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Tuesday, December 28, 2010

The cost of Gordon Brown's obsession with PFI

I am not one of those who have ideological issues with private finance. If done properly as with the Welsh Housing Investment Trust then it can genuinely add value. What does not work as well is the more traditional PFI model as embraced so enthusiastically by Tony Blair and Gordon Brown over the 13 years they were in power.

Evidence of that is seen in this article in which it is revealed that taxpayers will end up paying five times over for building projects funded by Private Finance Initiative deals commissioned by the last Labour government.

They say that new analysis shows that the 544 PFI projects agreed under Labour will cost every working family in the country an average of nearly £15,000 each, even though the original building cost stands at just over £3,000. On average, the gap between the total repayment and the actual cost of the building is the equivalent of £11,700, four times the original pricetag:

Under the terms of the PFI deals struck by Labour, taxpayers are due to pay £245 billion by the 2047/48 financial year. However, the 544 projects involved cost only £51.5 billion to build.

George Osborne, the Chancellor, recently told how he was informed that under the Treasury’s PFI service contract signed by Labour, the cost of supplying a Christmas tree to the Treasury stood at £900, despite being sold by the retailer B&Q for only £40.

A few months earlier, he had been told that the PFI contractor would charge £148.58 to provide a fish and chip lunch for six in his private office.

In the end, Mr Osborne, Mervyn King, the Governor of the Bank of England, and their team ate the same lunch in the Treasury canteen for £32.88.

Hospitals have complained that PFI service contracts mean that they have to pay up to £333 to have a light bulb changed.

A hospital in Hereford was charged £963 to have a new television aerial, and a school £1,000 for a computer desk which normally retails at £200.

No wonder Labour stand accused of forcing future generations to pay for the financial illiteracy of the past.
Has PFI and the Fish and Chip lunch got confused in this article? Not wishing for even a split second to support Brown or Blair, but are the figures for PFI repayment inflation adjusted(or some guess at the discount rate)? The Fish and Chip mess would just be poor procurement practice. I very much suspect that PFI did not provide value for money to Jane and Joe the tax payer, but failing to account for inflation invalidates the argument.

The difference in timescale and failure to account for inflation make the article in the Telegraph confused at best and misleading at worst.

Some clever chap who did hard sums said something about compound interest being the most powerful force in the universe.
The article was based on research by the Conservative Party. Would this be the party that in 1992 first introduced something called PFI? I thought you would have been quoting today the article by Julian Glover in the Guardian yesterday on EU farm subsidies. He directed readers to a site entitled farmsubsidy.org which lists all the organisations that have received EU money since 1999 by country and local authority. I was fascinated to see,for example, that Lewis Pies had received 358,717 euros under ERDF when it is based not in the country side but on the Swansea West Industrial Estate. But that is chicken feed compared to Frederick Hiam Limited a company based in Suffolk which for some reason decided to claim its 5,521,317 euros from its two dairy farms just outside Haverfordwest. It was also fascinating to see what local farmers had claimed since 1999 on land which seems to produce very little. I wonder how much the CAP which accounts for half the EU budget is costing each British family?
I agree with you on CAP Jeff and yes you are right PFI was first mooted by the Tories, which makes them equally culpable. Though even you have to acknowledge that it was not until Laboour came to power in 1997 that PFI really came into its own as a funder of major public sector projects.
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