Atlas should shrug off PFI deals
Private-finance initiatives and public-private partnerships were championed by Labour – but don’t be fooled into thinking that made the party business-friendly, says Max King: old prejudices were still at work.
Commentators have been quick to remind us of the enthusiasm of the 1997-2010 Labour government for the private-finance initiative (PFI), thereby implying this was a business-friendly administration. Maybe, but it wasn't immune from old socialist prejudices.
In the 1980s and 1990s, Labour had been a vociferous opponent of privatisation and the culture of popular capitalism that it encouraged. In office, it abandoned wholesale renationalisation, but imposed a £5bn "windfall" tax on the "excess profits" of privatised utilities, which it thought had been sold too cheaply.
In the face of arbitrary taxes, a regulatory clampdown and a hostile media, the utility companies quickly disappeared from public view, accepting bids from overseas or from private equity, where management was more opaque and less accountable to public opinion. Few remain as listed companies and "popular capitalism" is a distant memory.
A brief history of renationalisations
Where Labour did nationalise, it was determined not to have to pay for it. It instigated a change in the basis of electricity pricing and when, as a result, British Energy, the operator of the UK's nuclear power stations, got into short-term financial difficulty, it seized control, forcing the disposal of valuable assets at fire-sale prices. In 2009, after a U-turn in nuclear power policy, UK power stations were sold to France's EDF for £12.5bn, handing Gordon Brown's government a multi-billion-pound windfall.
EDF had promised to build four new nuclear power stations, but whittled its commitment down to a 67% stake in just one project Hinkley Point. After the example of British Energy, no British company was prepared to invest and so EDF was able to dictate terms. Costs soon inflated to £20.3bn, to pay for which the government agreed that EDF would receive an electricity price which was more than twice the wholesale price. This cost will simply be passed on to consumers via the private-sector suppliers who, naturally, will then be accused of excess price rises.
In 2001, the government seized control of Railtrack, which was struggling operationally and financially to catch up on decades of under-investment in the public sector. Since then, Network Rail's debt has multiplied to nearly £50bn while efficiency has declined by 5% in the last three years, according to the Office of Rail and Road. Grandiose projects routinely over-run in terms of cost and time, but the blame for the consequent disruption to services and increases in ticket prices always falls on the privately-owned train operating companies that are the public face of the railways.
TfL, another nationalised industry, has embarked on a major programme of investment and upgrades of the tube network. Gordon Brown set up three public-private partnership (PPP) companies to carry out the work, in the face of opposition from London's then mayor, Ken Livingstone. Private-sector companies were keen to get involved, not just because of the potential for profit, but out of a nave enthusiasm for helping to improve London's transport infrastructure.
I remember warning the directors of Amey, whose shares I held in funds I managed, that their involvement in such a politically sensitive area would ruin both their company and them personally. When they dismissed my warnings, I sold out. The tube PPPs did indeed prove to be a disaster for all those involved. The Amey share price collapsed while TfL had to take the contracts back in house. The FT recently reported that TfL is heading for an annual deficit of £1bn.
Equally toxic for private companies has been involvement in the NHS. A total of £10bn was wasted on computerisation before the project was abandoned. Inevitably, Computer Science Corporation rather than the NHS got the blame but, as a US company, it could just walk away. UK companies such as Torex and iSoft were ruined. A similar fate has befallen other companies seeking to provide services to the NHS.
They just don't want a partnership
Private companies consistently fail to understand that large parts of the public sector don't want to work in partnership with them they resent the intrusion of the private sector into their workplace and the profit that is consequently made.
Those parts that do accept the need for private-sector capital and expertise don't want to pay for it. The collapse of Carillion is just the latest in a long line of companies who misunderstood that reality. It accepted fixed price contracts to build hospitals not out of greed but through over-confidence and a misguided belief in "doing good", just as Amey, Jarvis and others had done.
The private sector needs to be much more wary of working with the public sector, even if that means that the infrastructure that the UK needs doesn't get built. When publicprivate partnerships go wrong, it is always the private sector that gets the blame. Investors beware!