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Pfi Finance – The Facts Laid Bare

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The Government is manipulating new accountancy rules to favour future Private Finance Initiative (PFI) schemes, the BBC has been told.

http://news.bbc.co.uk/1/hi/uk_politics/8112758.stm

FileOn4: The real cost of PFI 23 Jun 09 from File on 4

http://www.bbc.co.uk/podcasts/series/fileon4

As arguments about public spending cuts take centre stage, Prime Minister Gordon Brown is under pressure to justify his numbers. But how is the crisis hitting his flagship policy for public investment, the Private Finance Initiative? Michael Robinson reveals new research showing how much more the taxpayer is paying for PFI than other publicly funded projects. And he hears claims that the Treasury is trying to manipulate new international accountancy rules.

Listened to the podcast and the program describes how the treasury (under Gordan’s influence) have manipulating Public Finance Initiatives to keep the costs off UK PLCs balance sheet :ph34r:

When George Osborne prises the spreadsheet from GB’s dead fingers I bet all the money from my STR fund that he’ll discover other dubious accounting practices from 12 years under NULabour

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I heard this on the radio the other night. It was shocking. It was probably dumbed down for public consumption, these things always are, so expect the full truth is, as you say, even worse.

In previous decades politicians resigned when they were shown to have been this disgraceful.

Edited by General Melchett

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Yes but it's off balance sheet so it doesn't count :ph34r:

All through this I was thinking 'Is anyone going to remark on the obvious Enron and CDO parralels here, and how badly they ended?' But, shockingly, in what was otherwise a good bit of radio journalism, they didnt.

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When George Osborne prises the spreadsheet from GB’s dead fingers I bet all the money from my STR fund that he’ll discover other dubious accounting practices from 12 years under NULabour

Which, as far as I'm aware, will actually happen before the next election if the polls keep pointing the way they are.

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Fundamentally, PFI makes no sense. The financing costs for these large, capital-intensive investments all comes down to the cost of capital. No one has a lower cost of capital than a sovereign state. It makes absolutely no sense to have anyone other than the government to finance these projects -- unless, of course, you're a dishonest politician looking to hide the expense from taxpayers and are willing to trade the well-being of the country for your own political gain.

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Fundamentally, PFI makes no sense. The financing costs for these large, capital-intensive investments all comes down to the cost of capital. No one has a lower cost of capital than a sovereign state. It makes absolutely no sense to have anyone other than the government to finance these projects -- unless, of course, you're a dishonest politician looking to hide the expense from taxpayers and are willing to trade the well-being of the country for your own political gain.

Totally agree. Earlier this year I had a meeting with an IFA who was trying to get me to buy into Venture Capital Scheme, which was basically PFI. So the people who fund these investments are getting massive tax breaks on top.

The whole this is disgusting.

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Fundamentally, PFI makes no sense. The financing costs for these large, capital-intensive investments all comes down to the cost of capital. No one has a lower cost of capital than a sovereign state. It makes absolutely no sense to have anyone other than the government to finance these projects -- unless, of course, you're a dishonest politician looking to hide the expense from taxpayers and are willing to trade the well-being of the country for your own political gain.

Can't see the point of PFI other than for fraud and obfuscation, given that private companies cannot borrow as cheaply as governments.

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One thing Osborne needs to do within a week of winning the election is to review the books and get out there in public to declare the true state. I fully expect the truth to be staggeringly worse than Brown is owning up to. the man has Maxwell written all over him.

It's their only chance to have a mandate for what needs to be done; you get a very short honeymoon now and they need to move very quickly.

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Fundamentally, PFI makes no sense. The financing costs for these large, capital-intensive investments all comes down to the cost of capital. No one has a lower cost of capital than a sovereign state. It makes absolutely no sense to have anyone other than the government to finance these projects -- unless, of course, you're a dishonest politician looking to hide the expense from taxpayers and are willing to trade the well-being of the country for your own political gain.

What about the transfer of risk from the public sector to the private sector?

What about the extra scrutiny and diligence that the private sector brings to get things right?

The financing of these projects is not the whole story - effective management and running of the projects can lead to far greater savings.

Also, why would the government want to hide the 'expense' of building a new hospital or school? - it isn't exactly analogous to a dodgy expense claim. Surely we should be happy the government is investing in Health and Education etc?

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One thing Osborne needs to do within a week of winning the election is to review the books and get out there in public to declare the true state. I fully expect the truth to be staggeringly worse than Brown is owning up to. the man has Maxwell written all over him.

It's their only chance to have a mandate for what needs to be done; you get a very short honeymoon now and they need to move very quickly.

That is exactly what they need to do. They have to be brutally honest with the British public, and apportion the blame accordingly. I imagine the true debt and skulduggery that will be exposed will be truly mindblowing.

Osborne will have to rise to the plate and treat the great British public like adults. Nothing but the truth will be good enough. I fear the scale of the economic disaster will take a generation to put right. We could be heading back to post war Britain. Maybe in 20 years time the next Beatles will finally arrive...

I want the lies exposed and the perpetraitors punished for reckless endangerment of the nation.

PFI, to me, sums up Brown's deceit, dishonesty and political disregard for the electorate.

Brown, a man who makes Richard Nixon look good.

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What about the transfer of risk from the public sector to the private sector?

What about the extra scrutiny and diligence that the private sector brings to get things right?

The financing of these projects is not the whole story - effective management and running of the projects can lead to far greater savings.

Also, why would the government want to hide the 'expense' of building a new hospital or school? - it isn't exactly analogous to a dodgy expense claim. Surely we should be happy the government is investing in Health and Education etc?

PFI was designed to kick the true cost of these projects down the road. Effectively, the Government has already spent a large chunk of future years tax receipts with these projects. The result is that when tax receipts tank, the Government isn't able to reduce spending on PFI as it is bound to the contract. The only solution will be massive spending cuts elsewhere.

With each passing day, I become more and more convinced that there is going to be a series of failed gilt auctions at some point in the next twelve months. When that happens all bets are off and house prices will be the least of our worries.

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What about the transfer of risk from the public sector to the private sector?

What about the extra scrutiny and diligence that the private sector brings to get things right?

The financing of these projects is not the whole story - effective management and running of the projects can lead to far greater savings.

Also, why would the government want to hide the 'expense' of building a new hospital or school? - it isn't exactly analogous to a dodgy expense claim. Surely we should be happy the government is investing in Health and Education etc?

Yeah, yeah, this is Brown's usual argument, but it's completely full of holes.

First, Brown has already bailed out several PFI projects that ran into trouble, so, clearly, there hasn't been a transfer of risk. Everyone knew that the government would step in if forced to do so, and events have proven that to be true. Who is really going to believe that the government won't offer similar bailouts in the future.

Second, "the extra scrutiny and diligence that the private sector brings", are you kidding? There's no excuse for people not doing their jobs, either in the public or private sectors. Judging from the banking fiasco, I'd say that the private sector is just as liable to do this as anyone in the government.

Third, and most importantly, there's no reason that these projects can't be outsourced to private contractors, and that might actually make sense, but that doesn't mean that the financing has to be outsourced along with the management. Arguing that the financing has to be outsourced along with management is a blatant falsehood.

Lastly, "why would the government want to hide the 'expense' of building a new hospital or school?". OK, I just realized that it's not that you're just kind of dim -- you're a complete and total idiot. Why, indeed, would they want to hide that?

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What about the transfer of risk from the public sector to the private sector?

In theory, yes, this would be a good thing. Except, the credit crunch has caused funding problems for the PFI firms, in effect causing them to become 'cash-flow insolvent' like a number of banks.

So, the private sector had taken on all the risks? Well, er..., no actually. Those PFI firms that have been bust by the credit crunch are now being bailed out by taxpayers funds - transferring the private sector risk back onto the taxpayer's books.

What about the extra scrutiny and diligence that the private sector brings to get things right?

Well, it's the same contractors building the projects as would be if they had been full public sector projects. The same slovenly build and maintenance quality is readily apparent. E.g. we have a new PFI hospital extension - the extension is built on higher ground, and there is a ramp connecting the new ward block to the main hospital. Unfortunately, the ramp is too steep for beds and trolleys safely to be pushed up/down it requiring a team of porters to accompany one patient. Still, it's not quite as bad as another PFI hospital extension I heard about - there, the ramp is so steep that beds can't be pushed even by a team of porters - instead, if an ill patient needs an urgent X-ray, an ambulance has to be called to take them from the front door of the extension to the front door of the main hospital.

That's just one problem of many - incorrect lighting is installed. E.g. expensive 'office grade' lighting is installed on the wards. These very expensive fittings are designed to point the light straight down, so that you don't get glare off computer screens. This is completely the wrong type of lighting for wards - a patient lying in bed gets dazzled by an intense beam of light focused at their eyes, and a doctor leaning over a patient to examine them casts strong shadows obscuring his view. A far better solution would be standard strip-lights with a diffuser. These are much cheaper than the polished aluminium 'category 2' lights. Unfortuantely, the PFI firm have the contract sown up tight, and the hospital can't change the lights to a more suitable form, without paying a prohibitively expensive service charge.

I could go on - I have many examples.

Also, why would the government want to hide the 'expense' of building a new hospital or school? - it isn't exactly analogous to a dodgy expense claim. Surely we should be happy the government is investing in Health and Education etc?

Very simple. Gordon Brown created a 'golden rule' of government money management - that public borrowing must not exceed 40% of GDP. In effect, he stated this rule was never to be broken.

However, public borrowing was already so high, it was approaching 40% very, very fast. GB would have to admit that he was breaking his most important rule, if the government borrowed directly. PFI was a very convenient obfuscation tool for hiding the exact amount of borrowing.

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PFI as a concept isn't necessarily bad, it just seems that the execution was woeful and the contracts are very one-sided.

When the private companies go bust, the taxpayer shouldn't have to bail them out, and the assets should just pass to the state. Instead, what we now see is that the private companies were being underwritten the whole way through, and the profits were passed to the private companies with the risk staying with the taxpayer.

The public risk/private profit arrangement appears to be a NuLab speciality.

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It's a good plan, the media won't be able to report on it because it's too complex to explain in a soundbite, a bit like QE. So

the main figures of Public Debt go down which is easy to report.

I wonder if PFI projects can be ring-fenced and effectively bankrupted so as to avoid paying these liabilities, completely screwing the private sector partners?

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Yeah, yeah, this is Brown's usual argument, but it's completely full of holes.

First, Brown has already bailed out several PFI projects that ran into trouble, so, clearly, there hasn't been a transfer of risk. Everyone knew that the government would step in if forced to do so, and events have proven that to be true. Who is really going to believe that the government won't offer similar bailouts in the future.

Second, "the extra scrutiny and diligence that the private sector brings", are you kidding? There's no excuse for people not doing their jobs, either in the public or private sectors. Judging from the banking fiasco, I'd say that the private sector is just as liable to do this as anyone in the government.

Third, and most importantly, there's no reason that these projects can't be outsourced to private contractors, and that might actually make sense, but that doesn't mean that the financing has to be outsourced along with the management. Arguing that the financing has to be outsourced along with management is a blatant falsehood.

Lastly, "why would the government want to hide the 'expense' of building a new hospital or school?". OK, I just realized that it's not that you're just kind of dim -- you're a complete and total idiot. Why, indeed, would they want to hide that?

One word re maintenance "CAPITA"

The Multi Billion pound leech of NHS and Education finances that you have never seen advertised or mentioned - anywhere!

Only Staff in NHS/Education authorities mainly deal with this lot.

We found out recently CAPITA also run a contract with the BBC TV licence gestapo.

They are NOT BBC employees who bang on your door calling themselves 'inspectors from the BBC licencing'!

PFEYE is an out and out Fraud.

UK citizens paying out huge amounts over the odds and with unrestricted contracts made, over the years the financers can rack up the lolly rates as much as they feel like!

The public just have no idea how much these PFi's cost them

(hidden coz payment is spread out over future years. Any Govt ministers to blame will be long gone!)

Let alone easily done fraud/ preferential treatment towards those in the same nudge nudge, wink wink, secret handshake club who own the PFi building businesses!

Edited by erranta

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The public just have no idea how much these PFi's cost them

(hidden coz payment is spread out over future years. Any Govt ministers to blame will be long gone!)

Let alone easily done fraud/ preferential treatment towards those in the same nudge nudge, wink wink, secret handshake club who own the PFi building businesses!

something else inflation could deal with...

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I wonder if PFI projects can be ring-fenced and effectively bankrupted so as to avoid paying these liabilities, completely screwing the private sector partners?

I suspect not, but I cannot see the logic in these private firms being baled out. Exactly what does that have to do with using the private sector?

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PFI has always been a con. Since day 1 ...

the govt wants to build a building but gets mr bloggs and his company to do it to make a profit for that company ... er, durrr it doesn't take a brain surgeon to work out that a business making a profit out of building something for the tax payer costs the tax payer more.

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In theory, yes, this would be a good thing. Except, the credit crunch has caused funding problems for the PFI firms, in effect causing them to become 'cash-flow insolvent' like a number of banks.

Snip

F-ing great post.

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