Con-Dems propose PFI rebirth


by Hazel Lewry

Westminster is now touting a second round of PFI for the UK economy.  It will be implemented in England but without opposition from Holyrood’s SNP government it could extend its reach north of the border.  

The PFI initials are identical, the results can be expected to mirror previous forays into the world of PFI, but the acronym carries a different meaning this time around.  It’s pension fund investment.

How it works is simple, the UK is broke therefore the Westminster government hasn’t any money for investment.  Without money Westminster can’t build infrastructure and stimulate employment which in turn kick-starts a stalling UK economy.  This economic infrastructure investment strategy is often referred to as Alex Salmond’s ‘Plan McB’.

The Westminster government can’t just borrow or print the money because it would be breaking its own spending guidelines.  We therefore have the odd situation where printing money to support failing banks or for quantitative easing is OK because it’s considered required, but printing money to support lives and welfare isn’t.

The single vast resource remaining to Westminster is our private pension funds, if they can be persuaded to part with the cash.

To part with the money the fund managers will require a gilt-edged guarantee from Westminster that their investment won’t just make market rates, but will be insured against losses.  If not there’s little reason for them to alter their present investment strategy.  Ideally for the managers market rates will be exceeded and bonuses increase.

The Lib Dems indicated that guarantees would be forthcoming when Vince Cable told the Sunday Times:  “We know there is a large amount of institutional investment in pension funds and insurance companies looking for a safe return.  At the moment, it is extraordinary that foreign institutions will invest in British infrastructure but British companies won’t.

“What we have to do is create a framework regulation so that private investors will have the confidence to invest in big projects and help get the British economy moving again.”

The key words are “safe return”.  That typically equates to all risk being borne by the taxpayer.

This means the plan being finalised by UK Ministers is focused around designs to boost investment in UK infrastructure and stimulate the economy, with proposals to pool the vast assets held in British pension funds and use them to back an ambitious programme of road and house building.  It’s a backdoor “Plan B” with built-in plausible deniability that it is in fact a “Plan B”.

The taxpayer then gets to pay for this infrastructure ‘off the books’ and fund the banking or insurance bonuses by the back door. In an ideal world they will also see pension assets grow.

Fund managers are to be encouraged to invest up to £50bn within a new type of ALEO slush fund dedicated to improving infrastructure, including private and social housing, power stations, super-fast broadband and motorway toll roads. It could be one way of finding the money for new nuclear power that nobody wants.

The proposals came following Vince Cable’s statement that there will be no new money from the UK Treasury.  Effectively emphasizing it’s broke.

The Liberal Democrats appear to be the main proponents of the plan, but it does appear to have the support of ministers and officials across the coalition as they try to design some type of stimulation package without giving the appearance of a political U-turn or facing accusations of adopting Salmond’s suggestions.

This Westminster proposal will create a “pension infrastructure fund” the details of which are set to be published around 29 November.  Cameron’s administration is open to such inventiveness after reports that the Bank of England is preparing to cut its growth forecasts to just 1% for 2011-12.

The idea is that as the pension funds will receive a share of the eventual revenue raised by the infrastructure building, through higher household energy bills, road tolls or household rents, the plan will be financially attractive to fund managers and will attract investment.  The problem with this scenario is that fund managers like quarterly returns and someone, most likely the taxpayer, will fund the interim interest.  At 10% that bill for interest will be over £400 million a month.

The individual homeowner or road user will pay for the plan, and the ongoing interest, not the UK government.  These will be additional payments from already stretched household budgets.  There was no mention of vehicle license refunds or Barnett consequential issues in the proposals.

This idea, taken up by both the Treasury and the Department for Business, headed by Vince Cable is being actively pursued by the coalition.  The focus has moved on to how pension funds could be synchronised into the proposed single package.

The current ideas come after the settlement of internal differences in the Con-Dem coalition about policy suggestions made by the venture capitalist Adrian Beecroft.  This is the same Adrian Beecroft who tabled the ending of unfair dismissal claims.

The official stance at present is that Westminster has yet to decide if the new pension infrastructure funds will underwrite their own risk on any investment, or whether the taxpaying public will underwrite their investment.  Presently all indications are the government will be adding “hidden” liabilities to the books.  It is thought this could be done off the balance sheet to retain the “no U-turn” stance.

This comes alongside an expected major push on credit easing – where the Treasury buys company debt – which is also expected to be off the balance sheet.  But again the taxpayer will hold the ultimate liability.

A Treasury source fuelled this expectation, telling the Sunday Times: “We will not be changing the government’s capital spending envelope and we will not be issuing new bonds to fund this.”  He said the mechanism would not affect the UK’s balance sheet.  The only conclusion which can be drawn from the Treasury statement is more hidden or unreported debt.

This new £50bn pot marks a significant amplification of this strategy.

This is important in several aspects within Scotland, as the proposals are designed to “keep the debt off the books”, therefore England will receive the discussed substantial infrastructure and employment boost without Scotland having any required Barnett consequential or ability to raise similar funds herself.

Broadband is also a “reserved issue” falling under broadcasting, and is UK-wide, therefore it is entirely feasible that Scots will pay more for poorer quality infrastructure as we once again subsidise those to the south of the wall.

It is questionable whether this “off the books” debt will remain “off the books” as the time for asset and debt allocation approaches with the impending demise of the Union as we presently know it.