The intrusion of private finance in the public sphere has had disastrous consequences, writes John Quiggin.
The long-running Brexit fiasco has overshadowed most news coming out of the United Kingdom these days.
It’s not surprising, therefore, that hardly any attention was paid to news that may be of more long-term economic significance to Australia and to the current crisis of neoliberalism, than a rearrangement of relations between the UK and the European Union.
In the Budget brought down in late October, UK Chancellor of the Exchequer, Philip Hammond announced the end of the Private Finance Initiative (PFI).
The PFI was introduced by the Conservative Government of John Major in 1992 and greatly expanded under Tony Blair’s New Labour Government. The PFI provides a financial framework for Public-Private Partnerships, which have their own acronym, PPPs.
PPPs are the archetypal example of the soft neoliberalism represented by Blair’s "Third Way". Like the hard neoliberalism of Thatcher and Reagan, soft neoliberalism accepts the primacy of financial capital and the superiority of markets over governments. On the other hand, soft neoliberals recognise the need to match the achievements of the social democratic welfare state, which reached its peak in the third quarter of the 20th Century.
These achievements include universally accessible health and education services as well as the provision of physical infrastructure such as roads.
The central idea of PPPs, instead of governments undertaking infrastructure projects themselves, or contracting with construction firms to do so, a private consortium would build, own and operate the project. The most immediate attraction to politicians was that the infrastructure asset would be off the government’s books and therefore would not involve any addition to the public debt. A more sophisticated claim was that the projects would deliver "value for money" by unleashing the power of private-sector innovation and incentives.
The public debt rationale ran into trouble early on. Most of the time, the construction firm involved in building, say, a tunnel, wanted to be paid for finishing the job, not for the number of cars that used the tunnel. So, financial engineers came up with a variety of ways to guarantee the payment, while making it appear that the asset was privately owned. Unfortunately for them, government audit offices were quickly on to this and forced governments to take such assets, and the associated debt, back on their books.
The claims of greater efficiency held up a bit better at first. PFI projects were generally completed on time and on or under budget.
The problems emerged later on.
First, the value of the stream of payments associated with PFI financing greatly exceeded the cost under traditional public procurement, making a mockery of the "on or under budget" claim. Even now that the PFI has ended in the UK, the National Audit Office estimates that the public is on the hook for nearly 200 billion pounds in payments stretching out to 2050.
Second, the operational phase has been a mess, particularly in the case of service facilities like schools and hospitals. Every unanticipated change can potentially require a contract variation, and, as anyone who has ever gone through a renovation project, it is the contract variations that really ramp up costs. Because the British PFI has been running longer than its many imitators, the problems are more acute there.
In the years before the Global Financial Crisis, these problems were obscured. Investors were willing to take on high-risk projects, based on dubious projections, on the assumption that there would always be someone willing to bail them out if things went wrong. Sometimes that was true.
But as governments tightened up, there were a string of failures.
The fundamental problem is that PPP projects almost invariably involve a higher cost, over the lifetime of the project, than direct public procurement. Either the public must pay more to meet this cost or private investors must take a loss. As both parties wise up, the flow of PPP projects turns to a trickle. The decline in the UK was so steep that the official end of the program was merely a recognition of reality.
The PFI has failed miserably in its country of origin. Yet it carries on a zombie existence in Australia, where it was the model for the National PPP Policy Framework and its various state-level counterparts. Our national planning body, Infrastructure Australia, seems oblivious of the failure of PFI.
Worse still, Australia is actively exporting this failed idea throughout the Asia-Pacific region.
According to the Department of Foreign Affairs:
'Our recognised domestic expertise in Public-Private Partnerships (PPPs) and “asset recycling” are of significant interest to our partners [in the Indo-Pacific region].'
Even as the UK looks for ways to unwind failed PFI contracts, new PPP contracts, with payments stretching far into the future, are still being signed.
Considered as a coherent policy program with a tenable theoretical basis, neoliberalism has been dead ever since the Global Financial Crisis. But the habits of mind instilled linger on a decade later. The bills for neoliberal policies like the PFI will still be coming due in the middle of this century and perhaps even beyond that.
This article first appeared on Professor John Quiggin's blog at johnquiggin.com. You can follow John on Twitter @johnquiggin.