A British House of Commons committee, presided over by Conservatives and their coalition-partner Liberal-Democrats, delivered a report last summer warning of the dangers to government of signing on with business in Private Finance Initiatives (PFIs).*
PFIs – also known as Public-Private Partnerships (PPPs or P3s) – are the neoconservative solution to just about anything that ails, or even seems to be ailing, public services. Need a new hospital but not sure you can afford it? We have a PFI for that. Garbage collectors demanding a raise? We have a PFI for that, too. Want to start a war in a faraway country? Well, that’s a topic for another entry…
PFIs have become a mantra and an article of faith for business stooges like the Brothers Ford in Toronto. They are invoked as the answer to every question that involves the cost of bureaucracy and the cruel burden of taxation. Can’t take it anymore? Just swallow the business elixir whole and obtain instant relief!
The Brothers Ford want to bury public transport—in the form of a subway to Scarborough—at a cost billions of dollars greater than the alternative light rapid transit system, which was endorsed by the previous administration. The expense, they claim, will be borne by business as part of a PFI.
The Brits, who have embraced PFIs for the past twenty years and now are dealing with consequences, have news for the Fords. Turns out there’s no such thing as a free ride.
The UK House of Commons Committee of Public Accounts, after hearings in which it took testimony from CEOs of major PFI investment companies and bureaucrats who crunch the numbers, found that business did very nicely in these partnerships while, time and again, the public was being left holding the bag. Here’s what they found.
- When business fronts the cash for a project that might otherwise be borrowed by the public sector, it pays a rate of interest typically two or more points higher than the government would have to pay. That extra interest inevitably makes the project more expensive. The difference, compounded over years or even decades, comes out of the public purse.
- Public accounts are transparent. They are subject to freedom-of-information requests and the officers responsible can be called before parliamentary committees to answer questions. The companies involved in PFIs are typically privately held and accountable to no one. Requests for information are shielded by claims that confidentiality is essential in a competitive business environment. So, even though public funds are being spent, there’s no way to find out how.
- The claim is often made that the public will make back in tax revenues what it loses in the initial stages of the deal. The Brits have found, however, that the companies involved often siphon their profits into offshore tax havens.
- The firms that invest in PFIs expect to make 8 to 10 percent profit from the deals they go into. From the point of view of the public, this means that the cost of the project is 8 to 10 percent greater than it would be if it were managed by the public sector. The PFI guys justify this by saying they bring management efficiencies to the project that offset the difference. But is this really the case?
Whatever you choose to believe, there’s no doubt that PFI managers and shareholders make out like bandits. David Metter, CEO of Innisfree, a PFI firm that has ongoing projects in Canada as well as Britain, responded to a question about his own financial situation as follows:
Q: Mr. Metter, you said earlier that there was a potential risk element to this, and your potential investors are saying, “Can we rely on the Government not to break its word or to come back for a haircut”, so to speak. I suggest to you the reason why there is the political risk is that people are hacked off with the behaviour of the PFI sector. About seven or eight years ago I met a securitization expert in an investment bank, who was involved in the PFI sector, and he said, “I like PFI. It is a good source of income, it is good for the business, but as a taxpayer it really pisses me off”. That is when I first woke up to the issues around PFI. He said, “There are about 100 people in London making £1 million a year out of this”. According to a newspaper – again it is only a newspaper, so it may be wrong – the Daily Telegraph of 28 January reported you as getting pay and dividends of £8.6 million [more than C$13.6 million] last year. Is that correct?
David Metter: That is correct.
Metter also testified, incidentally, that most of his fortune is parked offshore.
Some of the flaws in the PFI model can be rectified. Metter, interestingly, pointed out that some deals in Canada have been framed to take advantage of the government’s access to low-interest loans. But the assumption that needs to be questioned first is whether the public sector is, indeed, so much less efficient than private companies—and their rapacious, unreachable, unaccountable shareholders—than public employees whose work is subject to scrutiny and whose motives are, as these things go, relatively pure.
These are not decisions, as the Brits have discovered, that should be based on articles of faith.
* United Kingdom, House of Commons, Committee of Public Accounts, Lessons from PFI and Other Projects, Forty-Fourth Report of Session 2010-12, July 18, 2011