Now let’s look at what that means for a minute. What are the market conditions for PFI, for example? I would suggest that the clearest indicator is that when valuing the future net earnings due from these contracts (which is the only reasonable way in which such value might be determined) the appropriate discount rate to be used should be that implicit in the original PFI contract. After all, that would be reasonable; this is what can be called an ‘arm’s length term’ i.e one set by independent contracting parties that was thought fair.
These discount rates (which effectively set the rate of return in the contract) were often quite high because it was supposed that quite large amounts of risk were transferred to the private sector when these contracts were issued (even though this rarely seems to have been the case in practice). This risk transfer was, after all, the whole reason for PFI and formed the supposed justification for the higher returns payable under this scheme than the equivalent government debt would cost. Given that this risk must still exist, because it would be unreasonable to presume they disappear when the contract was signed , then I think this argument can hold true. And it is this risk factor that should equate why, in a rational market, the higher return on PFI produces a yield that is no more attractive, despite that higher sums apparently earned, than is payable on government bonds, with which John McDonnell is proposing that the contracts be bought out.
Well, no. Because a PFI contract comes in two parts.
Building something and then maintaining it.
The building it is the risky part, once it has been built it’s less risky. That initial discount rate will cover the risks of both parts of the contract.