Socialists and planning

This investigation into PFI contracts is fascinating:

PFI schools were introduced by the last Labour government as a way of getting new buildings without paying upfront. Hundreds of new schools were delivered. But the contracts, which typically last 30 years, require high annual payments throughout that time and must be honoured regardless of the effects of population change or parental choice on school rolls.

The new Bishops Park School, in Clacton, Essex, was open for only three years before closing after expected housing development failed to materialise.

The building has been taken over by another school, Clacton Coastal Academy, which is temporarily teaching some former Bishops Park pupils in it. However, the academy’s head teacher said he wanted to move them to its main site in Clacton town centre.

About £10?million has already been paid for the school but the PFI contract still requires payments of £1.8?million to be made for the building each year until 2035. In total, taxpayers will have to repay about £55?million for the school, more than twice what the building would be worth even if it was in full use.

In Brighton, the city council had to pay £4.6?million to buy out the contract for the Comart PFI school after it closed due to falling rolls. In County Down, Balmoral High School was closed but taxpayers must still pay the PFI contractor £370,000 a year for the empty building until 2027. Some of the classrooms are in temporary use by another school.

Leave aside the why it was done: Gordon Brown wanted to have lots of infrastructure but didn\’t want to have to say he was paying for it. So get it financed off the books.

Leave aside the opposite point, that it isn\’t as expensive as it seems, for it rolls together capital and maintenance costs in a way that other methods of budgeting don\’t.

Think instead of what this shows us of the socialist (or if you prefer, plannerist) mindset that infest so much of UK society. No, this isn\’t limited to the left it\’s just more virulent there.

That we should be planning the future: indeed we must. Failing entirely to understand that you simply cannot gather enough information in order to be able to plan the complexity for three decades out.

Sure, of course, you do need to be able to decide where and how large to build schools and you\’d rather like them to have a decades long life as infrastucture. But it all needs to be a lot more flexible than deciding 30 years in advance who is going to, or even when they\’re going to, repaint the walls.

And if we have this problem with schools, which we do, then imagine how much more difficult the planning of the production side of the economy is going to be? We might be able to make a good guess about what is going to be the hot new technological area in 2018. But anyone seriously predicting what it will be in 2035 (except in the most general terms, biopharma perhaps, or renewable energy) would and should be derided as entirely barking.

And yet we do still have those who would say it is both possible and desirable that we should, through politics and the bureaucracy, try to plan these things.

Even when we\’ve the evidence that in something much more stable, schooling, the wheels come off such planning attempts after only a decade.

In short, it\’s not just the way that PFI was financed. It\’s the way that an attempt was made to plan in detail decades out. something that really just doesn\’t work.

12 thoughts on “Socialists and planning”

  1. The annual spending budget for a typical secondary school (1200 kids) is about £6million. About £200k of that is spent on buildings maintenance. A school rebuild (assuming land is already available to the school) is about £30 million.

    So is PFI a good deal?

  2. I planned ahead 25 years when I bought my house, and I don’t think such long-term planning is totally absent from the private sector.

  3. The bizarre thing is that criticism of locked-in payments would equally apply had the building just been paid for up-front with current Government expenditure as critics (from the left) of PFI would generally prefer.

    Either way, you’ve exchanged a big pile of cash for a building, that may or may not be useful for educating kids for 30 years.

    PFI could have built in options transferring the risk of stranding this asset to the private sector, but you have to pay for that with higher charges.

  4. not with you on this one, Tim. If the government had borrowed 30 million (using marksany’s number) to build a school and repaid over 30 years, it would come to the same thing – 55 million total repaid doesn’t look crazy (should be able to calculate the interest rate from those numbers – knock a bit off for maintenance) and the same risk that somewhere in the middle the school wouldn’t be needed anymore.

    is the complication that the government can’t sell the school half way? That would be a serious difference; otherwise, it’s all one or the other, with people taking risks about future needs and interest costs.

    Tim adds: “is the complication that the government can’t sell the school half way?”

    Partly. But worse than that, the government can’t change the maintenance contractor, can’t change the layout, can’t change the plugs, can’t change the use, for that 30 years.

    They’ve planned all the flexibility out: and flexibility is something we need in this ever changing world. Which is the major point: you cannot plan the future in detail because you require flexibility.

  5. Also, with the PFI, what’s the incentive for the government agent to be negotiating a good deal with the contractor? It’s not their money.

    I don’t think it’s so much a leftist mindset, as just normal government failure because the negotiating agent doesn’t have to pay the costs. Having an agent act for you is difficult enough in the private sector.

  6. Maybe if the school was any good people would move to the catchment area? Been known to happen, you know.

  7. Large centralised states like the Soviet Union were actually quite able to take account of innovation in their plans: there wasn’t any.

  8. PFIs aren’t necessarily bad things. Provided one accounts for them honestly and makes all the usual provisions. The key for them to be successful however is proper negotiation of the terms. This, it appears was where Gordon’s functionaries fell on their arses in a major way.

    Using some of the numbers available (and yes, I know they aren’t very clear) it does look like the interest rate being charged for the initial capital is about 6%. What was the interest rate in Britain between 2005 and now? Less than 6% I would imagine.

    And then there’s the operating costs. Contractors live by charging the absolute minimum for run of the mill work as laid out in the contract. Where they make their money is on the extras and exceptions. Anyone who’s dealt with contractors will know this and would normally put in place a system to query everything and refuse the inevitable excesses.

    Clearly the government has failed to manage either of these elements thus causing the UK taxpayer huge costs. I think that comes under the definition of malfeasance, doesn’t it?

  9. one of the rationales behind PFI was that if the entity that builds the building is the same one that’s going to have to maintain it for 30 years, they have good reason to build to a high quality, and to build it quickly.

    traditional procurement (dear contractor, please build us a school, then we will own it) gives them good reason to build it slowly (the usual practice of making the client pay for revisions to job specification that you ‘discover’ once building has started) and to build it cheaply. Maintenance is somebody else’s problem.

    If you offer somebody a contract which says if you build this for us, we will guarantee to pay you £x for 30 years, you will negotiate a price for that.

    If you offer somebody the same contract which still says build this for us, but we reserve the right to stop paying you should we decide to, for whatever reason, you will negotiate a different price for that.

    Which contract is better depends on the price differential, and how often one finds oneself regretting having entered into the contract, ex-post.

    The fact that in some cases you end up paying for something you no longer need does NOT demonstrate that the former contract is the wrong contract. Overall you might still save money, even if in some cases you end up paying for unwanted buildings.

  10. If I were PM, I’d set the police to investigate one or two of the more outrageous deals. No doubt they’d find that sweeteners had changed hands and so the deals could then be scrapped. Other deals might then, I dare say, be renegotiated by firms keen to avoid investigation. If there are actually deals that were above board, then we are stuck with them I suppose. Though at least the government could rename surviving rotten deals asBrown-Balls deals, or the like.

  11. “The key for them to be successful however is proper negotiation of the terms”

    Well, yes it is, but even so, I laugh until the tears come. I’m a developer. There is no government employee on this planet capable of out-negotiating my secretary for the price of a cup of coffee.

    We call them Public Private Partnerships out here, P3s, and they’re a license to take money from fools. One of the lads in my business just built some low cost housing for our local politicos at $320K per unit the same year I built condos, better quality for $200K per unit.

    If there ever is a government employee with some idea of how to negotiate, some developer will hire him right away.

    I used to write furious letters to newspapers and politicians decrying this horrendous waste of state funds, but I’ve changed, matured. Now I lobby for a P3 contract for me. Canada Bill Jones was right – it is immoral to let a sucker keep his money. Voters are suckers for electing these fools.

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