Commitment issues

The UK government’s attempts to claw back money from PFI contracts recall the lack of commitment that scared the private sector and forced governments to finance infrastructure from their balance sheets for most of the 20th century.

Ask any relationship counsellor about commitment and they will surely tell you that the lack of it is one of the chief culprits behind the breakdown of your average relationship. Why is it so hard for people to commit to something over the long term? Discussion is arguably pointless – it just is.

From this perspective, the UK government’s recently created task force to analyse public-private partnership contracts (or PFI, as they are known in the UK) with a view to generating savings for the taxpayer shouldn’t really surprise anyone.

If you look at public procurement – the method used to build the vast majority of infrastructure across the UK and, indeed, most of the world – you will find that the type of long-term arrangements stipulated in PFI contracts are an anomaly. 

In the world of public procurement, things change  all the time: initial requirements change, parameters change during construction, budgets and procurement times acquire tremendous elasticity, and maintenance provisions can fluctuate like a heart patient’s electrocardiogram.

Detractors will tell you that PFI arrangements are too inflexible: they lock taxpayers into 30-year plus contracts that might grate with present economic reality; they allow private companies to profit obscenely from these arrangements through, among other things, being able to charge £333 (€396; $538) to change a light bulb (according to the Daily Mail). They might even be right.

But the main problem with the government’s recent attempts to change pre-agreed contracts is that they are depressingly familiar, with well-known consequences:

“During much of the twentieth century, the inability to credibly commit on the part of governments undermined [infrastructure] investment incentives so seriously, that nationalisation was required with the state doing the investing which the private sector was reluctant to deliver,” writes Oxford University economist Dieter Helm in a recent paper.

Perhaps that is the intention of many of the forces that have aligned against PFI: to confine this modest footprint of private procurement to the footnotes of history. But there’s a small problem: European governments – the UK’s included – are in no position, fiscally speaking, to undertake the sort of public infrastructure investments they have carried out throughout the 20th century. As Helm puts it: “The implication is that infrastructure will continue its trend from the public to the private sector. There will be little alternative, short of simply not investing.”

But a suspension of infrastructure spending is not what the UK government has been signalling – quite the opposite, in fact. In late October, Prime Minister David Cameron announced a £200 billion plan to modernise Britain’s infrastructure to “help rebalance the economy and give industries the right conditions in which to grow”. Moreover, Cameron has signalled that he wants the private sector to help finance it, to the tune of 17 percent, according to a spokesman from the Treasury.

The problem is that, contrary to the boom years, funding is increasingly harder and more expensive to come by, with lenders ever more risk averse. Governments that want significant volumes of private finance for their infrastructure programmes have to credibly commit (to borrow a term from Helm) to them.

What they shouldn’t be doing is showing investors how willing they are to change the rules of engagement and allow the value of their contracts to depreciate mid-way through the game. You do not attract investors to pay for your house only to tell them, after they have built it, that you have decided said house is actually too expensive and not worth the price originally agreed.

If you do, you can be sure of one of two things: either investors will not heed your calls to invest again; or they will charge you more money for your unpredictability. As Helm says: “The point to establish here is that [government’s] failure to credibly commit has a direct financial consequence.”

This is not to say the UK shouldn’t attempt to make savings from PFI contracts. As Lord Sassoon, commercial secretary to the Treasury, rightly maintained: “PFI contracts are not immune from savings”. 

But the tone of righteous indignation and populist bashing of a procurement method primarily used by the government’s political predecessors make one wonder if a distinction between realistic renegotiation and retroactive arm-twisting is possible.