The Private Finance Initiative : sixth report, together with the proceedings of the Committee, minutes of evidence and appendices / Treasury Committee.

  • Great Britain. Parliament. House of Commons. Treasury Committee
Date:
1996
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Licence: Open Government Licence

Credit: The Private Finance Initiative : sixth report, together with the proceedings of the Committee, minutes of evidence and appendices / Treasury Committee. Source: Wellcome Collection.

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    effects are not measurably different, recourse to private finance does not relax any constraint on the availability of finance which genuinely originates from macroeconomic considerations. EFLs may frus- trate public investment at the margin, thus imposing an opportunity cost in terms of foregone returns. However, at least in principle, the Treasury ought, in the light of the macroeconomic gains to be derived from stringent fiscal control, to be setting EFLs so as to equalise marginal returns. Similarly, the Treasury would have to reduce EFLs or equivalent allocations by an amount equivalent to the use of pri- vate finance in order to maintain its chosen macroeconomic stance. The use of private finance therefore does not release macroeconomic constraints, despite the claims of its advocates: If the [private finance] initiative succeeds, it will produce more investment than the Government can afford in much-needed capital assets such as community health centres, day surgeries, roads, railway carriages, signalling equipment and bail hostels. There is, fortunately, a limit to the amount of tax that the Government is willing to impose; and public borrowing is already too high. If some public investments are privately financed, and added to what the Exchequer is able to fund, the consumer of public services will benefit (Hancock, 1993, italics added). This list of ‘much-needed capital assets’ includes those for which charges are not levied upon ‘con- sumers’, and which must therefore be financed by taxes or public borrowing, both of which are stated to be constrained. In such circumstances, private finance can only alter the time profile of public expendi- ture scoring. Although user charges do provide a means of servicing the private finance, taxpayers may resist paying both an existing level of taxes and newly introduced user charges. This evident circularity has encouraged the view that the Treasury’s use of rules is insincere, using them primarily to block things which the Government does not want to happen on other grounds. This apparent lack of even-handedness in application naturally increases the willingness of opposition politi- cians to consider redefining those rules (Brown, Cook and Prescott, 1994). Moreover, due to their timing, recent developments concerning private finance can be characterised as a hidden form of activist macroeconomic policy: ... the construction industry is in a truly dreadful state and you have got to think of some ways in which it can be resuscitated and to think of some more or less respectable argument for pro- viding them with what may be rather more expensive finance ... the irony is that by the time you have finally worked out both the principles and practice of this system of private financing it is highly likely that the cycle of economic activity will have changed and once again you will have to think of some apparently important principle which will then make it more difficult for private finance because you will be told by those who manage the economy that this type of financing is inappropriate in circumstances of some strength of the economy (Budgen, 1993, QQ. 8-9). These quotations illustrate a clash of perceptions as to the true purpose of recourse to private finance, relating in part to how the PFI has been presented and in part to the conflicting interests of participants. Perceptions as to the rationality of public expenditure constraints depend crucially upon the vantage point of the perceiver; that is just as true now of the central government departments and quasi-public sector bodies who are main users of private finance in the mid-1990s as it was of local authorities in the mid-1980s. Irrespective of judgements about the microeconomic gains, there is a compelling case for securing transparency as public expenditure control systems have an inherent fragility. 23 January 1996 REFERENCES Beith, A. (1993) ‘Oral question’ in Treasury and Civil Service Committee, Private Finance for Public Projects: Minutes of Evidence, Wednesday 17 February 1993, HC 508-i of Session 1992-93, London, HMSO, Q. 43. Blejer, M. I. and A. Cheasty (1991) ‘The measurement of fiscal deficits: analytical and methodological issues’, Journal of Economic Literature, Vol. 29, pp. 1644-78. Brown, G., R. Cook and J. Prescott (1994) Financing Infrastructure Investment: Promoting a Partnership between Public and Private Finance, Joint consultative paper prepared for the Labour Finance & Industry Group symposium on Public-Private Finance, London. Budgen, N. (1993) ‘Oral question’ in Treasury and Civil Service Committee, Private Finance for Public Projects: Minutes of Evidence, Wednesday 17 February 1993, HC 508-i of Session 1992-93, London, HMSO, QQ. 8-9. Byatt, I.C.R. (1984) ‘The framework of government control’, in Grieve Smith, J. (ed) Strategic Planning in the Nationalised Industries, London, Macmillan, pp. 67-87.