Stephen Rees's blog

Thoughts about the relationships between transport and the urban area it serves

Archive for November 30th, 2006

The cost of privatisation will haunt us for years to come

with 2 comments

Guardian Unlimited | Comment is free | The cost of privatisation will haunt us for years to come

PFI, and indeed much of the government’s case for privatisation, is predicated on a myth that the Tories naturally do not challenge, given that PFI and mass privatisation were originally their ideas. That myth, the false premise of PFI, is that government borrowing – its gross financial liabilities – must be held down at all costs. This is nonsense. The Treasury has persuaded our leaders that it is vital to keep government borrowing as a proportion of GDP at around 40%. It has risen above that in recent years, but it is still very low by historical and international standards.

The latest available international comparisons from the OECD show that Britain has kept government borrowing (at 44% of GDP) well below those of the successful Scandinavian economies (Denmark 53%, Sweden 63%), and even further below those of the major eurozone countries (Germany 68%, France 75%). US borrowing (64%) is also well above Britain’s, and Japan’s (156%) is off the scale. In some of these countries there have been economic difficulties, but none has experienced anything like economic disaster.

This is a splendid political polemic. Directed at the current change in leadership of New Labour in Britain, it is worth noting here too. This particular mantra – about the Public Sector Borrowing Requirement – is not heard here. We tend to be lectured in simpler terms – debt and deficit, and the cost to future generations of interest payments. But the fallacies are similar, and I suspect that we will regret most of the decisions now being forced on us by a similarly doctrinaire approach to public investments that now requires private finance for all projects over $20m – municipal and provincial.

There is an alternative method of finance that avoids borrowing altogether and is used in some European countries. The project is put to a public referendum in the area impacted. If approved the project is paid for out of a one time fixed increase in a tax. So there is no borrowing required public or private, it is simply “pay as you go” – and once the asset is built, the maintenance is simply a charge against operating cost, which is also an incentive to build it properly, with an eye to life cycle or full cost accounting. I don’t know if it is still the case here, but up until recently schools could not be built by school boards to standards which lowered their heating cost – because it was not allowed to spend more in capital to save on operating cost – because they have different funding mechanisms.

But if we are going to borrow to pay for infrastructure the first thing to bear in mind is that public debt is always much cheaper than private debt. And public enterprises do not need to make profits to satisfy the holders of equities. Simple, ain’t it.

Written by Stephen Rees

November 30, 2006 at 7:35 am