Crossrail PFI: a crisis waiting to happen
Ever wondered why London transport is so damn expensive? Part of the reason is the failed Metronet PFI scheme, which required a government bailout that cost the taxpayer hundreds of millions in 2007.
Last week, a dispute about the PFI financing of London’s Crossrail project broke out between Transport for London (TfL) and Whitehall.
TfL, who learned about PFI the hard way is keen to learn from its mistake and take the project in house. The Department for Transport (DfT) and Treasury? Not so much.
Quite sensibly, TfL wants to make use of the governments AAA credit rating to secure low interest finance for the project. It points to a recent treasury report which states PFI companies’ inferior credit ratings mean their interest repayments are often 70% higher than government’s.
TfL also said there was nothing that the private sector can do that the public sector can’t: “[T]he benefits that do arise from private finance could also be achieved through a disciplined, wholly public procurement.”
Whitehall is opposed to the move because funding the project directly would bring more debt onto government books. Whatever any politician tells you, about efficiency or the supremacy of the private sector, this has always been the attraction of the scheme. Whitehall also claims that PFI transfers risk to the private sector.
But the case of Metronet shows us this is nonsense. Its debt obligations were 95% guaranteed by TfL, meaning that it’s lenders only saw 5% of its debts as at risk.
Consequently, Metronet was allowed to borrow with extreme irresponsibility, racking up debts close to £2 billion before going bust. The Department for Transport had to step in and pay out £1.7 billion to Metronet’s lenders and the National Audit Office (NAO) estimated the direct loss to the taxpayer was between £170 and £410 million.
So why are we getting ready to do it all over again with Crossrail? Well, things have changed since 2007. Metronet was a unique case and such large debt guarantees are rare and unlikely to be repeated.
But, we are also now living through the most austere and uncertain times since the Great Depression. Borrowing capital is difficult and expensive and future of countries and currencies, never mind companies, is precarious.
PFI companies continue to fail. This month GR wrote previously about the problems PFI hospitals are currently facing while AssetCo, the PFI company that owns and leases firefighting equipment may need to auction off London’s fire engines to pay its debts.
Using private finance to manage public services is, and has always been, recklessly short-termist and inefficient. But can TfL can convince the Treasury of that?
GR will be holding a public forum on PFI on Wednesday 7 December in Central London, watch this space for more detail.