Costly lesson of private finance and public debt
Carillion's collapse shows the perils of private funding of major projects, writes Colm McCarthy
The bankruptcy of the giant UK building contractor and outsourcing company Carillion has produced some backwash in Ireland, where the company was involved in several school-building projects. The collapse has provoked politicians in Britain, on both left and right, to question anew the so-called private finance initiative (PFI) which has been used to fund many state investments in the UK since the early 1990s. It is identical to what we call public-private partnership (PPP) in this country. The politicians have a point, although not quite the point many of them have been making. Carillion's collapse was due only in part to its PFI activities, and the deeper criticisms of the PFI model have been around for a long time.
Finding money to finance public investment in schools, roads or hospitals before PFI came along used to require upfront public borrowing, with an immediate increase in the outstanding debt and deferred expenses for interest and maintenance. Around 1990, somebody invented a new model, the private finance initiative. The contracting firm will not just build the facility, they will raise the money on their own balance sheet and do the maintenance as well for 20 or 30 years with ownership eventually reverting to the State. Government needs to find no money in advance - the capital, interest and maintenance costs get rolled into a long-term annual fee arrangement. Since government accounts are not done properly, the deferred liability for these ongoing payments is not shown as a debt on the State balance sheet. It's a bit like the 100pc mortgage - no money up front, but plenty of costs (and risk) down the line.
So the finance minister can tell parliament that no, there has been no increase in State borrowing, we have cleverly mobilised ''private capital'' and can build more schools and roads. The national debt is unchanged according to the public finance accountants, including Eurostat, and future ministers are left to worry about the deferred costs. The whole approach could politely be described as an accounting trick.