By Andre Iton

An article in Sunday’s UK Observer reported that the Shadow Chancellor, George Osborne had written to respected Observer economist/commentator Will Hutton acknowledging that a Tory Government (yes the same Tory Government that has pledged to support the Cayman Islands if elected) will scrap Labour’s Private Finance Initiative.

In his email to Hutton, Osborne says … “Labour’s PFI model is flawed and must be replaced. We need a new system that doesn’t pretend that risks have been transferred to the private sector, when they can’t and genuinely transfer risks when they can be”.

He continues … “the first step is transparent accounting, to remove the perverse incentives that result in PFI simply being used to keep liabilities off Balance Sheet”.

The new Government has expressed its intention to utilize the PFI mechanism as a key plank of its strategy for the funding of public sector capital projects in its current effort to stimulate the economy.
We have already been made aware of a specific project to be funded through this mechanism, the Cruise Ship Port.

Quite apart from any issues related to the bidding process for the award of contracts for any such projects, it is imperative that the public seek and obtain clarification of the fact that the use of this financing mechanism, clearly dubbed a failure from the standpoint of the taxpaying public in the UK where it had its genesis, is not expected to deliver similar results here.

PFI projects are glibly suggested as being at no cost to the Government. In reality Governments are no more likely to get the proverbial “free lunch” than the average citizen.

As Mr. Osborne suggested in his email, it is mainly a matter of keeping liabilities off the Balance Sheet.

The real test of the cost/ benefit realities in such a project financing arrangement requires a determination and quantification of the stream of future revenues the Government forgoes to the Private Investor.

Once we establish that the savvy private investor is only likely to enter into such an arrangement if it affords him the opportunity to generate returns on his/her investment that are greater than alternative private sector projects, we can make the reasonable assumption that the loser in any such arrangement is probably going to be the taxpaying public. ( We do pay taxes even if we choose to call them other names and we choose only the most regressive forms.)

The experience of a similar arrangement in Belize is very instructive in getting a sense of the likely outcome.

In the Belizean case, the PFI investor developed the cruise ship port on the basis of a contractual arrangement that saw the Government having to forgo 80% of the head tax on cruise arrivals for a period of 15 years.

Four Dollars of every Five Dollars of head tax accrued to the investor for a period of 15 years.

I recall a conversation I had with the principal of the company involved, shortly after the facility became operational in which he cagily acknowledged that it was an extremely attractive investment for his outfit.

It is indeed instructive that alongside the strident criticism of the Shadow Chancellor, large groups of Labour backbenchers have campaigned for the cessation of the use of the financing mechanism on the grounds that it permitted private sector investors to cream off huge profits at minimum risk to their shareholders.

As we rush headlong into the use of a spent fad we would do well to remember that you should always look a gift horse in the mouth. There are truly no free lunches even in tax havens.

Andre Iton, who is an economist and former Chairman of Cayman Islands Development Bank (CIDB),