Rebuilding Place in the Urban Space

"A community’s physical form, rather than its land uses, is its most intrinsic and enduring characteristic." [Katz, EPA] This blog focuses on place and placemaking and all that makes it work--historic preservation, urban design, transportation, asset-based community development, arts & cultural development, commercial district revitalization, tourism & destination development, and quality of life advocacy--along with doses of civic engagement and good governance watchdogging.

Wednesday, August 10, 2011

Private financing of public infrastructure is good business for business

Face it, the reason that private outfits finance public projects, buy toll roads, fund traffic cameras, etc., is because there is money in it.

But it comes at a cost, because if the projects had been funded with public monies, all of the monies spent would have gone to the projects, rather than to financing, administration, and private profit.

The Financial Times has a big article on the topic, "Public finances: A divisive initiative" and an editorial, "Building debts for the future."

From the article:

“I first really began to worry about the private finance initiative back in 2003,” says Mr Bacon. “I ran into an investment banker who said: ‘I like the PFI [Private Finance Initiative]. It’s good for business. We make a lot of money out of it. But as a taxpayer, it really cheeses me off.’ That rather woke me up. This was not a trade unionist complaining. It was a City fat cat getting fatter on the proceeds.” ...

Why has it proved to be so popular? “For three reasons,” a former Treasury adviser says. “Governments think it transfers risks, and works. Because they don’t have to raise the capital now. And because accounting rules mean it often does not count on the government’s books. You make your own judgment over which is the main driver,” In other words, for at least two of those reasons, governments simply cannot resist it.

After all, private borrowing costs more than government borrowing. And while any government borrowing would be written off if the school or hospital were no longer needed, under PFI the taxpayer would also have to cover the lenders’ anticipated profit. So once a PFI contract is signed, it is almost impossible to get out except at enormous expense.

In theory the transfer of risk, and the efficiencies gained, more than pay for the extra borrowing costs. But these are not small. ... Calculations by the Financial Times suggest that, on the £53bn capital value of current PFI projects, that translates to the taxpayer having to pay £20bn-£25bn above the government borrowing rate – the equivalent of 40 or so big hospitals. “You need an awful lot of risk transfer or efficiency gain to make that worthwhile,” Mr Bacon says.

The editorial closes with this paragraph:

PFI has created an export industry. It is a nice business for the City, employing armies of bankers and consultants. But it is not the taxpayers’ job to provide a living for these people. A new approach is required. Before signing more PFI deals, the government should show that the same project could not have been delivered with better value for money had it been financed directly by the state.

Also from the Financial Times:

-- "Watchdog calls for alternative to PFI"
-- "PFI profits ‘not shared by the taxpayer’"
-- "MPs hear of PFI profit-share potential" (this article suggests that the public sector should get a cut of the appreciation when such public-private assets are sold)

-- UK National Audit Office, section on Private Finance

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