Crippling PFI Deals Leave Britain £222bn in Debt

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Courtesy of

Every man, woman and child in Britain is more than £3,400 in debt – without knowing it and without borrowing a single penny – thanks to the proliferation of controversial deals used to pay for infrastructure such as schools and hospitals.

The UK owes more than £222bn to banks and businesses as a result of Private Finance Initiatives (PFIs) – “buy now, pay later” agreements between the government and private companies on major projects. The startling figure – described by experts as a “financial disaster” – has been calculated as part of an Independent on Sunday analysis of Treasury data on more than 720 PFIs. The analysis has been verified by the National Audit Office (NAO).

The headline debt is based on “unitary charges” which start this month and will continue for 35 years. They include fees for services rendered, such as maintenance and cleaning, as well as the repayment of loans underwritten by banks and investment companies.

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The situation is expected to worsen as PFI projects spread across the world (Getty)

Basically, a PFI is like a mortgage that the government takes out on behalf of the public. The average annual cost of meeting the terms of the UK’s PFI contracts will be more than £10bn over the next decade.

And the cost of servicing PFIs is growing. Last year, it rose by £5bn. It could rise further, with inflation. The upward creep is the price taxpayers’ pay for a financing system which allows private firms to profit from investing in infrastructure.

An NAO briefing, released last month, says: “In the short term using private finance will reduce reported public spending and government debt figures.” But, longer term, “additional public spending will be required to repay the debt and interest of the original investment”.

A case in point is Britain’s biggest health trust, Barts Health NHS Trust in London, which was placed in special measures last month. It is £93m in debt – struggling under the weight of a 43-year PFI contract under which it will pay back more than £7bn on contracts valued at a fraction of that sum (£1.1bn) Continue reading

The Paradox of Interest Revisited

Courtesy of Antal E. Fekete @ ProfessorFekete.com

The classical formulation of the paradox of interest is due to Böhm-Bawerk and Schumpeter. Its modern formulation is due to Hausman and Kirzner. I quote Kirzner:

Much – perhaps all – will turn out to depend on the way in which the interest problem is formulated. For present purposes we adopt a modern formulation of the problem, but wish to emphasize that this formulation is very similar in spirit and character to classic formulations… The modern formulation we cite is that of Hausman. Hausman points out that an “individual’s capital . . . enables that individual to earn interest. If the capital is invested in a machine, the sum of the rentals the machine earns over its lifetime is greater than the machine’s cost. Why?” Common observation, that is, tells us that possession of a given stock or capital funds can, by judicious investment (say, in a machine) yield a continuous flow of income (annual rentals net of depreciation) without impairing the ability of the capital funds to serve indefinitely as a source of income. The problem is, how this can occur. Why is not the price of the machine (paid by the capitalist at the time he invests in the machine) bid up (by the competition of others eagerly seeking to capture the net surplus of rentals over cost) – to the point where no such surplus remains? We are seeking, then, an explanation for an observed phenomenon which is, in the absence of a theory of interest, unable to be accounted for. Absent a theory of interest, no interest income ought to be forthcoming, except as a transient phenomenon; competition ought to squeeze it out of existence.

In this note I propose to solve the paradox by suggesting that the exchange of wealth and income should be made the cornerstone of the theory of interest, replacing the exchange of a present and a future good.

To say that the capitalist “invests” his wealth is too simplistic. Investing is bound to confuse the issue. Moreover, possession of wealth does not automatically guarantee access to income. There is an implicit exchange of wealth and income interposed between the capitalist and entrepreneur that needs to be made explicit. Here is what happens.

The capitalist exchanges wealth for income. Income is yielded by the entrepreneur, who converts wealth into capital goods (such as a machine or a fruit tree) and hires a manager to tend them (including the task of setting depreciation quotas in anticipation of having to replace the capital goods at the end of their useful life without further charges to the capitalist). The entrepreneur sets up three accounts for the distribution of the yield after depreciation, namely, one for each of:

(1) a fixed interest income payable to the capitalist,
(2) wages payable to the manager,
(3) the remainder, or entrepreneurial profit, payable to himself. Continue reading

On the Payment of Interest

Courtesy of Hugo Salinas Price @ Plata:

The question of interest has occupied thinkers for more than two thousand years. Aristotle came to the conclusion that interest is illegitimate and cannot be justified, since “money cannot beget money”, unlike all living things which reproduce themselves. Since “money cannot beget money”, Aristotle argued that it is unreasonable and impossible to demand that money lent should be repaid with a greater amount than the amount of the original loan.

The thinking of Aristotle influenced the Catholic Church, which for centuries banned the taking of interest. Loans with interest were made by Jews, not subject to the laws of the Catholic Church, and by Christians who sinned in doing so, and circumvented the prohibition on interest by schemes which hid the interest under other labels. It was at least partly due to a sense of having sinned, and in atonement for it, that the heads of the great financial dynasty of the Medici of Florence contributed so heavily to the building of the Renaissance temples of that city, and paid splendidly for the beautiful religious art of that period.

There is still, today, a minority who agree with Aristotle. And of course, there is the Islamic ban on the taking of interest, which is substituted in Islamic law or sharia, by having the lender participate, according to a set of rules, in the profits expected by the borrower as a result of obtaining a loan. (Note: I am not endorsing all modern Islamic banking, because it seems to me that the Islamic bankers may be evading their religious law by various schemes, just as the Medici did in their time; one important Islamic scholar and leader has told me that Islam is flatly against all payment of interest whatsoever.)

A popular argument against the Western banking system is frequently expressed as “the banks make loans and in doing so, create money; but they do not create the money to pay the interest. Therefore, the system is unsound and must collapse eventually.” This would appear to be a variant of the Aristotelian objection.

The argument that “banks make loans and thus create money, but do not create the money to pay the interest on the loan” is a specious and confusing argument because, on the one hand the power which modern banking systems have to create money out of nothing by granting credit is an anti-social power based on fraud, since real money can only be gold and silver and these cannot be created out of nothing. And on the other hand, the idea that “there is not enough money in existence at any moment to pay the interest due on loans” is fallacious, because all interest does not come due at any given moment; the payment of interest takes place over time as debts mature and become payable. Continue reading