Tuesday, January 8, 2013

The origins of PFI/PPP

Infrastructure investment in Britain declined dramatically after the 1973 oil crisis and International Monetary Fund intervention three years later. Both Labour and Conservative governments imposed substantive cuts in public sector capital spending programmes. Net public sector investment under the Labour government, £28.8bn (5.8 per cent of GDP) in 1974/75, more than halved by the end of the decade and plummeted to a mere 0.4 per cent of GDP in both 1988/89 and 1998/99. The decline in public sector investment in the last two decades occurred at the same time as the government had unprecedented privatisation receipts and North Sea Oil revenues. 

By the mid 1980s a spate of studies by the Confederation of British Industry, the Federation of Civil Engineering Contractors, and the now defunct National Economic Development Council, had exposed the deteriorating state of the infrastructure and assessed the potential impact of further cuts in capital spending. The major contractors and construction industry bodies demanded increased government capital expenditure and relaxation of the External Financing Limits on nationalised industries and PSBR controls. There was little reference to the use of private finance.

The Conservative government doubled the road building programme to £12bn and proposed that additional road schemes could be built and operated by the private sector in ‘corridors of opportunity’. The Treasury’s Ryrie rules, which required a matching reduction in public funding in response to private funding of infrastructure projects, were relaxed in 1989. 

Some British companies were involved in some commercially unsuccessful private infrastructure projects overseas, but the Thatcher government insisted that privately financed schemes should not be subsidised. A number of private sector transport schemes including the rail link to the Channel Tunnel, a second Severn Bridge, a rail link to Heathrow and the Docklands Light Railway extension were developed at this time.

By 1990, with much of the basic transport and utility infrastructure either in private ownership or planned for privatisation, contractors were lukewarm over the prospect of private roads.  They turned to other sectors such as hospitals, prisons and urban development where they believed they could obtain higher returns and access ‘surplus’ land and property for development.

The Private Finance Initiative was launched in November 1992, a financial mechanism to obtain private finance which could satisfy the political need to increase investment in the infrastructure without affecting public borrowing, guarantee large contracts for construction companies and create new investment opportunities for finance capital. 

Most politicians had a short-term perspective, but capital was looking longer term. The ‘crisis’ in the flow of PFI projects between 1995-97 was partly caused by demands for state financial guarantees and partly because PFI consortia were flexing their muscles to ensure contracts reflected their interests. In one sense, PFI was a natural progression given the Conservative’s privatisation and economic policies in the 1980s. The privatisation ‘machine’ was never going to stop, at least not of its own accord. PFI is privatisation by stealth, privatising those parts which could not, at least politically, be sold-off as complete services. It is the route to the ultimate marketisation and privatisation of health, education and social services.

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