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NHS & PFI

April 23rd, 2005

The latest London Review of Books has a great review article by David Runciman (subscription only, unfortunately). The books covered are Restoring Responsibility: Ethics in Government, Business and Healthcare by Dennis Thompson , NHS plc: The Privatisation of Our Healthcare by Allyson Pollock and Brown’s Britain by Robert Peston.

Of these, I’m most interested in the book by Pollock, who’s been a prominent critic of the Private Finance Initiative, particularly in relation to health care. I think the biggest problems with the PFI are going to emerge ten or twenty years into the contracts, when any safeguards written into the original contracts will be obsolete, and the private party will have an incentive to extract as much rent as possible from the remaining life of the deal.

The whole idea of governments signing these long-term contracts is dubious in many respects. It’s bad public policy for a government to bind its successors in this way. And it’s bad commercial policy to sign 30-year contracts for services where ordinary principles of risk allocation would suggest a term more like five years. The PFI and similar initiatives have already run into plenty of problems, but I think the worst is yet to come.

A particularly egregious example came to light in Australia recently. The late, and not much lamented Kennett government signed contracts giving monopoly rights monopoly rights to operate gambling enterprises to two firms, Tabcorp and Tattersalls.

It now emerges that, if these contracts are not renewed, obscure clauses entitle the monopolists to compensation of up to $1 billion.

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  1. Andrew Reynolds
    April 23rd, 2005 at 23:11 | #1

    PrQ,
    Just another reason why the government should not be involved in the provision of healthcare – except perhaps as an insurer of last resort.

  2. Dave Ricardo
    April 24th, 2005 at 10:37 | #2

    The late Kennett government may well be unlamented, but it was Joan Kirner’s government that gave (and that is gave, not sold) the Victorian pokie licences to Tabcorp and Tattersalls.

  3. John Quiggin
    April 24th, 2005 at 11:50 | #3

    From the story cited

    State Government spokesman Geoff Fraser said the Government’s debt to the gaming industry was established under the Kennett government. The contingent liabilities are listed in the budget papers annually and have been since the contracts were negotiated by the Kennett government,” he said.

  4. Dave Ricardo
    April 24th, 2005 at 12:16 | #4

    Hmmm, I’d be careful about accepting at face value what a Bracks government spokesman said about this. Tabcorp and Tattersalls were certainly offered the licenses by the Kirner government. But this happened very late in the life of that government. It may be that the final deal was signed early in the life of the Kennett government.

    Not that assigning the blame matters much now. Both the late Kirner government and early Kennett governmnent had their minds on other things, so they probably weren’t paying close attention. What’s more, nobody thought at the time that pokies would grow to be the monster that they have. My guess is that the clause in the contract doesn’t refer to a number at such, but some percentage of pokie turnover, which is now much, much bigger than anyone thought would happen, so the penalty clause now implies a much, much bigger number than anyone conceived at the time.

  5. John Quiggin
    April 24th, 2005 at 12:44 | #5

    My guess is that the clause in the contract doesn’t refer to a number at such, but some percentage of pokie turnover, which is now much, much bigger than anyone thought would happen, so the penalty clause now implies a much, much bigger number than anyone conceived at the time

    I’d agree with this comment, which of course reinforces my general point about contractual terms coming back to bite.

  6. April 24th, 2005 at 23:22 | #6

    Portland all over again.

  7. stephen bartos
    April 26th, 2005 at 18:19 | #7

    now the parliamentary secretary to the finance minister, Sharman Stone, is arguing that the Commonwealth (“Australian”) government should be doing more to encourage PPPs – which could be distinguished from PFIs except it’s clear from her speeches that she means the same thing by the term. We should be afraid…very afraid. When it was a case of governemtn deciding each case on its merits (the policy I advocated when advising governement on these things, and which fortunately they adopted) we can be reasonably safe – and in fact not too many PPPs got up on that basis. But when a government talks about encouraging PPPs then dodgy financing deals can’t be too far away.

  8. stephen bartos
    April 26th, 2005 at 18:20 | #8

    sorry about the typos in previous post – I type “government” far too quickly and the keys get mixed up.

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