Old Grumpy is just ancient enough to remember the advent of
hire purchase, later known as the never-never.
Just as the tabloids now get excited about the effect of family
breakdown, back in the 1950s, when hire purchase first became
commonplace, they worried about the moral corrosion caused by
what was dubbed "live now pay later".
Governments, concerned that the money supply was running out
of control, used to impose "credit squeezes", usually
involving such measures as statutory minimum levels of deposits
and interest rates on hire purchase contracts.
The idea being that if people had to find a bigger down payment
or pay larger instalments they would be deterred from fuelling
a consumer boom and the inflation which inevitably followed.
None of this worked, at least not for long.
The attractions of buying that new three-piece suite with future
income rather than past income (savings) proved irresistible.
These thoughts occurred to me while I was reading a report
in last week's Western Telegraph about the wonderful new £8.4
m junior school (Project Phoenix) being built in Pembroke Dock
under what is grandly known as a "private finance initiative"
This PFI wheeze was first thought up by the last Tory government
- described by the Labour opposition at the time as "immorally
mortgaging the future".
But, as with taking large lumps of cash from influence-seeking
donors, once in power the temptation for Labour proved too great.
The advantage for the government is that they get their new
school (and the political plaudits) but the cost doesn't appear
in the Public Sector Borrowing Requirement (PSBR) - the sort of
off-balance-sheet transaction so beloved of the late Robert Maxwell.
The bare bones of the deal are that a private company will
build the £8.4m school and provide ground maintenance, cleaning
and other services for the next 30 years.
In return the council will pay the company £1.15m a year
during the relevant period at the completion of which the school
will revert to the council's ownership.
As the mathematicians among you will already have worked out,
by the end of the lease the council will have coughed up some
£34.5m at today's prices - probably more like £50m
in actual money, given that the payments are index-linked.
Some idea of what a dumb deal this is can be discerned from
the fact that this works out at £2,300 per pupil per year
- more than the average spent per head on primary pupils across
the county, including teachers' salaries, which account for more
than 70% of the total.
Put another way, if all schools in the county were on a par
with Project Phoenix the whole of the education budget would be
consumed before a penny was spent on teaching staff.
In the normal course of events, Project Phoenix would have
made its way through the so-called democratic process via the
Education Committee, Policy and Resources and Full Council when
there would have been ample opportunity for scrutiny and debate.
However, in this case the matter first surfaced at the pre
Christmas meeting of Full Council when, understandably, the members
had their minds on the end of term free drinkies.
The result was that this huge commitment of public money was
whistled through in less than five minutes.
The only intelligent question came from Cllr Bill Philpin,
who wanted to know how the costs of this PFI compared with the
council building the school itself.
The answer from Director of Finance Mark Lewis could hardly
be described as comprehensive, though he did say that, while the
council could borrow money at 5%, the company were paying 6.1%.
From that nugget of information it can be calculated that in
interest costs alone the company starts off £90,000 behind
Bearing in mind that the company will also be looking to make
a profit - say 10%of £1.15m - it can be assumed that the
taxpayer is £200,000 a year worse off as a result of this
Mr Lewis also let slip that if the council had had to fund
the whole package from its own resources then it wouldn't have
But the fact is that the Welsh Assembly will pay £850,000
of the annual cost, leaving the authority to pay the balance of
And that is not the end of the Assembly's largesse.
During my 1999 trawl through the council's books I happened
on some rather eye-catching invoices from two London firms: Robson
Rhodes(accountants) and Beechcraft Wansborough(solicitors) who
had been paid £69,000 and £32,000 respectively in
consultancy fees for Project Phoenix.
On my most recent fishing expedition I discovered that these
metropolitan whiz kids had picked up a further £137,000
during 1999/2000 : Beechcraft £102,000 and Robson Rhodes
£35,000, making the best part of a quarter of a million
Just in case you are wondering how we can pay a firm of solicitors
on a part-time consultancy £2,000 a week for a whole year,
I should point out that the solicitors charge out their senior
staff at £170 per hour while the accountants come at the
knockdown price of £150 (abated, in the accountant's case,
to £100 in later invoices)
In addition to the consultants, the council also had its own
full-time staff on the case - costing the best part of another
£100,000 a year over the two years it took to plan and negotiate
Add to that the large number of bills I discovered for accommodating
and entertaining our friends from London at the Cleddau Bridge
Hotel and Project Phoenix probably set us back half a million
quid before the first brick was laid.
The reason this has slipped through the system with hardly
a word of debate is because almost all the political parties are
The Tories can't complain because these PFIs were their idea
in the first place: Labour and the Lib Dems are running the Cardiff
government that is pushing the scheme forward: and the Independent
Political (sic) Group on the county council is sticking to its
policy of rubber stamping whatever emerges from the Chief Officers
Management Board (COMB).
That leaves only Plaid Cymru, so don't hold your breath!
While the government presses on with the policy of involving
the private sector in areas like the provision of school buildings
and hospitals it also shows a disturbing tendency to interfere
in what should properly be the province of the private sector.
Last week, in an interview with The Times, Gordon Brown hinted
that he was minded to impose a windfall tax on the excess profits
made by the oil companies as a result of the dramatic drop in
the price of crude.
A hapless spokesman for Shell was hauled on to the Today programme
to be interrogated by John Humphrys.
When he denied these charges of profiteering Humphrys played
his trump card.
"But you made £2.4 billion last year and that's
a colossal amount of money" the great inquisitor snorted.
The man from Shell explained that this admittedly vast amount
of profit was the result of the company's massive turnover and
represented a mere 1p per litre on the company's total sales.
He might also have pointed out that, compared to the capital
employed, £2.4 billion was in no way excessive.
According to my Daily Telegraph, Shell's market capitalisation
(the value of its shares at current prices) is some £55
£2.4 billion is about 4.5% of the company's open market
value - a smaller rate of return than Mr Humphrys gets on his
building society account.
Of course, unlike a building society account, shares can go
up in value.
As those who ignored Old Grumpy's advice of a year ago, to
dump those overpriced dot coms, have discovered, they can also
Shares are risk capital and if every time somebody's gamble
pays off the Chancellor is waiting to whack them with a windfall
tax it will not be long before investors realise that they are
in a no-win situation and take their cash elsewhere.
In any case, making large profits, provided they do not flow
from monopoly, price fixing or fraud, is actually rather a good
thing in a free market.
That is because high profits usually flow from scarcity and
the prospect of making a killing will attract investment into
the production of whatever is in short supply - at the same time
alleviating the shortage, reducing the price and with it the profit
Conversely, if governments try to limit profits either through
windfall taxes or price controls the result is always scarcity.
For instance, if the state capped the price of eggs at 25p
a dozen nobody would bother to produce them, except, that is,
for the £2 a dozen black market.
I am sure Gordon Brown understands all this, so we must assume
that his threats against the oil companies was for the benefit
of the dinosaurs on the left of his party, some of whom still
appear to believe that the USSR was an outstanding economic success.
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