Propping up the private

Far from championing the free market, the UK government's Private Finance Initiative highlights the state’s increasing economic intervention.

Phil Mullan

Topics Politics

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Loved by some, loathed by others, the Private Finance Initiative (PFI) has come to symbolise the New Labour government’s approach to public services.

PFI is when a government buys something big like a new hospital but pays for it later, with the additional bonus of not having to record the debt. It is a hybrid of those consumer credit schemes that implore you to ‘buy a new sofa, but pay nothing upfront’, mixed with Enron-style off-balance sheet accounting.

This means the government can acquire new hospitals or schools that are not just built by the private sector (as they always have been), but that are initially paid for by the private sector too. The project in question is then leased back by the government, with annual lease payments over a period of up to 30 years, during which time the projects remain under private management.

Launched by the previous Tory government in 1992, PFI projects have only taken off over the past five years. Today, over £26billion of PFI contracts have been signed, with a recent annual run rate of about £4billion. This is expected to grow in the near future, boosted by the government’s commitment to increase health spending. Compared to recent public capital budgets of about £15billion a year, PFI represents a big chunk of new facilities and infrastructure.

Most discussion of PFI tends to focus on whether it represents ‘value for money’. Many question whether the business culture of the private sector will be able to offset the extra costs incurred by PFI projects. Private companies pay more to banks than the Treasury would in borrowing charges, and extra amounts will have to be paid from public revenues for profits, due to the additional private sector function of running operations. Considering that PFI is still relatively new, the ‘value for money’ studies carried out so far have been inconclusive.

So what is the attraction of PFI and its close relative PPP (Public-Private Partnership)? There seem to be three reasons that people are keen on PFI. First, there is the pragmatic financial advantage. Through private financing of public service projects the government is able to build more hospitals and schools without appearing to spend or borrow a lot, at least in the short term.

PPPs also limit the immediate cost to the Exchequer. This makes it easier to stay within the high-profile limits on public spending and public debt that have become such touchy issues since the intellectual demise of Keynesian economics in the 1970s. So PFI is attractive to the keepers of the public purse.

Our leaders are also interested in PFI for political reasons. Political elites no longer have much faith in the ability of the state machinery to deliver. This tends to generate a self-fulfilling dynamic of poor quality and inefficient operations – but it also prompts the elite to search for solutions outside of the state, in the private sector. Turning to the market is often seen as a way of addressing the problem of political legitimacy. Rubbish health service? Bring in the private sector. Falling educational standards? Bring in the private sector.

Will Hutton, head of the Work Foundation, says that with PFI, ‘the private sector has become central government’s principal means of geeing up what it sees as underperforming public services’ (1). Prime minister Tony Blair is especially keen to inject what he sees as the positive aspects of private sector culture into public services: ambition, innovation, a ‘can-do’ record of achievement.

In addition to this, PFI fulfils a traditional role for the state by giving support to the private sector. And it does so in a way that is appropriate in an age when explicit ‘big government’ is unpopular. PFI and PPPs follow in the post-Keynesian tradition of appearing to limit the economic role of the state, while business dependency on the state increases.

This is where the broader controversy over PFI misses the mark. While fans of PFI hope that the market will deliver what the state has failed to, critics of PFI see the initiative as a sellout of public sector principles.

The trade unions’ defeat of the government on PFI at the Labour Party conference in October 2002 was presented as an ideological homecoming for Old Labour. Many claimed that the unions had admonished Tony Blair and chancellor Gordon Brown for supposedly adopting right-wing economics. For some, the fact that Blair and Brown dismissed the vote against PFI confirmed that New Labour has turned its back on an ideological staple of old Labour: public sector good, private sector bad.

Less partisan commentators took a more dispassionate view. They agree that PFI is a departure from the traditional mixed economy of the postwar era – but they doubt whether there is a practical alternative to it. They consider the adoption of PFI and PPPs as a sign of the times, continuing the state’s retreat in the face of rampant market forces.

It is wrong to view the public and private sectors as polar opposites that are always in competition. Many claim that when one of the sectors is dominant, the other is in decline, as if they are opposite ends of a seesaw. Many on both the left and the right view the relationship between state and capital in this way.

These views contribute to the mistaken notion that there is something socialistic and anti-capitalist about state intervention. Others claim that government policies over the past 20 years limited the economic role of the state and therefore strengthened the ‘free market’. Both of these conclusions are invalid.

The state does not act in opposition to or apart from capital. After all, its activities are ultimately funded by the collective surplus produced by capital. Rather, state and capital coexist in a symbiotic and potentially contradictory relationship. The state can’t act or function without profit being produced by the private sector; and profit-making is increasingly reliant upon state activity.

Throughout the 250 years of capitalism, private capital has needed the support of state intervention. Usually, this has involved the state creating institutions or performing the social functions necessary to maintain capitalist relations. The state has also passed laws that are inimical to the short-term interests of particular capitalists, but necessary in the longer-term interests of capitalism itself – for example, health and safety legislation.

The state has had to take responsibility for infrastructure and utilities that the private sector has proved unwilling or unable to operate successfully – including roads, railways, power. Recent problems with Railtrack, National Air Traffic Services (a PPP) and British Energy show that this seems to be as true as ever. You can take such operations out of the public sector and privatise them, but that doesn’t mean you automatically create a commercially successful business.

Over the past century, state economic intervention has become more important for ensuring capitalism can cope. The state has become an ever-present prop for the survival of ‘free enterprise’ – particularly through the mechanism of public spending

Consider the growth of state spending and taxation in industrialised nations during the twentieth century. It rose from about 10 percent before the First World War to 25 percent before and after the Second World War, to 40 percent since the end of the 1960s (it has been a bit lower in the USA and Japan, and a bit higher on Continental Europe).

This financial expansion illustrates how the state has taken on more responsibility from the private sector: for social functions (health, education, benefits); for running important utility-type enterprises directly; and for handouts to the private sector (often disguised as tax breaks rather than recorded as grants and subsidies).

Returning to PFI – there is nothing new about close connections between state and capital. What is different today, however, is how pronounced and widespread capital’s dependence upon the state has become. Far from the state’s role diminishing, state-capital relations have developed so that the web of linkages is even bigger, and the impact of state intervention more extensive.

This is not to suggest that the relationship between state and capital is trouble-free. At the level of individual capitalists, the relationship is often fraught. Most businesses hate the bureaucratic processes involved in dealing with the state, and get frustrated with the public sector work mentality. But despite all this, more and more individual capitalists depend on their relationship to the state.

In the past, state economic links tended to be specific, focusing mostly on the nationalised industries (transport, power, communications), the arms sector, and occasional bailouts for important manufacturing companies, like Rolls Royce and British Leyland in the 1970s.

The beneficiaries were often, though not always, the weaker, unprofitable parts of the economy. But more recently, even what appear to be the most dynamic sectors and businesses – like information technology and pharmaceuticals – are more reliant on government contracts or state spending of one form or another. The state often occupies a central part of today’s business plans.

Ironically, the very measures that are said to show the ‘retreat of the state’ over the past 20 years have coincided with this denser web of state-capital relations. Privatisation, still the most evocative policy of the pro-market agenda, was simply change in the form of state intervention. The state moved from being owner to regulator. Nationalisation and privatisation are just two different phases of state intervention.

While government has stood back from directly producing and distributing many goods and services, there have been new state regulations, subsidies and institutions aimed at introducing a favourable environment for the newly privatised industries.

Far from rolling back the state, privatisation institutionalises the corporate dependency culture. The usual pattern was the one-off benefit to private capital of a state asset on the cheap – with debts being expunged and subsidies being provided.

Similarly, despite being seen as a post-Reagan and Thatcher truism, the notion of widespread business deregulation and liberalisation is a myth. Even the OECD complains that the reality has been one of ‘regulatory inflation’ – a world of over-regulation, not deregulation.

Deregulation and liberalisation of a part of the private sector usually signals the arrival of more regulation. For example, the Anglo-American liberalisation of financial services, telecommunications and power have ushered in a plethora of new regulations to allow these industries to function.

Even where deregulation has been less ambiguous – as in the deregulation of British labour markets – it is still a consequence of state policy. Whether we have regulation, deregulation or re-regulation – they are all state policies, supporting the general interests of capital. None is ever about rolling back the state.

PFI follows in this mould – an apparent retreat of the state that in fact signals a more extensive public-private interrelationship. PFIs and PPPs amount to another form of public procurement, alongside tendering, franchising, contracting out, and direct service provision. The state funds from tax revenue, while the business sector provides and earns a profit from these government contracts. The importance of these relationships is not just measured in cash terms. The contracts also provide the stability of recurring revenue streams.

Britain is a pioneer in this deepening of corporate dependency, just as it was with privatisation. Consider how public sector employment in Britain has fallen sharply over the past 20 years, from seven million to five million, or from about 30 percent of the workforce to less than 20 percent. At the same time, however, public spending as a percentage of GDP has been reasonably constant.

About half of the fall in public-sector jobs is due to privatisation – and most of the rest is due to the outsourcing of public services. So while the state still takes roughly the same share of GDP in tax revenue, more is spent on contracts with private sector businesses, not on the public sector payroll.

Overall public procurement in Britain on both current operations and capital projects represents about 15 to 20 percent of GDP. Between one-sixth and one-fifth of value added tax is produced for the state as purchaser. Much higher shares than this have been earned by traditional government suppliers in construction, transport materials, armaments and telecoms equipment. Many of the companies prominently associated with PFI projects, including WS Atkins, Serco, Capita, Amey and Amec, get more than half their revenues from the public sector. But it is hard today to identify any sector for which there isn’t the potential of lucrative public sector contracts: office supplies, healthcare providers, information technology hardware and services, business and financial services, catering and cleaning services….

PFIs and PPPs, like their immediate predecessors privatisation, deregulation and liberalisation, express the widening web of state-capital links. Businesses may complain about the cumbersome PFI process, but you won’t see many rejecting the principle. Not because it represents the triumph of the market, but because the market needs its state fix more than ever.

Phil Mullan is the author of The Imaginary Time Bomb: Why an Ageing Population Is Not a Social Problem, IB Tauris, 2000 (buy this book from Amazon (UK) or Amazon (USA))

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spiked-issue: Economy

(1) Public Finance, 7 June 2002

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Topics Politics


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