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Sunday, April 12, 2015

The crippling cost of the Tory and Labour obsession with the private finance initiative

The idea of taking capital spending off the Treasury books and handing public sector projects to the private sector was first conceived by the Tories and then embraced enthusiastically by Labour.The vast majority of PFI projects were commissioned by Labour.

In theory the cost of funding a project by both PFI and the more traditional method of Government borrowing is compared and assessed and the cheapest option chosen. In reality though the odds were deliberately stacke din favour of PFI.  The result is a debt burden that only now the country is coming to terms with.

How big that burden is can be seen from this article in the Independent. They say that every man, woman and child in Britain is more than £3,400 in debt thanks to the proliferation of these controversial deals, which were used to pay for infrastructure such as schools and hospitals. In total the UK owes more than £222bn to banks and businesses thanks to these “buy now, pay later”deals. This data has been verified by the National Audit Office:

The headline debt is based on “unitary charges” which start this month and will continue for 35 years. They include fees for services rendered, such as maintenance and cleaning, as well as the repayment of loans underwritten by banks and investment companies.

Basically, a PFI is like a mortgage that the government takes out on behalf of the public. The average annual cost of meeting the terms of the UK’s PFI contracts will be more than £10bn over the next decade.

And the cost of servicing PFIs is growing. Last year, it rose by £5bn. It could rise further, with inflation. The upward creep is the price taxpayers’ pay for a financing system which allows private firms to profit from investing in infrastructure.

An NAO briefing, released last month, says: “In the short term using private finance will reduce reported public spending and government debt figures.” But, longer term, “additional public spending will be required to repay the debt and interest of the original investment”.

Another legacy from Gordon Brown's tenure in government we are going to be paying for over the years to come.
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