PLC Public Sector reports:
The banks failed … the Government threw the golden rule out of the window and bailed them out. The banks failed again … the Government bailed them out again.
The Government is now pledging to spend its way out of the depression, sorry recession (apologies for the “slip of the tongue“), including providing the necessary funds to support several large PFI schemes. Many of these schemes have been experiencing difficulties because the banks refused (and in most cases still refuse) to provide the required finance.
We will only be able to judge the success of the Government’s financial stimulus in time. However, a debate is needed now as to whether PFI is the appropriate vehicle for the Government’s rescue plans.
In the course of this debate, several questions need to be asked – our suggested answers are provided, however, you are invited to consider your own responses:
Which is cheaper for the Government, raising finance itself or borrowing from banks?
SUGGESTED ANSWER: raising finance itself.
Why has the Government advocated PFI in light of this fact?
SUGGESTED ANSWER: the (now defunct) golden rule.
Should the Government have re-capitalised the banks?
SUGGESTED ANSWER: probably yes, a functioning financial system is vital to the UK economy.
Does it seem sensible for the public sector to borrow back the money used to re-capitalise the banks and then pay it back to the banks with a rather large premium?
SUGGESTED ANSWER: no it does not.
Would Government funds earmarked for public sector spending be better spent directly by the public sector?
SUGGESTED ANSWER: Yes, surely this would mean that the funds would bypass the costly merry-go-round and allow the Government to introduce a larger financial stimulus directly into the economy.
The main argument for the Government sticking with PFI seems to be that it is now a significant shareholder in many of the UK’s banks. By riding the merry-go-round and providing increased profits to the banks, it will help the financial sector, and by doing so, increase its chances of a healthy return on its “investment”. This argument begs the question of whether the Government really expects to break even (or do better) from its dealings with the banks? Do Messrs Brown and Darling expect to succeed where the industry has failed? The pro-PFI argument also seems to ignore the fact that an economy buoyed by direct government investment should itself contribute to a revival in the banking sector.
All of the questions in this post are ones that the Government needs to consider, especially in light of the inevitable public outcry that can be expected as the banks enter bonus season.
Given the scarcity of project finance in the market, I wonder whether it will be increasingly cost effective for LAs to borrow via the Public Works Loans Board rather than go for a PFI?
On a slightly different note, while PFI remains an option but bank finance is still scarce, public sector bodies will need to work hard to make sure that any project they need private finance for is as attractive as possible. This means doing the necessary due diligence before going to the market and then working closely with the chosen provider to convince banks that the project is deliverable and as risk free as possible.
The Times reports today that the Chancellor will shortly announce the Government’s solution to the PFI problem. The report claims that the Treasury will provide bridging finance for stalled PFI projects. When the economy picks up, the projects will then be refinanced back to the private sector. At first glance this appears to be a little muddled but we await the detail with interest.
The Times was correct and the Government established the infrastructure finance unit to provide finance to PFI projects at risk. While using public money to provide private finance could be argued to be somewhat inappropriate, the IFU’s involvement in the recent closure of the Greater Manchester Waste PFI does highlight one argument in favour of the approach adopted by the Government. That is, any switch away from PFI at this stage could well have introduced significant delays in project delivery as both the public and private sectors had to adapt to whatever system was brought in to replace PFI. For evidence of this risk, look at the current situation in Scotland where the replacement for PFI – the Scottish Futures Trust – has come in for criticism due to a failure to deliver. At least by sticking with PFI, there is the chance that this injection of funds will get projects moving forward again quickly.