Old financial models never die. They just get restructured and rebranded. That seems to be the lesson from the remarkable resuscitation of the Private Finance Initiative, reported in this week’s Public Finance.
At the onset of the recession, there were dire predictions about the demise of the Treasury’s favourite instrument for building hospitals, schools and infrastructure – off-balance sheet and on the never-never.
New international accounting rules combined with banks’ unwillingness to lend were expected to kill off the 17-year-old PFI – and not before time according to its critics.
In the event, the prophets of doom have been outmanoeuvred. The Treasury Infrastructure Finance Unit, a life-support service for the PFI, has proved short of customers. Only Greater Manchester’s waste disposal project has availed itself of Tifu’s services. The troubled M25 widening scheme was eventually funded entirely privately.
Meanwhile, as Mark Hellowell reports, banks are now recording soaring credit margins on PFI finance deals: around three times higher than last summer. The near-monopoly position of banks funding these projects has restored the industry to rude health. And the IFRS regulations have been neatly sidestepped.
The PFI’s revival is, of course, only part of a wider picture. Investment bank profits and City bonuses have recently made a spectacular comeback, and there is cautious talk about an upturn.
At one level, this is good news for the public sector. Who, after all, wants boarded-up high streets and job losses putting yet more pressure on service budgets? And with capital spending set to halve after 2011, it is tempting to welcome back the PFI with open arms.
But it’s a little more complex than that. The public finances are already paying a hefty price for underwriting the fragile financial revival. Conservative plans for 10% local service cuts indicate the likely effects on the ground.
Now, with banks increasingly calling the shots, public bodies risk being locked into private finance deals with even higher costs and penalties than at present.
The public sector needs to take a longer view. The Treasury should get tougher with PFI financiers (especially the part-public banks). And councils must explore all available borrowing options, including tackling the legal barriers to running their own banks. Now, more than ever, it is important that the PFI is not the only game in town.
