The PFI Legacy
I did not rejoice at Margaret Thatcher’s death but I confess to a feeling of relief at her funeral, marking as it did the end to wall-to-wall coverage of her life and times in the newspapers. The dust has now settled sufficiently for me to comment on one aspect of her legacy.
Mrs Thatcher, as we all know, was a great believer in minimising the state and promoting private enterprise. Perhaps it is unfair to blame her for the great private finance initiative scandal, since this was a policy begun by John Major and seized on eagerly by Gordon Brown, but the idea of the private sector running public services surely flows from her philosophy and is a natural add-on to her privatisation programme.
PFI has landed the taxpayer with bills running on for typically 30 years but what is, in the long run at least, bad for the taxpayer is great for those companies that benefit from this largesse, bringing with it work now and guaranteed income over many years.
Milking the taxpayer came under attack from the parties that now form the coalition government, with threats of bringing PFI to a halt. Shareholders need not worry. Politicians in opposition say all sorts of things that get magically dropped when the realities of government dawn and the idea of something cheap now in return for dumping a toxic legacy on future chancellors is too great to pass up.
George Osborne said way back in November 2011 that the government intended to undertake a fundamental reassessment of PFI. Danny Alexander, Chief Secretary to the Treasury, later said that PFI “has become tarnished by its waste, inflexibility and lack of transparency”.
We now have PF2, which Alexander claims is a new procurement tool that will dispense with the many evils of PFI. Don’t hold your breath.
James Larmour of Freeth Cartwright, a law firm that includes business services among its specialisations, says: ‘In truth, what government has done is simply to cut away some of the rougher edges of PFI. PF2 is broadly similar to PFI and although certain aspects are unlikely to go down well with the private sector, deal flow is likely to sugar the pill.
‘Large swathes of the previous guidance for PFI contracts remain unchanged and for the critics of PFI, this must surely smack of tinkering at the edges.’
I have no doubt that he will be proved right and that support services, construction and transport companies that pick up government contracts and franchises will continue to prosper at public expense.
This week saw a proposal to build hospital hotels for elderly patients who are occupying beds long term as they wait for a place in a nursing home.
These would be built and run by the private sector, converting where possible existing hospital buildings, which sounds ominously like handing public property to the private sector, as has already happened in schools.
Long term patients cost the NHS an estimated £4 million a week but they will still need specialist equipment and trained nurses to care for them properly. Why do I get the feeling that this idea will produce a lower standard of care at greater cost?
Meanwhile the shareholders of the companies that benefit will be laughing all the way to the bank. Most of us can’t avoid paying tax but investors can see that they get some of it back.
I have been carrying out my resolve to invest my ISA allowance early in the financial year and I have topped up my holding in infrastructure group Balfour Beatty (BBY), whose shares have in my view been unfairly punished of late.
Dividends received so far more than compensate for the fall in the share price since I first bought.
Dips and Blips
News that the UK economy grew by 0.3% in the first quarter is very welcome indeed, and not only because it might shut Ed Balls up. That figure was at the top end of expectations, with most economists hardly daring that GDP would be in positive territory at all.
Ignore the talk about avoiding triple dip recession, though. As I have constantly argued, we have been in one long recession since the crisis broke in 2008 and we still are. Economic problems, particularly in Europe, continue and the UK economy may well flatline for the rest of this year and beyond.
That is why I am remaining cautious, though fully invested. A lot of companies now look fully valued on the London Stock Exchange.
Call Me Goebbels
I believe it was Joseph Goebbels who argued that if you are going to tell a lie, tell a big one, but even that master of propaganda would have been hard put to countenance my ludicrous assertion last week that UK quoted companies pay out £1 billion for every resident of the country every year.
No excuses for the brainstorm, just an apology and a thank you to the readers who pointed out the error and allowed us to correct the figure to £1,000 promptly on the Morningstar website.
The real figure is rather less dramatic although it is still well worth having. As journalists often say to each other in jest, don’t let the facts spoil a good story.
Rodney Hobson is a long-term investor commenting on his own portfolio; his comments are for informational purposes only and should not be construed as investment advice.
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