Live now pay later

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" (PFI)

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 the council.

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 deal.

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 gone ahead.

But the fact is that the Welsh Assembly will pay £850,000 of the annual cost, leaving the authority to pay the balance of £300,000.

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 in all.

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 this deal.

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 compromised.

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!

 

A sop to the left?

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 billion.

£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 go down.

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 margin.

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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