When I read Brett Christophers' book about Asset Managers "
Our Lives in Their Portfolios" I made a few notes about PFI in the UK. Without wishing to teach any Grandmas about egg sucking, I thought that some might find the notes useful, particularly if they weren't aware just how ideologically bonkers and corrosive the whole process is.
Private finance initiatives (PFI), often known elsewhere in the world as ‘Public-Private Partnerships, (PPP), are long term contracts between the state and asset management corporations to finance, build and operate physical infrastructural projects for a defined period. The funding for such roads, hospitals, prisons or schools etc. is usually arranged by the asset mangers, typically through a ‘Special Purpose Vehicle’ (SPV) company wholly owned by the contracted asset management corporation.
For the duration of the contract, often 25 years, the asset managers control the asset and have exclusivity of financial reward from the operation as though they owned it outright for the contract term. So, under PPI, asset management corporations increasingly control the basic physical building blocks of our society and economy.
The UK’s PFI (PPP) was introduced by the Tories in 1992, but accelerated markedly after ‘New Labour’ was elected in 1997. The benefits to the financialised capital corporations were obvious including guaranteed, de-risked returns and they lobbied to get their way. Contracts are nearly always structured to give annual ‘unitary’ payments irrespective of the level or nature of the actual usage of the asset. The benefits to ‘New Labour’ were principally the ability to garner electoral favour by producing infrastructural projects after 18 years of Tory under-investment, but crucially by also simultaneously massaging the reported public debt figures. The liability to the contractor over the 25 year life go the contract did not appear on the current balance sheet.
Contracts usually saw that the asset management corporations receive an annual ‘unitary’ payment, from the state, from which it had to meet 3 main sets of costs; servicing the debt incurred to build the asset, operating/maintaining the asset and tax. Anything left over was/is profit to be retained by the company or distributed to its fund’s investors, after the deduction of management/performance fees.
The scale of PFI is staggering; by 2017 there were over 700 UK contracts valued at around £60 bn in total and, revealingly, by that stage the state had already made over £110 bn in total payments to the contractors with a further, projected £200 bn due in the period up to the 2040s. One large UK contractor, Innisfree, has 26 active health sector infrastructure investments with a combined value of £10.8 bn and 17 educational investments encompassing 260 UK schools valued at £1.5 bn.
Of course the concession owning corporations behind PFI have also engineered other ways to make capital gains out of the contracts held by selling/trading contracts part-way through their life. An example being the Calderdale Royal Hospital in Halifax where equity in the project changed hands nine times between 1998 and 2012. With such transient holdings the temptation to skimp on properly invest in repair and maintenance of the assets is obvious.
In 2019, Jonathan Ford of the FT said that the UK’s PFI had been an ideological disaster with the private finance raised on average being vastly more expensive than the equivalent public debt that the government could have raised itself. So, the inflated cost of infrastructure via PFI derives partly from overly priced private debt and the returns demanded by the asset managers and their investor clients, despite the lack of risk or any evidence of improved operating efficiencies.
Very happy to be corrected if anyone here feels any of this is misleading or incomplete.
www.adamsmith.org
