Tuesday, 31 October 2017

Public Finance Initiatives: The Power of Privatisation

Today’s post acts as a sequel to a previous post here in Financial Regulation Matters that was concerned with ‘Public Finance Initiatives’, or PFIs for short. In that first post, the PFIs were established as a good idea captured by private greed, ultimately posing a great threat to society at a time where greed can have generational consequences over and above that caused by the Financial Crisis. The focus of the post was on the cross-party support for these initiatives, with their output being vastly overvalued and the tab being taken on the by the citizens of the U.K. However, in this post, we will look at the PFI issue from within the confines of tax, or more precisely the lack of it, that is derived from these initiatives. However, there is something important that needs to be declared before the post continues, and that is that this post does not aim to fall in line with a certain political party’s denouncement of all things private i.e. the current incarnation of the Labour Party, as their anti-privatisation standpoint seems to be a convenient whitewashing of the party’s role in their creation in the first place, irrespective of whether one labels the party ‘New Labour’ or otherwise.

With that being established, there is also the need to point out that this post need not go into the intricacies of what a PFI is and what it is supposed to do, as the first post covered these aspects via direct analysis or reference. Yet, whilst the first post made reference to vast overvaluing occurring in the sector, and the dominance enjoyed by these companies, recent news suggests that there is another distasteful and revealing aspect to the sector, in that five large PFI firms avoided paying (or paying nominal amounts) tax during a five-year period, despite making almost £2 billion in profit. The BBC, no less, reported that these offshore companies are currently on a buying spree with regards to PFIs and their projects, with nine offshore companies owning, majoritively, 45% of the total amount of current projects in the U.K. – there are currently 735 projects. Furthermore, socially-central institutions like schools and hospitals account for over two-thirds of these companies’ investment, signalling the move to intrinsically interweave themselves within British society (and many other societies). Countering these figures, one leading PFI company suggested that the figures do not take into account that the companies’ subsidiaries pay tax, as do their shareholders, but the fact remains that offshore PFI companies are making incredible profits with extraordinary rates of return – figures as high as 28% have been widely quoted. Yet, the figures highlight issues that closer analyses reveal in all their gory detail.

One example of this is University College London Hospital’s NHS Foundation Trust, which is complaining that its current levels of debt, debt owed to a PFI, is unsustainable based upon increased rates of interest like 7 to 8%. In Scotland, a PFI exodus to offshore jurisdictions has been noted, with the effect being that now 19 of 42 projects are wholly owned by offshore PFIs based in placed like Jersey, Guernsey, and Luxembourg – the other 23 are at least 50% owned by offshore PFI companies. Yet, whilst these issues could be discussed at length, based upon a number of examples, it is perhaps more useful to peak behind the curtain and ask more abstract questions, like who is it investing in these PFIs anyway?

The reality of the situation should lead to a moment of self-reflection. Whilst there is a general understanding that populist thought is negative with regards to the PFIs and the profits they are making, analysis in the Financial Times suggests that large pension funds are the biggest investors in these initiatives, chasing the highest returns whilst remaining within their regulatory-imposed boundaries. One leading pension fund – Aberdeen Standard Investments – holds involvement in at least 60 PFIs across the U.K. This relationship between leading pension funds and PFIs was a slow-burner to begin with, despite the Government creating the ‘Pensions Infrastructure Platform’ in 2012, but recent data suggests a growing relationship between the two entities. Also, the pension funds of leading employers within the U.K., including companies like the BBC, Tesco, and BAE, recently lost a case when they tried to sue a PFI for liability of fund managers, ultimately suggesting that the investment in PFIs is social, rather than sector-dependent. So what does this tell us?

Ultimately, these issues reveal one particular dynamic that will not be discussed on any panel show or review of the morning’s papers – the average citizen is always caught in the crossfire of high finance. This dynamic revealed by PFIs suggests that citizens, who by and large are also employees, pay into their pension pots every month, which is then used to invest in projects that excessively extract money from the projects those same citizens pay for in their state-mandated taxes; so, the insecurity that comes with old age is being monetised and extracted from those who feel insecure, based upon conservative figures that suggest the pensionable age will continue to rise and rise. However, the opposing argument is that it is those employees who must take some responsibility and act accordingly. The different number of takes on this issues suggests that finding a solution, for the good of society, will not be forthcoming, because the balance between collective benefits and personal benefits has long been weighted towards the latter, which is something parties like the Labour Party are suggesting they are trying to address, mostly in order to differentiate themselves from the Party in power – yet, one of the main reasons why personal benefits trump collective benefits may be exactly this change in sentiment; how can the public be expected to believe a party that played perhaps the most crucial role in creating these PFIs? They cannot, and they will not, as demonstrated by a widespread and growing distrust of political systems, which will only ever have one consequence – increasing individualism, which is fuel to high finance.

Keywords – PFI, finance, pensions, employees, politics, business, Labour, @finregmatters

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