Odd And Interesting – Nils Pratley And The Guardian Support PFI Projects Now

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Isn’t is just lovely and wondrous how principles change dependent upon circumstances. Why, it’s almost as if they’re not principles at all, isn’t it? So it is with this from The Guardian, brought to us by Nils Pratley.

The basic background of the Private Finance Initiative is that if some bugger has their own money at risk then we’ve got at least some bugger interested in making sure that the project happens to time, to spec and on or even under budget. All that about the debt not being on the national debt is little more than a convenience. The real point is that with any project – the larger the project the more this is so – we want someone with skin in the game. The function of those private companies and builders and all that is to provide this. Some outside capital, that capital being at risk. The first buffer against the inevitable screw ups. There’s someone going to lose money if those walls don’t go up. Roughly straight, too.

This is also the argument against anything being entirely debt funded. There’s no one there with their own cash at risk. And of course it’s the argument against anything entirely taxpayer – say, the Humber Bridge – funded. No one does end up meat shopping in the cat food aisle if the whole thing is a Mongolian Clusterhuddle. Experience, hard won and centuries long experience, tells us that this does not always work – Channel Tunnel, *cough* *cough* – but it is the only thing we’ve got that we know of which stops it not working every time.

It’s entirely true that PFI borrowing is more expensive than government such. Thus one part of the financing cost of the entire project is more expensive. But – and this is the part that can be disagree with if you wish – the bet is that the extra interest costs are more than outweighed by the lower risks of project incompletion, overrun or truly crap public sector building standards.

So, to Heathrow:

Whatever your view on the expansion of Heathrow, it ought to be easy to agree that if a third runway is going to happen at a (current) official estimate of £14.3bn, it should be 100% clear who is on the hook if costs explode. The government has danced around the question, with transport secretary Chris Grayling offering vague lines about how a third runway must be “affordable” and be built “at a sensible cost” without defining what he means in figures.

The airports national policy statement – the key document in the process – was 91 pages of flimflam. It simply stated that the final proposal should be “cost-efficient and sustainable” and seek “to minimise costs to airlines, passengers and freight owners”, with the Civil Aviation Authority left to sort out the details. Good luck to the CAA but one suspects it will be no match for Heathrow’s battalion of lobbyists.

At a minimum, the government should oblige Heathrow’s owners – led by the Spanish firm Ferrovial, with a 25% stake, and the Qatar Investment Authority, with 20% – to inject many billions of pounds in upfront equity capital into their company to ensure the scheme can withstand the inevitable delays and surprises. As things stand today, Heathrow’s use of debt – £13.5bn at the last count – is so extreme that even Carillion’s bosses would have blushed at the leverage ratios. Unlike at Carillion, however, if a financial emergency were to materialise with the third runway, there isn’t a credible option of letting the company fail. The airport is too important to the UK – and the owners know it.

Or, as we might put it:

The basic background of the Private Finance Initiative is that if some bugger has their own money at risk then we’ve got at least some bugger interested in making sure that the project happens to time, to spec and on or even under budget. All that about the debt not being on the national debt is little more than a convenience. The real point is that with any project – the larger the project the more this is so – we want someone with skin in the game. The function of those private companies and builders and all that is to provide this. Some outside capital, that capital being at risk. The first buffer against the inevitable screw ups. There’s someone going to lose money if those walls don’t go up. Roughly straight, too.

This is also the argument against anything being entirely debt funded. There’s no one there with their own cash at risk. And of course it’s the argument against anything entirely taxpayer – say, the Humber Bridge – funded. No one does end up meat shopping in the cat food aisle if the whole thing is a Mongolian Clusterhuddle. Experience, hard won and centuries long experience, tells us that this does not always work – Channel Tunnel, *cough* *cough* – but it is the only thing we’ve got that we know of which stops it not working every time.

At which point we’ve only the one interesting question left. What are our odds of getting the Guardian, or Pratley, to agree that the logic is the same in both cases?

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SouthernerTDBloke in North DorsetPatPhoenix84 Recent comment authors
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Phoenix84
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Phoenix84

There is a principle – private bad and greedy, public good and angelic. That’s why the Guardian hates monopolies (say Heathrow) and loves monopolies (say the NHS).

That’s also why costs at Heathrow being higher = bad, because consumers will have to pay more, but paying nurses more = good, even though that inevitably means consumers will…pay more.

Pat
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Pat

If a financial emergency comes with the third runway the company can certainly be allowed to fail. It gets bankrupted and it’s assets including Heathrow get sold on to the highest bidder. And assuming that there is some value in a working airport at Heathrow such will continue to exist, albeit under new ownership.
Not that different from Carillion, whose useful work continues to be done but by others.

Bloke in North Dorset
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Bloke in North Dorset

Indeed, but there’s also another good reason for PFI. It is more likely to tease out the real costs and timescales, slightly underbidding to win aside, than if the project is dreamt up by bureaucrats who have an incentive to lowball both the costs and timescales to get their pet project accepted. Said bureaucrats not being around when the brown stuff hits inevitably hits the whirly thing being part of the problem.

TD
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TD

Willie Brown, former mayor of San Francisco, once wrote: News that the Transbay Terminal is something like $300 million over budget should not come as a shock to anyone. We always knew the initial estimate was way under the real cost. Just like we never had a real cost for the Central Subway or the Bay Bridge or any other massive construction project. So get off it. In the world of civic projects, the first budget is really just a down payment. If people knew the real cost from the start, nothing would ever be approved. The idea is to… Read more »

Southerner
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(y)