A public finance scandal in the making

Here is a journalistic conspiracy- theorist's guide to what sort of things go badly wrong in government. Look first for wheezes that allow big spending where there wasn't big spending before - one thinks of the gush of shiny new headquarters, car fleets and refurbishment that followed the establishment of hospital trusts and government agencies.

Look next for a bland cross-party consensus about some fashionable idea - a sure sign of looming disaster. The vogue for killing off grammar schools and building tower blocks are obvious examples. And remember, third, that most serious problems seem, at first sight, to be too boring and complicated for normal people to concentrate on - military helicopter procurement; the details of the Child Support Agency; public interest immunity certificates.

Now, it may just be me, but is it not mildly alarming that the Private Finance Initiative sets off each of these three alarm bells? It allows government ministers to announce spending that they couldn't otherwise have sanctioned - pounds 5bn of bridges, hospitals and computer systems so far. It is a wheeze that is keenly supported by everyone from Tory right-wingers to, in a slightly different form, Labour's John Prescott. And it is, at first sight, complex and dull (and second sight, and third).

But it is important. We must pour ourselves another coffee and concentrate. The basic idea is simple. In the past, governments paid private companies to build things, such as schools or roads. The bill was footed by the taxpayer.

Under the PFI the private sector doesn't just carry out a contract given to it by a government department; it raises the money, manages and designs the project, and then helps to run it, too. The state, which because of tight public borrowing targets couldn't have raised the money itself, gets the project and pays the private company what is, in essence, a rent for using the facilities.

The private sector digs deeper into the ownership and management of things that were once wholly under the control of the state. It is a sort of "beyond privatisation" idea, something that the Tory right likes for ideological reasons. But it allows government to take the political credit for buildings and investments that, without private involvement, wouldn't have happened. The Tory left and the Labour Party likes it for that reason.

And, party instincts aside, the PFI has some genuine merits. When the state simply paid the bills, we saw appalling examples of cost overruns, over-lavish outfitting and sheer managerial incompetence. The new British Library is a good example, and most areas of Britain have hospitals that took far too long to build and cost hideously more than expected. Under the PFI, the idea is that the private contractor shoulders more of the risk. If a bridge needs to be resurfaced after five years, the private partner pays.

But there are two or three obvious catches. Though risks can be neatly apportioned on paper (a truly complex business) in the end, a government cannot walk away from serious cock-ups in services bought on behalf of the public. If a bridge collapses or a hospital has to be closed, there are public duties on ministers and public costs that no contract will eradicate.

Cock-ups aside, the PFI may anyway cost the taxpayer more than ordinary public spending. The state can borrow more cheaply than private companies through the gilt market, so the financing costs of these projects would be lower. True, this big benefit may be overwhelmed by the added efficiency of private management, and the transfer of risks to the private sector.

But no one knows. A recent paper from the merchant bank BZW said: "This may or may not be true, but it will be some time before the taxpayer really knows whether they have had a good deal or not ..." Furthermore, as BZW also pointed out, the PFI is essentially a postponement of public spending. Taxpayers still shell out by paying a rent; the money just gets spent later than it would have done.

Who is supposed to make the difficult balancing calculation between the lower costs of ordinary public spending and the possible efficiency gains from private sector management of a project? Answer: the permanent secretaries running each department, under pressure from ministers who want to be able to announce new projects.

There seems to be risk for everyone except the here-today, gone-tomorrow politician, who gets the political credit now, secure in the knowledge that any final reckoning will be postponed until after he or she has retired. No wonder politicians, irrespective of party allegiance, are so keen.

Under a government that has made a virtue of trying to pay back the national debt to lift the burden from future generations of taxpayers, this seems a short-term, even shabby, approach to spending. And since the PFI is bound to spending create companies dependent on such work, it will also create a new lobby for public spending. Whatever this is, it isn't public spending without tears.

Nor are the potential problems limited to the expense and new upward pressures for government spending. There are also serious policy questions. One recent PFI proposal to hand the power over court committal work - who stands trial where and when - to a private computer company was only stopped after angry intervention by judges and Opposition politicians.

Another proposal, for the use of private capital to fund air traffic control was attacked last week by the chief executive of National Air Traffic Services, because a private sector operator would buy different equipment which could affect the efficiency of the system. If a private sector company is managing a hospital, even the non-clinical bit, doesn't that have implications for bed use? And so on. The PFI seems to me to try to disentangle management and money, on the one hand, from effective political power on the other; and this is not possible.

Strangely, it may seem, those Treasury officials who held a briefing last week about the PFI will be delighted by this scepticism. Their pleasure comes from the fact that up to now the much-vaunted initiative, which dates back to November 1992, has been generally regarded as a Majorite damp squib, another bureaucratic-sounding hiss of deflating air.

Actually, though, the PFI is beginning to take off. Projects from the Channel tunnel rail link to the Skye bridge, from a new pounds 250m hospital in Edinburgh to the other examples given above are beginning to tumble out of Whitehall. Initial caution from the Treasury and traditionalist civil servants is crumbling under the political pressure of a government constrained in how much it can borrow yet as keen as any government to make announcements about shiny new buildings.

So this is just the moment to become mildly alarmed. We, taxpayers and users of services, are effectively being offered public investment on hire purchase terms, in a system that will pass real powers from the state bureaucracy to private companies and in which lines of accountability are further blurred.

The complexity of the issues and the forbidding thicket of initials are enough to keep most people away from this subject. But a good conspiracy theorist would expect that the public spending scandals of 2010 are being hatched now, deep in the bowels of the PFI. And, however unfashionable it may be to say so, recent experience of government shows that the conspiracy theorists are often quite right.