« What the people want | Main | Securonomics vs productivity »

May 23, 2023


Luis Enrique

I am going to offer a partial defence of PFI. One should not compare costs of debt without looking at the allocation of risk.

If private lenders are charging 10% that should be because there are states of the world in which they will not be repaid, and under traditional government procurement, in which the government borrowing at 2% finances the project, in those same states of the world the government would be liable for cost overruns. So a proper cost comparison must account for those possibilities and the probability of them occurring. Or the government could contract on a fixed-cost basis, in which case the contractor would build the cost of bearing the risk of screwing up and going bust into their pricing. This is a version of your "there is no magic money tree argument" - you can move the cost of risk around, but it doesn't vanish - private finance makes it more visible. Naïve comparisons of private versus government costs of borrowing miss that point, however.

Whether PFI is a good deal or not depends on how much the private lenders are charging for bearing risk. I am quite prepared to believe they managed to negotiate rates of return that were not justified by the risk they took ... but that's a different point.

It is also wrong not to think about quality - the theoretical justification for PFI was that contractors had incentives to build to a higher quality because contracts made them liable for maintenance and service delivery. Again, whether the actual contracts did that successfully is a separate question - again I would not be surprised if the private sector managed to negotiate terms that did not expose them to the costs they should bear in theory.

(I have read some evaluations that noted higher quality in PFIs).

The Guardian article you link to indulges in a bit of magical thinking too "My hospital trust, in north-east London, spends nearly £150m a year repaying its PFI debt – nearly half of which is on interest payments" - the government chooses whether to make trusts face the costs, including interest, of building and running things, whether PFI nor not. The trust could be charged £150m a year by central government for buildings etc.


«Long NHS waiting lists are forcing people to go private. What people save in taxes by not funding the NHS is thus, for many, offset by paying for private care.»

One of the thing that is common in our blogger's writing is respect for the neoliberal convention that distributional impacts cannot be mentioned, so they are obfuscated by generic terms like "people", "the economy", "the national interest".

In this case the "people" who save money in taxes save a lot more than paying for private care, because the cost of the NHS costs around £4,000 per person per year, and many taxpayers pay a lot more than that for the NHS in the share of taxes.

«privatization might increase efficiency and so cut costs.»

Another thing that our blogger seems of ten to respect is the neoliberal prevarication between productivity in physical terms (physical quantity of output for physical hours worked) and productivity in money terms (price of output for cost of wages). Here "efficiency" can mean either.

«But this only works if monopoly is replaced by competition.»

The fantasy is that during bidding to run a privatized service there will be competition and this will eventually lead to an increase in the physical productivity of the service.

The reality is that the increase in efficiency will be usually achieved by cutting pay, which used to be easier for contractors than for the government. Cut pay by 20-40% and 10-20% can go to contractor profits, 10-20% in lower taxes. It is a WIN-WIN! :-)

«only if we can create or mobilize these that we can have more or better schools, hospitals, utilities or whatever.»

For whom? For "people"? For "the economy"? For "the national interest"?

«Otherwise, you are just wibbling about magic money trees.»

But there are magic money trees, in cutting pay and increasing property costs, and these can lead to "better schools, hospitals, utilities or whatever" for the right sort of people, who have been very grateful accordingly to Thatcher, Blair and their successors.

If group A can "sponsors" a policy that increases costs by 20% for everybody else, but reduces their own costs by 10%, isn't that a "magic money tree" too?

A more serious discussion of these things would be based on two topics:

* The thatcherites want to replace insurance pools with individual tax-free savings plans. This is hugely expensive for most people, except for group A.

* The thatcherites want to turn all services into gold, silver, bronze plans, with only the bronze plans being partially funded by state funds. This meeans a huge reduction in levels of service for most people, except for group A.

Why are the middle classes voting zealously for all that?


«contractors had incentives»

Here "contractors" is a wishy-washy term on which much dissembling can be based...

«the private sector managed to negotiate terms that did not expose them to the costs they should bear in theory»

The private sector are not morons and the standard for all these contracts is that "contractors" means a maze of corporate entities and those who get the profits tend to be based in tax havens and don't bear any risk, and those that bear risks don't get the profits and their theoretical owners don't care if they go bankrupt. "Bye bye suckers!" :-)

Compare illustrious precedents like the Channel Tunnel Company and Carillion.


The problem is one of solidarity and pricing.

Why should the farmer work five days a week if you won't? Why shouldn't the improvements in productivity accrue to the farmer and they stop producing after four days work and take Friday's off.

For the farmer to work that final day, producing the surplus for those who are currently unemployed, they need to see something in return. That's other people working about as much as they do.

Moreover the Job Guarantee *sets the base price of the labour hour in the economy from which all other prices are derived*. It is the anchor, of the anchorism within MMT.

If I give you 10 of my notes, you have absolutely no idea how much they are worth or how many Big Macs they will buy. But if I tell you you get those 10 notes for five hours work, you will be able to gauge quickly how much a Big Mac should be in my notes. Therefore you'll tend not to overpay.

That anchors inflation. Everybody knows how much a labour hour is worth at base, and that then *replaces* interest rate adjustments as stabilisation policy in the economy. We move stabilisation from the market for money to the market for labour.


Of course there is a magic money tree, the rich have been enjoying it's fruit, since the dawn of time. It is the consumer surplus captured by the rich, as determined by Government.

The water industry like all private industries is an extractive industry, no not of water from the environnment, but wealth from the public.

Gaming the system as allowed by Government, enables the water companies to avoid and inflate costs and move the resulting profits offshore. Providing water and sewerage is an unfortunate distraction, to financial manipulation and tax avoidance.

Nationalisation would stop the profit extraction, and so the public pays less, in the future. Priorities: Whose priorities, the rich, or societies?

Society always pays, how much, and to whom, is the question.

The distribution of wealth and resources, is always the issue.

Costs and priorities are determined by the wealthy.

Socialise costs, privatise profits aka Neoliberalism.


«as we see in water companies plans to make customers pay the costs of investing in the sewage system. [...] Governments can borrow more cheaply than the private sector.»

The first note is that "Governments" here is one of those unqualified generic terms that can be used to prevaricate.

Because many "governments" can only borrow more expensively than the private sector. Only the governments that can be trusted to inflict brutal taxing or spending squeezes on their lower classes to repay their debts can borrow cheaply. That is they can borrow cheaply only if they are not "profligate", that is they don't spend the borrowed funds to net-improve the life their lower classes.

But this point and the aim to make "customers pay the costs of investing in the sewage system" are related, because as perhaps our blogger has forgotten there was quite a debate about privatisations, decades ago, with one premise and two overt positions:

* The premise: there was a need to spend a lot to fix and upgrade various utility infrastructures, so "someone" ought to pay for that.

* Position 1: funding investment with state borrowing, would trigger the "bond vigilantes" and result in much increased government borrowing costs, and generally higher interest rates, thus endangering the property and finance sectors, unless it was clear that taxes would be soon raised to pay back all that borrowing, greatly endangering higher rate taxpayers.

* Position number 2: it is politically very difficult for most governments to increase the price of public services because voters then directly blame the governing party and vote against it, because they regard it a political decision, while they don't if it is a private company that does it, because they are fooled by the apparent lack of a direct link. So funding investment with price increases would only work after privatisation.

Position 2 won the public debate, also because of 3 less overt arguments:

* In position 2 a significant chunk of the funds to invest in maintenance and expansion would also come from cutting wages, through both unemployment and cutting outright wage and pensions levels, while doing that in state owned business at the time was going to be less popular.

* In position 2 the process of privatisation and then stock price management and private financing would generate big profits for the consultancy and private sectors.

* In position 2 there was the possibility to sell cheaply the privatised shares to voters, thus buying their loyalty to right-wing parties, as proven by some crucial study of the late 1970s.

«Water charges are 4.3 times as high as they were when the industry was privatized, whilst electricity prices are 5.7 times as high»

It would be interesting to know how much has the wage bill increased and how much has net investment increased in the same sectors.

«consumer prices generally are 2.3 times as high»

That may be the usual confusion between (one of the) "consumer price index" and "consumer prices", two rather different concepts and quantities.


"you can move the cost of risk around, but it doesn't vanish"

How about when the central bank buys it from you?


«It is the consumer surplus captured by the rich, as determined by Government. The water industry like all private industries is an extractive industry, no not of water from the environnment, but wealth from the public.»

Indeed, and that is pretty much what some people cannot realize or don't want to discuss when they use generic terms like "people", "governments", etc., but here "extractive" and "public" are also a bit too generic:

* There are two (main) types of extraction, from workers by employers (or far more rarely vice-versa), and from consumers by vendors (or far more rarely vice-versa, and vendors are not always employers, and there are large categories of consumers that are not workers).

* The "public" is made of persons that maybe in more than more category of workers, employers, consumers, vendors, so what matters is *net* extraction (like "incidence" for taxation).

«Nationalisation would stop the profit extraction, and so the public pays less, in the future. Priorities: Whose priorities, the rich, or societies?»

So there are a couple of issues with the expectation that "the public" would pay less, if having replaced private owners with less self-dealing state ownership simply enabled another self-dealing category, like managers, workers, suppliers, landlords, to become more extractive.

Decades ago there was some merit in some cases in the right-wing allegation that public sector ownership enabled "workers" to exploit "the public", e.g. as reflected in various statements like this:

«And behind it was an appeal to the consumer - usually female — over the interests of the producer — usually male and unionised. This potent postwar mix contains many of the ingredients of “Thatcherism.”»

Margaret Thatcher implied that when she stated that the only thing worse than a private monopoly was a public monopoly (a fairly insightful statement, even if partly based on arguable assumptions of fact).

As an aside I have kept getting sad for decades that once well understood concepts like value added/plusvalue, cost accounting, incidence, depreciation, self-dealing, seem to have largely disappeared from public discourse.



"The critique of her and her government was encapsulated in her notorious remark, that there was " no such thing as society.""


"She once confessed to Frank Field that her great regret was that there was not much more charitable giving by the rich whose taxes she had cut."


"There are of course limits to what governments can do, especially about the petty differences between us and people we know, which are often the inequalities people worry about. Nevertheless in dismissing all this as just the politics of envy we showed we did not understand something which does affect wellbeing. Back then we just assumed that there was a robust British society and all that had gone wrong was that statist economic policies had messed up the wealth producing bit, but when that was sorted people would stop being so angry about things."

Margaret Thatcher was an asset stripper who favoured certain sections of society, and let the devil take the hindmost. It was Thatcher that moved people on to disability (to hide unemployment (3 Million Plus)). Now many just think the game is not worth the candle.

The anacho-capitalists don't care for society, it is capitalists greed and inequality, that have destroyed the wealth producing bit of the economy. They see no restraints in exploiting people (home and abroad) or self-dealing. No veil of ignorance at Eton. How can anyone (but the already rich) be self-reliant, given the current distribution of power and lack of constraints on exploitation.

"the only thing worse than a private monopoly was a public monopoly"
Margaret Thatcher.

"Human empathy is important for society and for our shared humanity and evolutionary biologists are helping us to understand where it comes from and how it works. We can understand more rigorously than ever before the sources of human wellbeing."
A (repentant) David Willetts (No longer a Thatcherite, also no longer in power).

Public monopolies are often natural and should be aligned with the public interest, and a sense of the public good and not a refuge for poor management or producer interests. Private monopolies are monsters, run by psychopaths.


«Public monopolies are often natural and should be aligned with the public interest, and a sense of the public good and not a refuge for poor management or producer interests. Private monopolies are monsters, run by psychopaths.»

I guess then that public monopolies should be run not by psychopaths, producer interests or poor management, but by fair and just wykehamist philosopher-kings so that they be «aligned with the public interest, and a sense of the public good».

But if we are wishing upon many many stars, shouldn't then we wish that everything be run by fair and just wykehamist philosopher-kings, not just public monopolies?
And shouldn't then also wish that every little girl get a pony?

Our blogger would then remind us of his teacher's "What's the mechanism?" question, and then we would wish upon those many stars also to be told by which mechanism public monopolies would would end up run by fair and just wykehamist philosopher-kings, and every little would end up getting a pony? :-)

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