Friday, July 06, 2012

PPPs are a scam

Our government is currently advancing plans to build schools, prisons, hospitals and roads under public-private partnership (PPP) schemes. Meanwhile, the evidence mounts that these schemes are nothing but an expensive scam. The Guardian has analysed UK Private Finance Initiative contracts, and found they result in the government massively overpaying for infrastructure:

The 717 PFI contracts currently under way across the UK are funding new schools, hospitals and other public facilities with a total capital value of £54.7bn, but the overall ultimate cost will reach £301bn by the time they have been paid off over the coming decades.

Much of this difference is due to ongoing running costs built into the contracts, but the schemes have also been criticised for providing poor value for money compared with the interest rates the government would pay if it borrowed money directly to pay for the schemes.

Last week, South London Healthcare Trust, which runs three hospitals in south-east London, was placed in administration by the health secretary as it struggled to meet the cost of its PFI obligations.

How much are they overpaying by?
For example, while the capital cost of rebuilding Calderdale Royal Hospital in Yorkshire is £64.6m, the scheme will end up costing Calderdale and Huddersfield NHS Foundation Trust a total of £773.2m. Similarly, the cost of building the new Walsgrave district general hospital in Coventry will jump from an initial £379m to an eventual £4bn.
Even at a ridiculously high 10% interest rate, you only end up paying 5.5 times the cost over twenty years. And governments don't pay anything like that; the UK government can currently borrow money at around 2% (giving a total multiplier of 1.5 over 20 years). So why are they paying so much?

The answer is that PPPs let the government hide debt, by shuffling it off the books. But this costs money - and a great deal of it, from the UK experience. PPPs are a very good deal for politicians (who get to hide the long-term costs of their policies, as well as being able to favour cronies in handing out contracts) - but a very bad one for the general public. We should not be buying in to this madness in New Zealand.