UK economy will be ruined by PFI debt

By Ian Fraser Financial Editor

Sunday Herald

December 19th, 2004

Academic issues grim warning to MSPs

allysonpollockWIDESPREAD use of the private finance initiative (PFI) to fund public sector projects is eroding government accountability and means the UK will lose its status as a first world economy, according to a leading academic.

Allyson Pollock, professor of public health at University College London, believes the funding method leads to the back-door privatisation of state-run services and spells a return to a patchy provision of health and education.

Pollock, due to speak on PFI to the cross-party group on the Scottish economy at the Holyrood parliament this Tuesday, told the Sunday Herald: “As the economy starts to slide, the government and communities will find it increasingly difficult to the pay costs associated with PFI.

“I fear that decay will set in and Britain will struggle to remain a mature economy if private sector asset stripping of public services continues. There is plenty of talk of risk being transferred to the private sector, but when things go wrong the public sector invariably ends up bailing out the private sector.

“The idea that PFI is a partnership between government and business looks a hollow joke, as private finance gets repaid while the public sector carries the extra cost of keeping services going and communities suffer, ” she said.

PFI, where borrowing is provided by mainstream banks on commercial terms, is recognised as being more expensive than conventional public sector funding. But supporters argue it ensures new schools and hospitals are delivered earlier and on time and on budget. But Pollock said that another government bail-out would make a mockery of the Treasury’s defence of PFI — proving that risk is not, in fact, being transferred to the private sector.

The way in which PFI funded projects are accounted for — with most being “off-balance sheet” — leads to scope for obfuscation. Pollock said: “Unfortunately, the true liabilities of PFI are neither recorded nor declared. Some PFI assets are sitting on no balance sheet.” This means accounting of PFI is “very hard to untangle”, she added. “The liability for future generations is totally unclear.”

One principle of PFI, Pollock said, is that funding decisions are being devolved to a local level. “We’re seeing a return to the days of the parish council, with a patchwork of rich and poor areas, and a loss of national standards.” Pollock warned that the growth of PFI is also limiting government transparency. “The Gladstonian tradition of public administration and the strong tradition of probity and transparency in the public sector, which was put in place more than 100 years ago, is being torn apart by PFI.”

Pollock said the Scottish Executive, led by first minister Jack McConnell, has swallowed English rhetoric on PFI. “The Scottish Executive has bought into English PFI propaganda and ignored the decay, disintegration and dismantling of public services associated with many PFI projects South of the border.”

But Jo Elliott, chief executive of investment bank Quayle Munro, a major player in Scottish PFI, accused Pollock of “erroneous spin”.

He said: “Pollock’s view that if you had used a cheaper funding method you could have had cheaper hospitals has been rejected by both the Treasury and the National Audit Office. There are countless examples of traditional public sector procurement going wrong.

“With Ninewells in Dundee the NHS was incapable of procuring a hospital either on time or on budget. If the Scottish parliament had been done by PFI, the cost would not have gone up by a factor of 10. If you’re sitting in a private sector consortium, you certainly feel that the risk is being transferred.”

Elliott said he does not believe the Scottish Executive has been hoodwinked by Westminster over PFI. He said the Executive in fact pioneered PFI and has a strong record of seeing projects through to completion. He cited projects such as Edinburgh Royal Infirmary and Hairmyres Hospital in East Kilbride.

Michael Nevin, managing director of PFI advisers Caledonian Economics, who worked for the Scottish Office in 1996-97, said: “Contrary to Pollock’s assertions, PFI is a wholly transparent and rigorous process. The contracts are more enforceable than with public sector funding.”

Copyright 2004 SMG Sunday Newspapers Ltd.

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