Thursday, August 25, 2011


Private Finance Initiatives known to politicians and those in the financial sector as PFIs are the buzz word of the moment. We have the Australians to thank for the concept but they have also been widely used by the British and Canadian governments as well as in Europe. Whilst the initial buzz was positive it has now been become annoying as a demented wasp. This has led to the House of Commons Treasury Select Committee calling on the Chancellor of the Exchequer George Osborne to wean his ministry off “the drug” of the PFI.
A PFI is complicated but in essence it is the combining of a mortgage to a full repairing lease. The government decides what project it wants, hospitals have been a popular use of this method of funds, the private sector then finances, builds and operates it for a set period, normally up to 30 years that includes full maintenance. At the end of the contract period the project is handed back to the government.
The PFI is attractive to governments because it transfers risks, they don’t have to raise the capital now nor does it have to appear on the government’s books so is not included in the debt total. In the UK it is estimated that since 1992 over 70 billion pounds of capital has been raised for hospitals, schools, prisons, new roads and defence projects. However there is an ultimate bill to pay including the running and maintenance costs and by 2050 the current PFIs will have cost British taxpayers, including those of yet unborn, 240 billion pounds.
Curiously when in opposition George Osborne described the Labour Government’s use of PFIs as “totally discredited” adding it was a flawed model which “must be replaced”. However the Treasury under Osborne has continued to use them. In the committee’s opinion using a PFI deal for a new infrastructure project could end up costing up to 1.7 times as much as paying for it directly out of the public purse.
It was the Tory Chancellor Norman Lamont who first used the PFI in 1992 but it was Gordon Brown as chancellor who perfected the art. The private sector agreed to build and run schools, hospitals and other infrastructure projects, for usually 30 years, in exchange for a steady flow of payments from the public purse.
Andrew Tyrie, the Conservative Chairman of the Treasury Select Committee summed the use of PFIs up as instead of transferring risk to the private sector and cutting costs for the taxpayer, PFI had fooled the public and Whitehall officials into thinking they could get shiny new public services “on the never-never”.
He continued: "PFI means getting something now and paying later. Any Whitehall department could be excused for becoming addicted to that. It’s like a drug. We can’t carry on as we are, expecting the next generation of taxpayers to pick up the tab. We must first acknowledge we’ve got a problem. This will be tough in the short term but it should benefit the economy and public finances in the longer term."
Which brings us to Gibraltar where if PFIs were used the debt could be hidden off the ministries’ balance sheets and hence not be included in the government’s debt. However it is not clear if PFIs have been used here or not or if the government plans to introduce them.
Chief minister Peter Caruana has talked about PFIs and their use in projects such as St Bernard’s Hospital. A package was negotiated with RBS in which the bank purchased the former Europort building for 8 million pounds from the government then leased it back adding 52 million pounds to cover the conversion costs. As the conversion came in higher the overruns were paid by government. The government has a 20 year rental agreement with break causes and the Draft Estimates of Expenditure presented for the Budget show an annual rental of 4,554,000 pounds.  Some experts say this is a sale and lease back, full repairing agreement and not a PFI. I have asked RBS how they classify this deal but am still awaiting a reply.
Whether St Bernard’s Hospital even in the government’s eyes is a PFI or not has yet to be established. However there is a whole raft of other projects waiting in the wings for finance that could take on PFI status. These could include the airport terminal, the power station, waste treatment plant and future car parks, which have to be privately funded as the banks have refused to do so on the previous basis.
There are two aspects for Gibraltarians to consider here. By the government’s own figures it already has a half billion pound debt in gross terms with actual debt plus the provision of 20 million pounds set aside for future development funding. First – if it uses the PFI model to fund these other projects it will in the words of Andrew Tyrie be expecting the next generation of Gibraltarian taxpayers to pick up the tab. The second is that half a billion pounds debt for a small community like Gibraltar is for many a worrying prospect but the true future figure could be much, much higher yet hidden under PFI schemes.