Thursday, February 27, 2014

Private Finance Initiative (PFI)

This little essay is sourced from a book I wrote a few years ago.

A speculative fantasy dreamed up by some British economists in the late twentieth century and elevated to a policy by a succession of right-wing governments.

PFI aims to relieve the state of many of its public service obligations by transferring responsibility for delivering and maintaining them to the private sector. Under PFI public buildings are built with private funds, social care provision for the elderly is delegated to corporations, private clinics replace state hospitals, management firms take over the running of “failing” schools” while successful ones are encouraged to sell off their playing fields before being demolished to make way for private academies. Little by little, government withdraws from its traditional role - indeed from the role for which it was elected. Instead it becomes an intermediary between the people and the private sector - receiving petitions from the former and contracting the latter to resolve them. In a curious reversal of classical economic theory, the state thereby emerges as the largest single source of business profits, and an efficient recycler of funds from taxpayers to the pockets of company directors and shareholders.

Politicians justify PFI on the grounds that because companies are stiffened by market discipline they can build and operate public facilities more cost-effectively than government. Regrettably, no element of this mantra stands up to the mildest scrutiny.

First, most governments can raise capital more cheaply than companies because they tend to have higher credit ratings and at least some control over domestic interest rates. More important, debt is usually less expensive than equity[1]. What this means is that the private sector pays more for its money than the state and will charge the cost back to the taxpayer.

Second, no evidence exists that companies have a genetic capacity to run public services more efficiently than governments. The supposed superior efficiency of the private sector is a favoured fantasy of business executives looking to secure government contracts because they find it peculiarly easy to drill into the mush that passes for the brains of incompetent politicians.

A useful corrective might be to recall from time to time a few items of our collective history that votaries of neo-liberalism are inclined to overlook. Universal access to health and education services, construction and maintenance of most of the world’s road and rail networks, the BBC, the CBC, MOMA[2], Sydney’s Opera House, the Louvre, the Library of Congress, police and fire services, pensions for retirees[3], sewerage and water supplies, the allied victory over Hitler and fascism, the US and Russian space programs, and parliamentary democracy, figure among the numberless initiatives and successes of the now derided public sector - the sector that citizens are told works badly on the infrequent occasions when it works at all.

In a competitive world, companies have to be efficient in order to survive. Those that fail either go under or pass into the hands of their competitors. Public services can’t be allowed to go under, however, because without them neither we nor the country in which we live could keep going. Instead, whenever the companies that run them get into trouble, the State bails them out, rewarding their inefficiencies with subsidies, allowing them to hike prices on a nod and a wink, and turning a blind eye to the inflated salaries of their executives. In place of market discipline, we get sequential rip-offs under government licence while they - the companies - get increasing profits for diminishing levels of service.

[1] Although companies usually borrow funds to finance a project, they still pay dividends on the profits, bonuses to their executives, and interest on the the debt. Dividends are more expensive because they are paid after tax, whereas debt is tax deductible. But, of course, governments don't pay tax or dividends to shareholders.

[2] New York Museum of Modern Art

[3] We have Napoleon to thank for this one.

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