The real expenses scandal

I get the sense that if I ever met George Monbiot, I'd dislike him. He often comes over as ignorant and opinionated. He's angry a lot of the time too. But none of this makes him wrong. And in yesterday's Guardian he was spectacularly right about PFI.

PFI allows consortiums of banks, construction and service companies to build and run our public infrastructure. Though the government maintains that this offers better value than using public money, in reality the numbers behind all PFI projects are rigged. While the government retains much of the risk, the investors keep the profits, which often run to many times the value of the schemes.

The public liability incurred so far by the private finance initiative is £215bn...

One of the consistent features of PFI is that the projects are reverse-engineered to meet the demands of corporate investors. This, for example, is how the £30m public scheme to refurbish Coventry's two hospitals became a £410m private scheme to knock them both down and rebuild one of them – containing fewer beds and fewer doctors and nurses. The old scheme was too cheap to attract private money.

We should all be incensed by this. Yes, MP's expenses are scandalous and symptomatic of a wider dishonesty. But if you want a case of public money being used for private gain, PFI is the biggest, most glaring example. How Gordon Brown ever got a reputation for prudence after promulgating PFI is beyond me. We should not let our anger at his other failings to distract ourselves from the failings of this rotten, shameful system. PFI encapsulates the worst of free market dogmatism without any compensating controls. There is no price discovery and little competition. Instead we have a simple transfer of public funds to private companies. PFI brings crony capitalism to the heart of public procurement, and anyone who cares that their taxes are spent efficiently should be vehmently opposed to it.

Political Futures

I don't always agree with Michael Meacher, but this letter in the Guardian is so good, and hits the tone which is lacking in both the government and the official opposition so well, that I am going to quote it nearly in full:

We urgently need ... an alternative to the prevailing Tory-New Labour orthodoxy. I would propose three central strands. It should seek to restore a social democracy which has been ripped apart by greed and an out-of-control inequality epitomised by the banks' bonus culture. We need a solidarity tax levied on the top 5% of incomes and on the so-called non-domiciled super-rich - who use Britain but don't pay into it - with the proceeds hypothecated to end child and pensioner poverty.

We need to redraw the boundaries between the state and the market. The market fundamentalism of the last 30 years is well and truly busted. But ending privatisation, deregulation and PFI is not enough. We need a new perspective for the state, not - as now - passive facilitator and rescuer of last resort, but actively interventionist where the public interest requires it, and strong promoter of the key social values of accountability, equity and real equality of opportunity. A robust market has an essential role, but so does the state, not only in health and education (where private markets do not belong), but in energy (a key to national security), housing (neglect of which is the biggest repository of social misery), transport (for a fully co-ordinated system), and banking (to prevent another collapse and provide reliable housing for low-income households).

We need a state which is less an intrusive snooper and more the guardian of our civil liberties. And we need a major redistribution of power: away from a top-down state to disenfranchised citizens; away from top-down industrial relations to a fair and constructive role for trade unions: and away from a top-down politics to a much more genuinely participative system of governing.

Run rat run

Labour MPs are, of course, far more concerned for themselves than either the governance of the country or their party. Here's just some of the utter nonsense, the self-serving anti democratic idiocy they and their leaders have been up to recently.

• Spending £3bn on new nuclear warheads despite not providing British troops in a war zone with the right body armour and posturing about Iran's nuclear ambitions.
  
• Umming and ahing over vehicle excise duty despite it being clearly sensible to charge more for the most polluting vehicles. And while we are on carbon issues, why doesn't aircraft fuel attact any duty at all?
  
• Utterly failing to reform the tax system to make it fairer and to prevent the rampant abuses of both corporates and wealthy individuals.
  
• Continuing to pursue the disaster that is PFI despite overwhelming evidence that there is little risk transfer to the private sector and excessive cost. Follow the New Zealand example instead and renationalise.
  
• Creating massive uncertain long dated liabilities by allowing new nuclear power stations to be built. Oh, and letting the company concerned, with a guarantee on clean up costs of course, be sold to the French.
  
• Failing to stop the free markets are the best thing ever for everything brigade from further ruining our public services. Damn it I'm a derivatives specialist and I'm far less keen on the power of the markets than Alan Milburn is. Maybe that's because I actually know something about them. And as for Hazel 'sum of all fears' Blears - heaven defend us against her kind of 'reform'.
  
• Not dealing with the utter mess that is MP's expenses. Stop spending my money on Lembit Opik. Or a ridiculously grandiose and over budget Olympics.
  
• Enacted the biggest snooping law in British history.
  

Now, I admit it, I cheered for Tony in 1997. I drank a lot of wine and ate pasta and stayed up until Portillo was gone. But now, please, can I have a Labour party back that is actually socialist, or at least has some vague aspirations other than leaving the rich alone, lining their own pockets, and trying to find some tiny chink of public life that has not yet been infected by Thatcherite free market dogma.

Privatised Infrastructure and the sad case of Heathrow

Heathrow, like Gatwick and Stanstead, is operated by BAA. Despite the positive impression created by the new Terminal 5, most of Heathrow is in a terrible state. It's old. It has little or no natural light. It's cramped. And it is stuffed full of shops and nasty food outlets to keep the waiting masses spending. Compared with many large airports - Hong Kong springs immediately to mind - it's embarrassing. Worse, the squalor and massive misery generation of Heathrow was entirely avoidable.

Stock companies have one aim: generating shareholder value. They have a legal obligation to work to that one end. They explicitly shouldn't care about national pride, client unhappiness, or holding back the broader economy if it gets in the way of making more money for shareholders. Hence not only can you not blame BAA for Heathrow, you should expect Heathrow to be as it is given it is privately owned and lightly regulated. BAA are doing what they are supposed to do: making money for their owners, Ferrovial. (Or in BAA's case, losing rather less money than they otherwise would.) The fact that this does not serve the countries' best interests, nor passengers, nor airlines, is irrelevant.

This is why private ownership of public infrastructure is inherently problematic. And why we won't be getting an airport anywhere near as good as Hong Kong's any time soon. Now wish me well - I have to use Heathrow again on Friday.

Update. It seems BAA can't even manage to run a brand new terminal properly. The BBC reports:

Cancelled flights and baggage delays have blighted the opening day of Heathrow's new £4.3bn Terminal 5.

British Airways, which has sole use of the terminal, was forced to cancel 34 flights by 1400 GMT due to "teething problems" encountered in the morning.

And it carried on. On Sunday we heard from the Guardian:

British Airways warned last night that the disruption that has plagued Heathrow's Terminal Five could run through this week as it emerged that 15,000 bags have yet to be returned to their owners. This figure is three times higher than BA had originally admitted to. Following three days of cancellations which saw more than 150 flights grounded and thousands of passengers disrupted, the airline, which has exclusive use of T5, said that a further 37 flights would not take off today.

Tanking PFI

I have blogged before on the idiocies of PFI - how Gordon Brown has a reputation for economic prudence given he facilitated this is beyond my ken - but the latest news is even more extraordinary. Not only are we paying more for our infrastructure than we should, but now the very future of an important project, the Airbus tanker project, is under threat. According to the FT:

The turmoil in credit markets has dealt a big blow to the UK government’s defence procurement programme, putting in jeopardy plans to help fund a new fleet of Airbus tankers for the Royal Air Force with a bond issue.

The issue is that the bonds financing this project were expected to be wrapped by Ambac. This is beyond crazy: in many instances either explicitly or implicitly (because the project cannot be allowed to fail) the government backstops PFI, so there is no need for a wrap. It is only the bizarre fiction of PFI that pretends that there is any risk transfer, and hence any need for an insurer to be involved. PFI is a waste of public funds on an extraordinary scale: it is time we held Gordon accountable for it.

Mr. Bean as the Fat Controller

The key question with any private sector involvement in public projects is whether the extra return shareholders rightly demand is compensated by increases in efficiency. Often the answer to that is no, which is why PFI makes so little sense - especially when you remember that there is rather little risk transfer to the private sector in many PFI projects. The latest rail debacle over the west coast main line is certainly evidence that the current mess of operating companies, National Rail, and private infrastructure contractors makes no sense -- our rail policy is fatally flawed. Let's renationalise the lot before our railway turns into a historical relic.

What works replaced by what we believe

The following quote comes from a post on the Guardian website:

What I find most striking about this, as about other items in this government's moralistic agenda, is how opposing arguments simply are not heard. It isn't just closed mindedness, the government and its supporters are in the grip of a kind of exclusivist belief system akin to a fundamentalist religion. Arguments based on individual choice, or the notion of adults making rational decisions, simply "do not compute"; they are here to protect us, like spoilt children, from the bad world out there, and they have our interests at heart, and if you don't agree then clearly you favour exploitation and slavery and oppression.

The two things that strike me about this quote are firstly how accurate it is, and secondly how many things it might be referring to: Europe; Iraq; PFI; Pensions; Trident; Nuclear Power; 42 day detention; the DNA database; ID cards. Pretty much any part of politics that is in any way controversial in fact. Even if you agree with a particular policy, the monological belief system which nourished it is deeply troubling. No government which scorns alternative views and abuses legislative privilege with deeply partisan, ill-thought out and costly nonsense as Brown's does deserves to survive, let alone win re-election.

The Death of Metronet

The collapse of Metronet and the attendant comment suggests it might be worth saying something about risks in equity and debt finance.

The classic model of a company is that it can raise money in two ways: by issueing shares, or by borrowing money. The best thing that can happen to a lender is that they get paid back: there is no upside to making a loan other than receiving your interest. Therefore lenders demand that they get paid before shareholders - if a company has funds, it must pay its creditors first, and only after that do shareholders receive a dividend. Moreover if a company cannot pay its debts, debt holders can typically seize the company and sell or liquidate it to get (some of) what they are owed.

In exchange for taking the risk that they might not receive anything, shareholders collectively own the company and so receive anything that is left after debt holders have been paid. This is sometimes called a residual interest: it is potentially high risk and high reward position, since if the company's earnings can't support its debt, they might get nothing; but if earnings are high, then there is a lot left for them after interest costs.

One key capitalist idea, then, is that shareholders take risk in exchange for potentially big rewards. If you don't like the idea that you might lose everything, don't buy equity.

Now consider a company in a long term PFI contract such as Metronet. The rewards are potentially very high, as the profits of someone like Amey indicate. But so are the risks, as we see with Metronet or the late and unlamented Railtrack. Is this a good deal for the tax payer?

There are two arguments for PFI: a specious one; and a sensible one. The specious one is that PFI gets infrastructure built without the government having to raise money. But that is just accounting trickery: the tax payer pays eventually, after all. A PFI contract is an ongoing liability just as a bond issued by the government to pay for maintaining the underground without a PFI contract would be.

A private firm doing government work will demand an extra return over and above what they think it will cost in order to pay their shareholders: they are right to do that as their shareholders are taking risk. So on average PFI contracts are more expensive than their fair cost. Are they still the best that is available? That depends on whether the PFI contractor can get the job done and make their profit for less than it would cost the government to do the job themselves. There is a natural assumption that private enterprise is more efficient than government - that may even be true - but is it so efficient it makes up for the extra profit shareholders demand?

Here's a view from the capital of London financing, Canary Wharf, to end.

Tories are heirs to Blair

From The Guardian:

The shadow chancellor, George Osborne, will say today that the Conservative party is the heir to Tony Blair's reforms of hospitals and schools, not Gordon Brown.

(A rather better monument than Tony is likely to get from his heirs, taken in a church in Milan.)

First reaction: yes, Tony's policies are not policies of the left. Second reaction: in saying that, does he imply that being Tony's heir is a good thing? I just wish I believed El Gordo agreed with this statement too...

What works? You wish...

'What matters is what works' Tony Blair once declared. I really believe that is true: sadly Tony doesn't, and I suspect never did. As Ann Clwyd is ejected from her position as Chairperson of the parlimentary labour party thanks to her support for Blair, it is worth highlighting five of the worse examples of Labour's doctrine pursuit of policies despite them obviously not working:

• Iraq. No more need be said than that one word.
• PFI. Wow, wouldn't it be really great to pay more for the same public services and lock the NHS, Transport for London and many other bodies into inflexible, long term contracts? Anyone who claims Gordon Brown is an economic genius should be forced to have 'PFI' branded on their forehead so they never forget the disasterous waste caused by this terrible idea.
• Faith Schools. We want a more tolerant society with higher standards of education. So let's set up schools which exclude some faiths, enhance the sense of being special of others, suck up education resources that could be spent on improving ordinary schools, and give their governance to those verging on monomania.
• Replacing Trident. We do not need to spend £25B on nuclear weapons now, honestly we don't. This is all about Labour appearing tough on defense: it has nothing to with what the country actually needs.
• The Internal Market in the NHS. No one who had actually spent any time trading the financial markets would ever suggest they are efficient allocators of resources so why on earth does the government think the market will magically solve the problems of the NHS?

None of these policies was obviously unworkable at the beginning: foolish or misguided perhaps, but not obviously unworkable. They all subsequently have been proved not to work. Yet still the government sticks with them, demonstrating the dominance of ideology over efficacy in their thinking.