John McDonnell’s ‘in-house’ PFI contracts are not only misjudged, they are dangerous

No-one likes rich shareholders – but what about pension funds or charities holding these shares for their steady dividends as ‘safe’ investments? What about the human right not to have property just stolen by the state?

Shadow Chancellor John McDonnell plans to wind up PFI contracts (Reuters)

Let’s be sensible here (here being anywhere but Labour’s conference in Brighton). Some PFI deals have been absolute stinkers for the taxpayer. For whatever reason – naïve civil servants, novelty, semi-corruption – some have seen the private companies involved make absurdly large and unwarranted profits out of vital public services.

Alternatively, when they’ve gone sour, with cost overruns and eroded profits, the private firms have simply “handed back the keys” to the public sector and told them they’re not interested in bearing any more of the financial risk. It has been true from NHS trusts to schools, from defence contracting to major transport and infrastructure projects.

So John McDonnell isn’t insane to want to reform them. Yet that is not what he wants to do. He wants to end them, with no new private finance initiatives being contracted – and bringing all the existing ones “in-house”. This is both dogmatic and wrong – because it could be ruinously expensive, and even more ruinously expensive than having the existing system, even on an unreformed basis. It’s mad.

For one thing, there is a reason why public private partnerships (PPPs) were invented. Way back in the 1990s we had a Conservative government that drove the economy into recession, with a weak leader and the public finances spiralling out of control. Yes, I know.

Anyway back then Norman Lamont, the Chancellor, looked around and came up with the clever wheeze of taking big public spending projects off the public sector’s books, at a time when the markets were starting to become unwilling to lend the UK government any more money.

After all, we had just blown billions trying to stay in the European Exchange rate mechanism, and our reputation for economic strength was going through another dodgy patch. So if HM Treasury couldn’t borrow, why not get the private firms to do so instead? Then, the reasoning went, we could give them a share of the revenues, via taxation or fees, for any revenues their assets generated. The bonuses were that the private sector was better at controlling cost – with a profit incentive to do so – and generally smarter at managing such gigantic projects. Some were; some were not.

Faced with much of the same sort of financial strictures, but also looking for efficiency, Labour under Tony Blair and Gordon Brown pushed them much further. Once again some worked well, others less so.

The asymmetry in the relationship was the obviously weakest part of all these deals – that the private contractors can make off with the money when the profits turn out to be far better than planned – but they drop the project like a hot spud if they turn out to be problematic and loss making. So they were not bearing their share of the financial risk.

What’s more, even if a private firm is not allowed to hand back a project when it gets into trouble, then it can go bust as a limited liability company – and once again the public has to pick up the pieces, as has happened on the railways and the NHS. If a car company or a shop goes bust then the public doesn’t suffer in the same way as if the trains aren’t running or a hospital simply stops running.

Still, it would be ruinously expensive to compensate those companies that have existing and profitable contracts. What’s more those agreements, reaching decades into the future, were reached freely and in good faith with a British government. In some contracts there will be no clause allowing the public sector to appropriate the business arbitrarily. It is illegal.

The only way this can be done is to override it via an Act of Parliament, which of course John McDonnell is delighted to put through Parliament. I would doubt that the private firms would be properly compensated for their lost profits. The net result is that private companies will be less willing to trust British governments in future, if and when the policy is reverse.

“Nationalisation without compensation” was the old hard-left Bennite slogan, implemented by communist regimes with relish over many decades; now it is “Nationalisation with partial compensation”. No-one likes rich shareholders – but what about pension funds or charities holding these shares for their steady dividends as “safe” investments? What about the human right not to have property just stolen by the state? Why would anyone trust McDonnell to pay his debts back and not simply cancel them by another Act of Parliament?

Yes, governments can borrow cheaper than the private sector, usually – but governments are much worse at allocating resources than markets have tended to be. There is a balance to be struck – but effectively scrapping and nationalising all of them cannot be the answer – and taking it all onto the public balance sheet now would seriously erode the British government's ability to borrow at reasonable rates and fund public services. We’d be busted.

With the other pledge to nationalise the utilities without compensation being made at market value, we have a major assault on investors’ rights. It is an abuse of democracy to have a Parliament simply take assets that people own for less than their worth. Imagine if someone from the council came round to the McDonnell family home and offered him 20 per cent or 76 per cent or whatever of the value of the family home, and said he’d have to like it or lump it because that was what “Parliament” had defined as “the market rate” as he put in on the Today programme – an obvious contradiction in terms.

Besides there are still gains that can come from intelligently constructed, legally tight and risk-sharing public private partnerships. They can be more efficient, lower cost, better value, better serviced, better all-round. They do not have to be rip offs. They do not all have to be taken “in house” – and it might be more costly to do so.

As with so anything, memories are short. There is a long list of vastly expensive and wasteful mega public spending projects that left the taxpayers with decades-long liabilities and no hope ever of seeing their investment back. They formed a colourful series of chapters in Britain’s post war history: civil nuclear power; the Concorde supersonic plane (and virtually every other British civil airliner of that era); the Humber Bridge; virtually every public housing tower block; the RAF Nimrod AEW system early warning system.

Some, though not all, would have benefited from a PFI style partnership – a better designed involvement of the private sector than simply handing over huge sums of public funds to private contractors. Some might well have been flops in any case.

Perhaps much the same goes for George Osborne’s “son of PFI” projects commissioned after 2012, supposedly smarter and better value for money. The plight of outsourcing firms such as Capita and Serco suggests that PFI and outsourcing arrangements don’t always guarantee easy profits indefinitely in areas under extreme cost pressure, such as prisons or social care.

The survival of the Channel Tunnel (entirely private) and prospects for Crossrail tells us that a substantial private sector involvement can work to the public good. Heathrow's Terminal 5 – overwhelmingly public, proves that the public sector is best placed in some instances to run things for the public good. The inquiry into the cladding and refurbishment of Grenfell Tower may make the same point (whatever the economics of the original build).

That though is the point. The relationship between the public and private sector has always been extremely complex, each single idea being more or less suitable to a given model of finance. Even McDonnell, surely, doesn’t want the ambulances, drugs or scanners the NHS users to come from publicly-owned suppliers?

Banning and demonising private sector involvement and trying to replace it with public sector workers, capital, management, technology and risk –taking is far too simplistic an answer. It is unworkable. They like the idea, though, in today’s Momentum Labour Party because “profit” has become a misunderstood, dirty word. It amounts to an unhinged rejection of the market economy. So maybe McDonnell is a little mad about things, in all senses. At any rate, he is very clearly wrong, and very clearly dangerous.