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Public work is funded by… public money. Shock. Surprise

Posted by softestpawn on April 7, 2009

George Monbiot claims that “The state’s road-building deal guarantees profits to private firms, while taxpayers put up the money and take the risks” as if this means we’re being robbed.

Big, unsupported numbers

Various large prices are bandied about, but with no support as to where they came from or what precisely they are for.  So we have the Skye bridge that ‘should’ have cost £15m to construct, but supposedly cost taxpayers and users £94m, with no indication of why it really should have cost £15m, nor where the £94m came from. The BBC claim that the taxpayer and the users forked out a total of £66m, including an initial £12m grant towards the £39m construction cost.  They’re not even the same thing; construction is part of but not all of the total costs of providing a toll route.

Skye Bridge

Skye Bridge - Success, Disaster, or Bridge?

(Update: this article also appears here with references. A £12m is apparently from “a civil engineer who studied the bridge”, a £15m from an unreferenced Scotsman estimate, and the £93m includes costs that are not directly part of building the bridge, such as approach roads and studies. There’s even more irrelevent comparisons there, and nothing said about the costs of using and running the ferry).

Similarly the comment on two hospitals that were demolished and rebuilt rather than renovated, has no support that renovation would have been better for the users.

Jawdroppingly, George even seems to think that the price of widening the M25 by using the hard shoulder is somehow comparible with the cost of doing it ‘properly’. Other costs might just be introduced there – for example those of coping with break downs stuck on the inside lane.

Estimating to expectations

He implies that costs are ‘massaged’ to fit expectations, yet manages to provide only vague insinuations. Which is odd, because of course large contracts are a negotiation, with both sides working through the tasks involved and the costs and acceptable price. They are not run as supermarket shopping comparisons, or a set of quotes to install a shower.

Risk

Risk is just a way of estimating costs when all the dependancies are not clear. ‘De-risk’ is an exercise in establishing those dependancies, so we can establish a more certain cost – which may not be a smaller cost.

In other words, risks are just the uncertain parts of the cost.

For example, if you’re building a house, and it’s not clear up front how deep the foundations need to be, you might base your estimate on some basic foundations and include a risk that they need to be deeper, with an  estimate of likelihood and the extra cost.  But if it turns out you need deeper foundations, then that’s just part of the ordinary project costs; it’s just a cost you weren’t sure about.

And as part of the cost, of course the customer pays for it. It may be that the responsibility for managing them (or some of them) rest with the supplier, but this only works if the risks that are realised (the ones that happen) are less than the total estimated risk costs. 

The Fundamental Error

But the main fundamental error here is in comparing ‘public funds’ with Private Finance Initiatives (PFIs) at all. Public projects are funded by the taxpayer; by public funds. That’s it.

No, really, that’s it.

Whatever the ‘initiative’, it is taxpayer money that is spent on government projects. The differences are only in whether the money up front is public or private, about how and when the public money is delivered, about who holds the risk ‘pot’ and so on. General standard boring contract management. PFIs are not an alternative to public funding, they are just another way of managing the payments of public funds.

(Tolls are a red herring; whether private or public, they’re a way of making users pay for a service rather than the general taxpayer)

That includes the risk; companies cannot (not will not) pay for overruns in large contracts. Few companies have money sloshing around in the basement that they can dip into to pay for salaries and equipment when large contracts overrun significantly. Where contracts are small enough that companies can take on responsibility for risk, the money that is used when Things Go Wrong has to be recovered somewhere – it doesn’t magically appear – and for companies with government as the main customer, that means the taxpayer again.

Companies have to make a profit – or they go bankrupt. And anyway, what else – other than public money – is supposed to be used to provide public services?! Who else – other than public bodies – are supposed to take on the risks in providing public services?!

There are many many problems with government procurements, some of them simply down to the huge scale. And some down to poor contract management that is not limited to government; a common mistake is to assume that outsourcing work also means you can outsource expertise.

And there are problems with PFIs, the obvious one in a British Medical Journal article (that George lazily refers to as “a paper”, but MJRobbins located) that private loans are more expensive than Treasury ones.

But in this article George has taken some big numbers, wrapped them up in emotional language, and claimed a ‘swindle’ that is simply not supported by what he’s given. His anti-capitalism allows him to make such leaps of logic; he’s a victim of the very religious blindness he blames PFI advocates for.

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