion of socialist economics, also highlighted how such refinancing
had been achieved in England. Sadly, while some projects have been brought back
in-house in Scotland, progress has been glacial, as our progress report this
summer shows.
An important forerunner to
any contract renegotiations should be stricter monitoring of contracts and
restructuring the existing provisions. A number of public bodies in Scotland
are beginning to take this seriously, but again more could be done. At UK level
John McDonnell could help by committing to changing some of the Treasury rules
that make refinancing more difficult than it might be.
That’s why the commitment from
Scottish Labour leadership candidate Richard Leonard is so welcome. He said:
“Scotland has a huge liability to PFI and the Scottish Government’s Non-Profit
Distributing scheme. The Scottish Government could and should set up a debt
disposal department dedicated to raising funds to buy out the total outstanding
£28.8bn PFI and NPD debt on operational contracts. Doing this could save the
public purse hundreds of millions of pounds. If I’m Labour leader I’ll be
pressing them on this issue and as a Labour First Minister it will be a
priority.”
McDonnell’s actual
commitment is fairly modest and doesn’t commit Labour to a massive increase in
public spending. That’s because the public sector is already paying over the
top for these schemes, so bringing them in-house would actually be a saving to
the public purse. As well as giving public bodies control over vital public
assets.
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