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Profits For Investors: The Political Economy of PFI

There are a couple of different ways you can look at the Carillion crisis. Last week I analysed Carillion’s collapse from the perspective of the firm, looking at what it reveals about the nature of capital accumulation in the contemporary economy. This week, I want to look at the saga from the perspective of government. What does the collapse of Carillion tell us about the political economy of private financing?

PFI: the history of an idea.

Private finance initiatives (PFIs) were first introduced under John Major’s Conservative government, before being taken up – and extended – under Tony Blair and Gordon Brown’s Labour government. The basic idea is that when the government wants to build something it will outsource the job to a private firm, which also comes up with the capital to fund the project. The government agrees to repay the firm over several decades, providing the firm with a long-term, fixed, and essentially risk-free income stream in exchange for an initial outlay of capital.

The original arguments for the adoption of PFI were twofold. First, PFIs would transfer the risk of delivering complex projects from the public to the private sector. Private companies would take on the risks associated with large infrastructure projects, profiting if they delivered under budget, and suffering if their costs escalated. This kind of outsourcing was a central plank of the new public management (NPM) ideology that prevailed at the time, which argued that the state was inefficient and bloated because it lacked the incentives that made private companies work cost-effectively.

Second, PFI projects were supposed to transfer borrowing from the government’s books to the private sector’s. Rather than spending billions on infrastructure projects in any one year, increasing the stock of public debt and rendering the government open to accusations of profligacy, the government could agree to carve up the cost of a project and pay the private sector back year by year, with interest, and uprated for inflation. Of course, this was only ever an accounting trick – there is no substantive difference between these two financing mechanisms, except that PFI is generally more expensive than government borrowing, especially at current rates of interest.

In fact, it has recently been revealed that some PFI contracts are costing the public 40% more than would have been the case had public money been used directly. According to the National Audit Office, over £200bn of taxpayers money is being funnelled into unproductive, financialised organisations like Carillion, only to enrich executives and shareholders, whilst leaving taxpayers to foot the bill.

A history of failure.

Just a cursory glance at the history of PFI reveals that more often than not private financing has failed to deliver on its promises.

We may currently be concerned about High Speed 2, but a few people might also remember the saga of HS1 – otherwise known as the Channel Tunnel Rail Link. HS1 was one of the first major transport projects to be delivered under PFI, and it ended with a spectacular bailout from central government. The consortium that won the contract to build HS1 – London and Continental Railways – failed to raise enough capital to build the link after potential investors glanced over the wildly overoptimistic assumptions the Department for Transport had included in the plans.

After a restructure, the venture was rebranded a ‘public private partnership’, with the government covering substantially more of the costs than originally anticipated. A report from the Public Accounts Committee found that the project has left taxpayers “saddled with £4.8bn worth of debt.” The fact that the government apparently failed to learn any of these lessons when financing HS2 would be ironic were the consequences not so severe.

More recent failures abound: the huge deficits run up by Barts NHS Trust, driven by an unpayable PFI loan; the disastrous M25 expansion that ran 25% over budget; the ‘Building Schools for the Future’ programme, which left many dilapidated buildings that barely met health and safety standards. The pattern is clear: PFI does not work. Despite continued warnings from academics, auditors and other experts, the government has continued to add to the £200bn worth of debt it has accrued under PFI initiatives.

Follow the money.

Whenever someone clever does something apparently stupid, it’s worth asking yourself a question: who benefited? And in the case of PFI, the answer is clear – big corporations, executives, and shareholders. PFI, like most neoliberal governance innovations, is about carving up the state to the benefit of investors.

Over the last 30 years, we have moved from an economy governed by the logic of industrial capitalism towards one based on financial capitalism. This has had a series of profound implications – from growth in the economic and political power of the City of London, to the changing nature of the firm that I outlined last week.

But one of the most significant transformations has been that which has taken place in government. As power has shifted from industrial to financial capital, the ways in which political parties make money has also shifted. This is clearest in the case of the Conservative party: almost 50% of the Tories’ donations came from banks in 2016. But the same imperatives also applied to New Labour – declining levels of unionisation, and of the size of the industrial working class more broadly, meant that it had to diversify its money-making and vote-winning strategies.

This is not to suggest there is a straight line that runs from financialisation to PFI – that would be overly deterministic. Rather, there are links between the ideas that we use to make sense of the world, and the nature of the world in which we live. Clearly, these links run both ways – ideas influence the world, and the world influences our ideas – but we often forget about the latter half of this equation. Generally speaking, those with economic power are better able to influence the way we think about the world and promote ideologies that serve their material interests.

In the UK, you see this with the rise of finance coupled with the emergence of the ideology of neoliberalism: the idea that prosperity was best guaranteed by a small state, free markets and big banks. Margaret Thatcher’s Conservatives used the crisis of the 1970s to mainstream this ideology, spreading their narrative through a network of think tanks, media organisations and academic institutions in the UK and around the world. With the resolution of the crisis of the 1970s in favour of financial capital, neoliberalism has become the new economic ‘common sense’, informing the way that ordinary people make sense of the economy, and the way in which Governments make decisions.

Profits for investors.

Material incentives for the adoption of PFI clearly exist. The Conservative party, for example, received a £50k donation from a company that bet on the failure of Carillion – the same company could not have made money from betting on the failure of publicly-owned services. The recent revelations surrounding the Crown representatives who are supposed to police private suppliers to the public sector are also telling. Several hold directorships of the very companies they are supposed to monitor, and one is a prominent Tory donor.

But these are extreme examples of the wider trend of intellectual colonisation that governs the way we think about the economy – and politics – under late capitalism. It was not the party of finance that was responsible for the massive increase in the use of PFI, but New Labour.

There were clearly many strong links between the Labour party, finance and big business – but more than anything else, the New Labour project was based on making the party appear economically ‘credible’. New Labour cleaved to many aspects of Thatcher’s neoliberal ideology – reduce government debt, deregulate the banks, and privatise bits of the state that will make money for investors – and the legacy of this strategy is clearly visible in the litany of failed PFI contracts it left behind.

So rather than shouting at the top of our lungs about the fact that PFI doesn’t work, we should be thinking a little bit harder about who it does work for. Investors have made billions from PFI contracts over the last 25 years. Meanwhile, the services that ordinary people depend on are eviscerated. This has the double effect of increasing the material power of financiers, whilst reducing ordinary people’s capacities for resistance. Even as the Conservatives shrink the state, apparently reducing the basis of their power, they are shifting economic and political power away from labour, and towards financial capital.

Without challenging the power of finance in this country, scandals like PFI will continue to break. This is why it is so important that the left rebuilds its social base – a project like New Labour, floating artificially atop a disengaged electorate – could only exacerbate the problems created by financialisation, papering over the cracks with greater public spending. Only building a movement that can take on the power of financial capital will allow us to avoid millions more Carillions.

Grace Blakeley is a researcher at IPPR. She writes in a personal capacity.

Published 24th January 2018

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