Rush to buy big PFI contracts ‘risks repeat of subprime crisis’

Academic warns of public-sector debt being held by investors on the other side of the world

deputy business editor

The rush of big investors to buy lucrative contracts to run schools and hospitals is creating a potentially risky financing structure for critical public services, reminiscent of America’s subprime mortgage fiasco, a leading academic has warned.

Doctor Nick Clifford, at Manchester Business School specialising in Public-Private Finance Initiatives, said he was concerned about the implications of public sector debt being controlled by investors miles away from the underlying assets.

Dr Clifford compared the situation with the rise of subprime mortgages in the US, which was largely to blame for the financial crisis.

In that instance, mortgages on large numbers of properties across the US were bundled together, refinanced and sold repeatedly around the world in such a way that it became nearly impossible to ascertain whether the people taking on the original mortgages could afford their repayments. As a result the mortgages were valued too cheaply and ran up catastrophic losses when homeowners defaulted.

Dr Clifford said: “We’re getting to a situation where a fire station in Stoke gets to be a debt somewhere in Singapore. That just feels instinctively not to be right. What was the real cause of the financial crisis? Banks lending without knowing where their debt really is. This [PFI flipping] stuff feels like part of that whole process again.”

The Independent revealed this week how construction firms had turned quick profits on long-term projects to build and run schools and hospitals by selling them to investors, often based in offshore tax havens, early in  the life of the contract.

Four large building firms had turned profits of more than £300m in recent years by “flipping” their contracts in this way, leading to accusations of profiteering from badly negotiated contracts awarded by the Labour government.

The situation is expected to worsen as PFI projects spread across the world. Meanwhile, the Government is keen to encourage more private investors to fund big infrastructure projects to boost the economy.

Today, the Labour MP Margaret Hodge admitted to The Independent that Labour had been “seduced” into PFI and that it was a “rip-off”.

However, the £300m of profit made by the construction firms’ sales of their contracts marks only the tip of the iceberg for how much taxpayers have agreed to pay the private sector to build and run public services in future decades.

Treasury data suggests that the bill to the public from PFI projects between 2015 and 2049 will be £320bn. These are the estimated “unitary charges” – a term meaning payments for services like maintenance, cleaning and security, as well as debt and interest repayments on the loans used to pay for the project to be built.

Contractors argue that they deserve extra payments to cover the risks of cost overruns, particularly in the building phase of the projects.

But NHS staff reacted angrily to the rise in flipped contracts when many hospitals are struggling to cope with high unitary charges. Clare Gerada, a GP and former chair of the Council of the Royal College of General Practitioners, tweeted: “This is where our public money is going and meanwhile academic/clinical health jobs cut.”

News
people

Actress sees off speculation about her appearance in an amazing way

Arts and Entertainment
Serge Pizzorno of Kasabian and Noel Fielding backstage at the Teenage Cancer Trust concerts
musicKasabian and Noel Fielding attack 'boring' musicians
Arts and Entertainment
Julianne Moore and Ellen Page are starring together in civil rights drama Freeheld
film
Voices
'Irritatingly Disneyfied': fashion vlogger Zoella
voicesVicky Chandler: Zoella shows us that feminism can come in all forms
PROMOTED VIDEO
News
ebooksAn unforgettable anthology of contemporary reportage
News
people

Sport
nflAtlanta Falcons can't count and don't know what the UK looks like
News
i100
Arts and Entertainment
High notes, flat performance: Jake Bugg
music

Review: Despite an uphill climb to see Jake Bugg in action, his performance is notably flat

News
The Putin automaton will go on sale next month in Germany
videoMusical Putin toy showing him annexing Crimea could sell for millions
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs Money & Business

IT Systems Business Analyst - Watford - £28k + bonus + benefits

£24000 - £28000 per annum + bonus & benefits: Ashdown Group: IT Business Syste...

Trainee Recruitment Consultant - Birmingham - Real Staffing

£18000 - £23000 per annum + Commission: SThree: The SThree group is a world le...

Trainee Recruitment Consultant Birmingham

£18000 - £23000 per annum + Comission: SThree: The SThree group is a world lea...

Trainee Recruitment Consultants

£20000 - £25000 per annum + OTE £Competitive: SThree: SThree Group and have be...

Day In a Page

Indiana serial killer? Man arrested for murdering teenage prostitute confesses to six other murders - and police fear there could be many more

A new American serial killer?

Police fear man arrested for murder of teen prostitute could be responsible for killing spree dating back 20 years
Sweetie, the fake 10-year-old girl designed to catch online predators, claims her first scalp

Sting to trap paedophiles may not carry weight in UK courts

Computer image of ‘Sweetie’ represented entrapment, experts say
Fukushima nuclear crisis: Evacuees still stuck in cramped emergency housing three years on - and may never return home

Return to Fukushima – a land they will never call home again

Evacuees still stuck in cramped emergency housing three years on from nuclear disaster
Wildlife Photographer of the Year: Intimate image of resting lions claims top prize

Wildlife Photographer of the Year

Intimate image of resting lions claims top prize
Online petitions: Sign here to change the world

Want to change the world? Just sign here

The proliferation of online petitions allows us to register our protests at the touch of a button. But do they change anything?
Ed Sheeran hits back after being labelled too boring to headline festivals

'You need me, I don’t need you'

Ed Sheeran hits back after being labelled too boring to headline festivals
How to Get Away with Murder: Shonda Rhimes reinvents the legal drama

How to Get Away with Murder

Shonda Rhimes reinvents the legal drama
A cup of tea is every worker's right

Hard to swallow

Three hospitals in Leicester have banned their staff from drinking tea and coffee in public areas. Christopher Hirst explains why he thinks that a cuppa is every worker's right
Which animals are nearly extinct?

Which animals are nearly extinct?

Conservationists in Kenya are in mourning after the death of a white northern rhino, which has left the species with a single male. These are the other species on the brink
12 best children's shoes

Perfect for leaf-kicking: 12 best children's shoes

Find footwear perfect to keep kids' feet protected this autumn
Anderlecht vs Arsenal: Gunners' ray of light Aaron Ramsey shines again

Arsenal’s ray of light ready to shine again

Aaron Ramsey’s injury record has prompted a club investigation. For now, the midfielder is just happy to be fit to face Anderlecht in the Champions League
Comment: David Moyes' show of sensitivity thrown back in his face by former Manchester United manager Sir Alex Ferguson

Moyes’ show of sensitivity thrown back in his face... by Ferguson

Manchester United legend tramples on successor who resisted criticising his inheritance
Two super-sized ships have cruised into British waters, but how big can these behemoths get?

Super-sized ships: How big can they get?

Two of the largest vessels in the world cruised into UK waters last week
British doctors on brink of 'cure' for paralysis with spinal cord treatment

British doctors on brink of cure for paralysis

Sufferers can now be offered the possibility of cure thanks to a revolutionary implant of regenerative cells
Ranked seventh in world’s best tourist cities - not London, or Edinburgh, but Salisbury

Lonely Planet’s Best in Travel 2015

UK city beats Vienna, Paris and New York to be ranked seventh in world’s best tourist destinations - but it's not London