Invisible Debt Has Invisible Risk Too

“Q: When is a debt not a debt? A: When it’s fallen off the balance sheet.”

The official unemployment figure in the UK is about 8%, that’s about 2.5M people. Of course, many don’t believe this number and speculate that the underlying figure is probably closer to 20%, or one in five of us. The difference is that some of the unemployed have conveniently been classified out of unemployment by the government. Financial wonks have played this game for decades, most outrageously by folk at Enron, who kept so much of its debt hidden and off its balance sheet that the whole house of cards collapsed once it was revealed.

Although it probably seems to most sensible observers that the UK has more than enough debt, like employment figures the official debt level isn’t really the complete story either, as the government has an off-balance-sheet game of its own. Public Finance Initiative (PFI) projects enable the debt for public projects to be financed by other people’s, private, borrowings so they don’t appear in the national debt figures. This hidden debt amounts to about £35bn and it would raise the national debt by about 2.5% if the government had borrowed the money rather than the private sector.

So, apart from the obvious flattering of the national debt figures, why bother with PFI? Well, government has been notoriously inept at managing big infrastructure projects, until of course they found John Armitt, hero of so many recent projects, not least the 2012 build. In stark contrast to civil servants before him John has done such a good job everywhere he has been that he is fast becoming a national treasure. It is hard to buy complex and risky projects if you aren’t an intelligent, savvy and experienced buyer of the same.

There is always a trade-off if you are passing the prime contractual responsibility and risk to a third party; they will want to be paid to take that risk. Also, if you haven’t had a sensible person negotiating these contracts in the first place you are likely to be somewhat out manoeuvred. The construction sector makes most of its money by negotiating and managing contracts and you have to be quite an expert to outsmart them. No wonder then that we are lumbered with a lot of PFI contracts that now seem too favourable for the contractor.

Whilst we can hide the capital component of  projects like this, we can’t hide the interest and operational payments, which many public organisations have been lumbered with and now find impossible to pay back. We seem to have paid a high financial cost for the political benefit of hiding some debt and along the way, before John, government seems to have been out negotiated by the contractors.

While the debt may be hidden, the crippling interest payments and management charges aren’t and surely we should learn from this mess and make sure it doesn’t happen again. Isn’t it time for government to appoint John, or someone like him, to make sure that government infrastructure projects are much better managed in future?

What’s any of this got to do with you? First, beware of off-balance-sheet financing; it always comes with risk and commitments that you may not be able to fulfil. Secondly, don’t negotiate with an expert unless you are an expert too, or you have one to help you, as you will always come off worse.


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