Are Big PFI Bailouts Next?

The UK government's use and abuse of the Private Finance Initiative (PFI) has long been an incredible disaster waiting to happen.

And now it is happening - see here.

There will be taxpayer bailouts for the PFI sector, benefiting the financiers just like for the banking sector. For, as with the banks, the underlying projects involved cannot be allowed to fail.

The PFI deals for schools, hospitals, and other infrastructure, can seem almost plausible in theory. The idea is that the private sector not only builds but also maintains the project for 30 or so years in return for regular government payments over the period.

It is "buy now, pay over a far longer period".

The "risk" supposedly is with the private sector; if the projects are not built or properly maintained, the public sector (it is claimed) can clawback money from the private firms involved.

In some ways, this approach was attractive: one only has to see the grand Victorian and Edwardian school buildings, crumbling through lack of maintenance, or the shoddy quickly-built concrete structures of the 1950s and 1960s (such as my own comprehensive school), to realise that there had not been enough emphasis on the "whole-life" upkeep of such buildings.

But this is not how PFI has worked out in practice.

The contracts between the public and private sectors were not sufficiently robust, primarily because the civil servants and government lawyers involved didn't have a clue what they were doing in their discussions with the various City bastards and sharks on the other sides of the table. And even if the contracts were ever robust, there was little real expertise in practical contract management.

The only terms of the contracts which were usually precise and easily enforceable were the financial provisions in favour of the contractor.

Accordingly, PFI deals have for a decade or so been treated as mere money making machines. And this is where the looming problems begin.

Only a small part of the public sector's payments really go to maintenance of the buildings, or even to repayment of the original capital costs of the project.

In many cases the payments instead go to incredibly elaborate securitarisation. In other cases, the contractors used the payments as the basis for borrowing in the capital markets. In either case, the long-term financial deals entered into by the public sector provides safe - almost guaranteed - income which can be borrowed against again and again by a web of financial institutions far divorced from the "schools'n'hosptials".

And all this suited the government as, infamously, PFI projects were off the public balance sheet. It didn't count against public borrowing.

The government "delivered" the infrastructure projects to the voters, but at the real cost of providing a basis for complex and multiplying financial transactions.

Now, in the era of the credit crunch and margin squeeze, this elaborate securitisation is beginning to strain.

And it will be the companies at the bottom of the chain, those charged actually with building and maintaining the "schools'n'hospitals", which will feel the most financial pain, as they have key outgoings in two directions.

Just as the overstretched banks have imploded, so now will some major PFI providers. It appears from the BBC that this is already happening.

Some of us familiar with government contracts saw this coming a few months ago, and it is sad that it has come to pass.

The reality was that the "risk" never was properly transferred to the private sector under PFI. The projects were always such that they would never be allowed to fail (school and hospital closures anyone?) and the contracts were usually too one-sided for any such risk allocation to be enforceable anyway.

So, yet again, the financial sector will have the government - and the taxpayer - squarely over a barrel. There is in store extraordinarily expensive bailouts which will primarily benefit financial institutions and bankers. Most of these will not be publicised because of the confidentiality provisions of the contracts themselves.

PFI was always - and will now be seen to be - a perhaps well-intentioned but highly misconceived political ploy.

Taking PFI along with the botched banking regulation reforms, the 10 pence tax fiasco, the utter mess of tax credits, the chaotic Tube finance and maintenance deals, "Britishness", "No More Boom and Bust", the forced LloydsTSB/HBOS merger, and so on, all reveal one now undeniable truth about the one man behind each of them.

Gordon Brown is simply the worst policy-maker of any politician in recent history.

And, to adapt Neil Kinnock, PFI will result in the grotesque spectacle of a Labour government - a Labour government - throwing ever-greater amounts of money at City financiers, all in the name of "schools'n'hospitals".