The Nature of Modern Capitalism

Grace Blakeley writes:

According to reports in the Financial Times, Chancellor Rachel Reeves is considering reviving the failed Private Financing Initiative (PFI) agenda to fund some of her proposed infrastructure projects. Among the proposals being considered is the £9 billion Lower Thames Crossing, which, in exchange for bankrolling the project, would guarantee investors returns over staggering ‘indefinite or 125-year contracts’.

PFIs are essentially outsourcing on steroids. Where regular outsourcing involves contracting out the construction, operation and maintenance of a particular service or project to the private sector, PFIs also outsource the financing of the project.

Say the government wants to build a railway tunnel. It might work with one of the big four management consultancies to contract out the construction and maintenance of the tunnel to one or more private companies. The contract would set out the conditions governing how and when the government would pay the firms that won the contract.

The outsourcing process has always been characterised by inefficiency and corruption. The consultancies helping the government to write the contract are probably simultaneously working for the companies bidding for that contract, for example. And the big outsourcing and construction companies always find a way to get paid, regardless of whether they meet the contract’s terms. But PFI takes the venality of outsourcing to a whole new level.

Rather than simply contracting out the construction and maintenance of the railway tunnel under a PFI project, the government would also outsource the financing to the private sector. Effectively, private cash is substituted for public money, with the private investors taking on the responsibility to pay the companies working to deliver the railway line, either by borrowing from a bank or issuing bonds.

The idea is that the private investors will take on some of the project risk, and will therefore do everything in their power to ensure that the costs of the project remain as low as possible. An added benefit is that the debt used to finance the project does not appear on the government’s books.

But this apparent reduction in the government’s liability for the costs of the construction of the railway tunnel is entirely illusory, because the entire process is underwritten — and ultimately paid for — by the government.

The powerful private organisations that undertake PFI projects have armies of lawyers on hand to make sure they are always paid what they feel they deserve, and if the paying firms fail, the costs are borne by the taxpayer. PFI is, in other words, a way to privatise the gains of public investment while socialising the losses.

If PFI projects were delivered significantly more efficiently than their publicly funded counterparts, some might argue that they could still be justified. But rather than reducing costs, PFI has sent them through the roof.

One 2018 report from the National Audit Office demonstrated that schools constructed through PFI schemes were 40 percent more expensive, and hospitals a staggering 70 percent more expensive, than those constructed through public financing.

There is one very obvious reason for this: for a powerful state like the UK, public borrowing is always cheaper than private borrowing. Why? Because the UK government is far less likely to default on its debt than even the biggest banks and multinational corporations. Lending to the government is also a cornerstone of the UK’s financial system — banks, pension funds, and many other financial institutions all have to own some government debt.

On a very basic economic level, then, PFI was always an utterly ludicrous proposition.

Public Cost, Private Profit

There are other, more nefarious reasons why PFI costs more than public financing, too. PFI schemes are notoriously complex, with a vast number of entities involved in the financing, construction, delivery and operation of any one project. The executives running these companies have to believe that the scheme will be profitable if they are to get involved.

The problem is that the projects themselves generally cannot produce profits per se. Rather, the providers’ profits come from the difference between the costs of delivery and the remuneration offered by the government. In the absence of a real market, there is ample opportunity for the corporations involved in these projects to squeeze extra cash out of the public sector by inflating rather than reducing their apparent costs.

One of the best-known examples of such cost inflation is the report that one NHS trust was charged £70 for a lightbulb to be changed by the now-defunct outsourcing firm Carillion. The more complexity added into this process, and the more entities involved, the easier it is for this kind of corruption to take place. As one economist put it, ‘public sector outsourcing is less efficient than Soviet central planning’.

Today, more than 30 years after the first PFI schemes were introduced, the public sector is still dealing with their toxic legacy. In 2017, the walls of several Scottish schools built under PFI schemes started to collapse, leading to the emergency closure of many schools across the country. NHS trusts have been saddled with huge unpayable debts thanks to PFI schemes and several subsequently had to be bailed out by the government. Carillon’s ignominious collapse is a case in point.

PFI doesn’t save the government money. It actually increases costs and leads to appalling outcomes. So why is Rachel Reeves trying to resurrect it?

The PFI agenda was always much more about politics than economics. Governments wanted to build infrastructure without looking like they were increasing borrowing. John Major was the first prime minister to make use of PFI, and he did so in order to circumvent the limits imposed on government borrowing as part of the EU’s Maastricht Treaty.

Rachel ‘fiscal discipline’ Reeves is looking to PFI for exactly the same reasons. Rather than being imposed from the outside, however, the rules to which she is seeking to adhere are self-imposed — Labour’s much-touted ‘fiscal credibility rule’ commits the government to balancing the budget over its first five-year term.

As many economists have pointed out, this will be impossible to achieve without imposing massive renewed austerity or realising currently unimaginable rates of economic growth. PFI provides a means to circumvent this problem by making it seem like the government is spending less than it actually is.

As well as placing liabilities ‘off balance sheet’, PFI projects also allowed governments to provide what were effectively government handouts to big corporations. Some of this cash was undoubtedly returned into the coffers of the political parties involved through donations made by these big businesses and their executives.

As I show in my latest book Vulture Capitalism, this kind of corruption is endemic under modern capitalism. While hiding behind the discourse of the ‘free market’, powerful states actually work with the private sector to plan economic activity in the interests of a small elite.

PFI is just one of a string of measures that this Labour government will use to placate private sector interests while imposing the costs on the general public. This is the nature of modern capitalism. Governments may change, but power remains concentrated in a very small number of hands.