Private Finance Insanity

So the debate on how Scotland’s public sector should face another four or more years of growing fiscal drought that will take 12% out of the £33bn devolved budget has been blown open by Labour’s unexpected conversion to revisiting universal care. Leaving aside the relative merits of that and the proposal made in this blog yesterday of adjusting (but not raising) Council Tax so that the rich pay proportionately more and the poor and middle pay the same, what other major factors are in play?

Together with the roughly £11bn of GAE (Grant-Aided Expenditure) from the Scottish Government, councils rely on around £3bn in council tax to balance their books after all fees and charges they levy are taken into account. A 12% rises in that tax take would certainly cover a multitude of fiscal problems—£360m is a wheen o’ siller. But that is not likely in the next year or two, so what else need we focus on?

Wages are a huge element of council expense and, despite a wage freeze, there is still an upward creep in this of around 1% because of promotions and grade advancements. That means that, if the 12% drop hits councils, we are really looking at a 16% squeeze by 2016. Any prognosis that all services are not in for some form of paring is unrealistic and it will take a level of clever management and shared service delivery that, to date, both CoSLA and council senior management have both shown themselves incapable of addressing, to avoid customers complaining about cuts and staff going out the door.

One of the culprits that gets away with no adverse publicity is the Irn Broon wheeze-of-the-noughties of PPP-redux, aka Private Finance Initiative (PFI). Labour-run councils in particular fell over themselves to use this because it was so tempting: get millions invested now and let children as yet unborn worry about how to pay for it once you were long retired. Great wheeze!

Had the halcyon pre-2008 days continued, PFI might not have been such a burden. When council tax and GAE were both rising at an average 5% each year, there was always more in the pot to spread around and cover such growing expenses.

Now, we’re in a totally different situation the income growth isn’t there but PFI demand is. As an example, East Lothian’s PFI for six high schools was valued at £56m and started in 2002 with payments of £5.5m. Ten years later, that annual payment has risen inexorably and now stands at £7.7m. Put another way, ELC is now paying a 13.75% rate on a £56m loan (when PWLB borrowing is around 2.8%) and it’s only going to go up.

Although it affects almost all areas of public finance, little has been written about PFI in Scotland and especially its growing vampire drain of public finance at a time when that finance is shrinking. There are 85 PFI projects running across Scotland that have produced a total capital investment of some £5.67bn. In return for that, by 2040, these projects will have cost the taxpayer £30.77bn in payments. Borrowing from the PWLB would have cost around £4.67bn over the 30 years. You judge which is the better deal.

But, now that the pips are squeaking and we are supposedly “all in this together” are any of the PFI contracts being renegotiated? Are any of the PFI consortia meeting with councils and the Scottish Government see see what they can do to ease distress? Not a bit of it; in fact Westminster insists that all PFI payments come ‘off the top’ before and other liabilities are considered for payment.

Because the Scottish Government gets all its funding directly from Westminster, it is not in a position to adjust its income at all. Councils are slightly better off in that they get ~20% of income from council tax. But, since that has been frozen, both are in the same cash-strapped boat—the question is more which category of government is more affected by the financial imposition of PFI. Chart 1 shows the main divisions:

Chart 1—PFI Capital Investments and Total Repayments by Category

While the other categories clearly made major use of PFI to fund projects—60% of total projects and just under 50% of repayments are council schools projects. One of the largest is Glasgow’s £225m of investment. It is also one of the worst deals going—currently costing £46m this year and rising inexorably to £68m each year before it finally ends in 2030.

If it were just Glasgow, the case against PFI would be bad enough. But because Finance-Minister-at-the-time Andy Kerr pushed PFI as “the only game in town” and many loyal Labour councils followed his instructions, councils put over 40 PFI schemes in place, almost all to do with building schools. Those involving over £100m in capital investment are shown on Chart 2, along with the total repayments involved:

Chart 2—Twelve of the Best? Council Schools PFI Projects over £100m

Obvious from this is that not all PFIs were created equal. The ‘Total Payment” is how much will be spent by the end of the full PFI period (usually 30 years). Part of that payment is repayment of the capital involved and, because management and maintenance are part of it too, not all can be described as interest/profit. However, subtracting the capital to be repaid and restating the total payment numbers as if they were interest over those 30 years yields Chart 3 below:

Chart 3—Effective Interest Rates for the 12 Biggest Schools PFI Projects

Even allowing for half of the annual costs to be management, an average interest rate around 6% is being charged when this scale of borrowing is available at 2.8% from the PWLB. But what Chart 3 underlines is the differing range of deals struck under PFI. While some are grossing under 10% for the PFI contractors, those dealing with Glasgow, Highland and Renfrewshire appear to have driven particularly sweet deals for themselves.

Let’s leave aside that UK and Holyrood governments, plus CoSLA left councils to strike the best deals themselves—and this was lambs-to-slaughter stuff considering council finance and law officials were totally outgunned by slick operators & QCs in the private sector. Leave aside the massive (for councils) start-up costs—East Lothian’s being especially heavy as their PFI contractor went bust during the process. Leave aside the much tougher cost structure for local groups to use PFI schools or the inability of school management to control snagging and maintenance over the PFI period.

The bottom line is that, each year, almost £500m of 32 councils’ £5bn total education budget—almost 10%—is skimmed right off the top and this proportion will only get larger as we approach 2030. That means that any reduction in Education budgets will be amplified by a further factor of 0.1 because each PFI can legally insist on its pound of flesh, no matter what trouble councils, schools or the whole of Scottish education gets into as a result.

When East Lothian Council proposed to buy out its £56m-capital PFI for £80m cash on the barrel (which would be financed by an equivalent loan but at 2.8%, instead of the effective 9% rate). With 20 years to run, that would have saved the public almost £120m.

Annoyingly, all those who foisted this on us didn’t even wait ten years to scarper before these ugly chickens came home to roost: Gordon Brown, Andy Kerr, Pat Lally, Norman Murray, et al have all fled the scene; they no longer need to stand up and defend this fiscal straightjacket they have consigned us to.

Given that local finances are entering ever choppier waters and PFI conglomerates are not going to volunteer to relinquish their cosy cash cows, it will take a bold move from Westminster to provide councils with teeth to renegotiate those contracts (see above) that are clearly not in the long-term public interest.

About davidsberry

Local councillor, tour guide and database designer. Keen on wildlife, history, boats and music. Stood for the Scottish Parliament 2011; lost by 151 votes.
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