LGC’s essential daily briefing.
Joanne Roney: Manchester must stick through its transformation
There is little human activity without jargon, but finance is often recognised as a leader in this field.
The financial crash introduced the public to such cumbersome phrases as “credit default swaps”, “collatoralised debt obligations” and “mortgage-backed securities”. Many who work in finance would struggle to explain these but most of the public grasped that, in aggregate, they were trouble.
The same is probably true with the phrase “private finance initiative”. Though a layman would be unable to explain just how PFIs work, the letters are justly notorious; the model having been found to be costly for taxpayers, most recently by the National Audit Office. In January the watchdog found that the use of private finance had usually proved more expensive than if the public had paid more directly. By one metric, a group of schools usually cost 40% more to build under PFIs than if paid for through government borrowing.
Chancellor Philip Hammond thus sought to bring an end to the PFI era by promising not to sign any more contracts using the model, or its younger brother PF2, at the Budget last week.
“In financing public infrastructure, I remain committed to the use of public/private partnership where it delivers value for the taxpayer and genuinely transfers risk to the private sector,” he said. “But there is compelling evidence that the private finance initiative does neither.”
Though Mr Hammond tried to raise partisan rancour by criticising New Labour’s enthusiasm for PFI contracts and condemning the party’s current ambition to abruptly terminate them, triggering what he called “ruinous penalty clauses”, the dumping of a failed model should be cause for widespread approval.
Yet already doubts are being raised about the move. LGC’s sister title New Civil Engineer reported that Jonathan Hart, director at the law firm Pinsent Masons, said last week that private financing of infrastructure is likely to survive in an alternative guise.
“We have been here before,” he said. “The first SNP government in Scotland ‘abolished PFI’ but ultimately replaced this with their own invention, the ‘not for profit model’ which has been in successful use for the best part of a decade.
“Not for profit’ has recently been followed by the Welsh government’s own ‘mutual investment model’.”
David Leam, executive director of infrastructure at business campaigning group London First, likewise believed that PFI might experience a reincarnation in due course.
“It seems PFI is dead but long live private investment in infrastructure,” he said. “There is no world in which any government won’t still need private finance or investment in infrastructure.”
The PFI saga does not necessarily suggest private funds can never be used for public good in infrastructure. But the financial sector has a history of obfuscation – and fraud – that should make the public wary of its wares.
In 2015, less than seven years after Lehman Brothers’ bankruptcy, a number of banks began offering “bespoke tranche opportunities”. According to Bloomberg these are collatoralised debt obligations - perceived as a key factor in causing the financial crisis - under another name.
All complex fields require precise terminology, and there will be a place for it in government finance, which by nature is complex. But government watchdogs – as well as the press – must remain vigilant in checking that the abolition of PFI is not merely a rebrand.
Jimmy Nicholls, features editor