Michael Harrison's Outlook: A hard lesson for Jarvis in transferring risk

RSA life fund; Rail solutions
Click to follow

Proof positive that the Government's private finance initiative was an accident waiting to happen or a shining example of risk transfer from the public sector in action? Jarvis's flirtation with disaster can be read either way. Which conclusion you draw will probably depend on whether or not you were a fan of PFI in the first place.

Proof positive that the Government's private finance initiative was an accident waiting to happen or a shining example of risk transfer from the public sector in action? Jarvis's flirtation with disaster can be read either way. Which conclusion you draw will probably depend on whether or not you were a fan of PFI in the first place.

Conceived of more than a decade ago as a handy way of keeping large amounts of borrowing off government books, the PFI has, in some respects, proved a fabulous success. More than £20bn worth of projects have been built and, without PFI, there would undoubtedly be fewer new hospitals, schools, libraries and student accommodation blocks around today. Fewer jails as well - interestingly one of the areas where PFI has, by common consent, worked best.

But public spending on the never-never, which is basically what PFI amounts to by allowing the private sector to build something and then rent it back to the state, presents some inherent risks. One is that taxpayers will get less than they bargained for and end up paying more than they needed to because privately raised finance can never be as cheap as triple-A rated government borrowing. The second is that the private sector will overstretch itself and fail to deliver, in which case who clears up the mess?

In the case of Jarvis, there is little doubt that it massively overreached itself and paid the price, in much the same way as its chairman Steven Norris did by running for London Mayor at the same time as trying to lead a public company and ending up doing both jobs badly.

Nor is Jarvis the first PFI contractor to come unstuck. Amey before it is another high-profile casualty. Amey's undoing was its failure to write off bid costs as it went along while taking unrealistically large profits in the early years of a project, when the risks were highest. When the rug was pulled from beneath this accounting edifice, the house of cards quickly collapsed.

Jarvis's nemesis was a series of school refurbishment programmes, taken on at fixed prices but without a proper understanding of the amount of work involved. By a stroke of misfortune, the school projects came unstuck at the same time as Jarvis incurred a heavy loss on its forced withdrawal from rail maintenance, pushing it into breach of its banking covenants.

The lifeline Jarvis was thrown by its banks yesterday will keep it afloat for another eight months. But it is far from home and dry. It is shipping water heavily, as last year's £247m loss demonstrates, and needs to throw half of its businesses overboard if it is to avoid being sunk by its debts.

Given the extensive health warnings in the accounts and the "fundamental uncertainties" about whether Jarvis can be classed as a going concern, it could just as easily be the undertakers who are waiting to greet it next spring. Kevin Hyde, the bluff Aussie who steers the ship when Cap'n Norris is pursuing his other interests, reckons Jarvis is an example of how well the PFI has succeeded in protecting the taxpayers' interests. It would be ironic if the company failed just to prove the point.

RSA life fund

The shape of life insurance is being dramatically transformed. Following Swiss Re's purchase of Life Assurance Holding, the newly created Resolution Life Group yesterday scooped up the life business of Royal & SunAlliance.

The trend is set to continue. Clive Cowdery, the entrepreneur who runs Resolution, says there are more than 15 life funds closed to new business, which means that they are being slowly run off as policyholders die. For a composite insurance group, as Royal & Sun was, this is a drain on capital which prevents it making progress in areas it can manage actively, such as general insurance. Royal & Sun owns More Than, which is spending vast sums on the cutesy adverts featuring Lucky the dog.

Much more fun than running a bond fund for dying life policyholders. For his part, Mr Cowdery is convinced he is on to a good thing. Running these closed life funds will be Resolution's main business, and it can reap economies of scale by buying several and chopping overheads. This, he hopes, will offset the extra capital the Financial Services Authority (FSA) is demanding be injected into these funds.

Ironically, two of Resolution's biggest shareholders are Prudential and Standard Life, who in other circumstances would be considered deadly rivals. But they too see which way the wind is blowing, and they prefer the Resolution model for life funds to the traditional one.

Mr Cowdery intends to float Resolution in a couple of years, when it should be a rock solid income yielder. So far so good, policyholders who are being sold in this deal? Arguably they cannot be worse off than under Royal & Sun's less than benign neglect. But Resolution is not a charity: it exists to make a profit for its shareholders, as Royal & Sun does.

The fairy with the magic wand in all this is the FSA, which will be obliged to ensure that Resolution's funds are properly managed. But, as others have discovered, there is plenty of scope for discretionary management within the rules. Bonuses are being cut, penalties imposed for attempts to cash in early. If the deal is voted through by Royal & Sun's shareholders, the policyholders being transferred had better hope that Mr Cowdery gives them a fair crack of the whip.

Rail solutions

Anyone who travels by train in southern England will not have needed to read the latest tome from the Public Accounts Committee to know that the introduction of £2bn worth of new rolling stock has been anything other than a catalogue of disasters.

First the new trains could not start running because someone had forgotten to make sure there was enough electricity on the network to power them. Now that there is enough juice, they are still not running because they are remarkably prone to break down. Electric doors which will not open. Electric engines which will not function properly. Electric toilets which will not flush. On one occasion this week, services from the south coast to central London were brought to a complete standstill by simultaneous train failures at either end of the route. Luckily for Southern, the operator of the service, a collision between a railway bridge and a motor vehicle came to the rescue, enabling it to blame the delays on Network Rail, not its own incompetence.

Apart from being disingenuous, this was also unfair to Network Rail. Remarkable as it may seem, the company's gamble of taking rail maintenance back in-house has paid off. The transfer back of responsibility to Network Rail, which was completed this week, has cut delays by more than one-fifth.

The good old Lib Dems greeted the PAC report by suggesting it was high time that the train operators took charge of their own rolling stock from the leasing companies. There is another solution. Why not put Network Rail in charge of the trains as well as the tracks and signalling? Then you could call it British Rail again. Whoever would have longed nostalgically for those days?