Private Finance Initiatives were first introduced by the Conservatives in the early 1990s and they became a popular method of funding a variety of new public projects under New Labour. These included the building of prisons, new roads, hospitals, schools etc. The idea is that a private firm funds the cost and maintenance of the public sector project, whilst the public sector makes use of it and begins repaying the cost – something like a mortgage, with contracts lasting for about 30 years. As with a mortgage, you are saddled with the payments and interest for many years to come. This is the problem now facing many NHS trusts, who are finding it too expensive to repay the annual charges to the PFI contractors for building and servicing the hospitals.
Undoubtedly, there are short term benefits – the public sector gets a brand new hospital without having to raise the capital, but in the long term, it is the public who end up repaying more than the hospital (or the PFI project) is actually worth. Data suggests that a hospital in Bromley will cost the NHS £1.2 billion, which is some 10 times more than it is worth. Analysis by the Conservatives last year suggested that the 544 projects agreed under Labour will cost every working family in the UK about £15,000. This, compared with the original building cost of £3,000, is leading to claims that the PFI projects do not represent ‘value for money.’
More and more NHS trusts are contacting Andrew Lansley to say that the cost of financing the PFI project is undermining their ‘clinical and financial stability’. More than 60 hospitals and 12 million patients could be affected if these hospitals are forced to close. Health Secretary Andrew Lansley commented that:
‘Like the economy, Labour has brought some parts of the NHS to the brink of financial collapse.’
Labour, on the other hand, argue that the PFI contracts they created were essential at the time ‘to replace the crumbling and unsafe building left behind after years of Tory neglect.’ Although the public have benefited from the development of new hospitals, schools, roads etc, the long term costs may still be to come. Once the schemes are paid off, in 2049, over £70billion will have been paid to private contractors – significantly more than the cost and value of the projects and it will be the taxpayer who foots the bill. The following articles consider this controversial issue.
Labour’s PFI debt will cost five times as much, Conservatives claim The Telegraph, Rosa Prince (27/12/10)
Rising PFI costs ‘putting hospitals at risk’ BBC News (22/9/11)
Hospitals face collapse over PFIs The Press Association (22/9/11)
NHS hospitals crippled by PFI scheme The Telegraph, Robert Winnett (21/9/11)
60 hospitals face crisis over Labour’s PFI deals Mail Online, Jason Groves (22/9/11)
Private Finance Initiative: where did all go wrong? The Telegraph (22/9/11)
PFI schemes ‘taking NHS trusts to brink of financial collapse’ Guardian, Lizzy Davies (22/9/11)
Hospitals ‘struggling with NHS mortgage repayments’ BBC News, Nick Triggle (22/9/11)
Questions
- What is a PFI?
- Briefly outline the trade-off between the short term and the long term when it comes to Private Finance Initiatives.
- What are the arguments for a PFI? What are the arguments against PFIs?
- If PFIs had not been used to finance building projects, how do you think that would have impacted the current budget deficit?
- Is the cost of financing PFIs likely to have an adverse effect on the future prosperity of the UK economy?
Cycling generated £2.9 billion for the UK economy in 2010 – a rise of 28% over 2009. This amounts to an average ‘Gross Cycling Product’ of £233 for each of Britain’s 12½ million cyclists. What is more, the figures are likely to continue growing rapidly in future years. This is the central finding of the LSE report, The British Cycling Economy, authored by Dr Alexander Grous, a productivity and innovation specialist at the Centre of Economic Performance (CEP) at the London School of Economics.
The major benefits to the economy from cycling include the sale of cycles and accessories, cycle maintenance, the generation of wages and tax revenues from 23,000 people employed directly in bicycle manufacture, sales, distribution and the maintenance of cycling infrastructure. There are also health benefits. These are partly the direct benefits to the economy of fewer days taken in sick leave by cyclists (a contribution of £128 million in 2010) and partly the health and well-being benefits to the individual and the saving on healthcare expenditure.
But are enough people being encouraged to get on their bikes? What are the major incentives for people to cycle? The report identifies the following:
• Cycling being made both segment- and gender-neutral, appealing to the widest number of user groups, across all ages and genders;
• Coordinated and preferential traffic signals that facilitate faster and safer journeys;
• ‘Short cut’ routes in dense urban areas and capital cities that join arterial road routes;
• Traffic calming initiatives that include road narrowing and speed restrictions that range from 30km/h to ‘walking speeds’;
• Extensive parking and in some areas, designated women-only spaces with CCTV and enhanced lighting;
• Established bike rental schemes;
• Long-running training programmes for children;
• The prevalence of strict ‘liability laws’ that assume a car driver is responsible in the event of a collision between a car and a cyclist.
Read the following articles and report and then consider, as an economist, how the benefits and costs should be analysed and what policy implications might follow.
Articles
Wheels of fortune: how cycling became a £3bn-a-year industry Independent, Tim Hume (22/8/11)
Cycling worth £3bn a year to UK economy, says LSE study Guardian (21/8/11)
Cycling industry gives economy £3bn boost BBC News (22/8/11)
Growth in cycling ‘boosting economy’, says LSE BBC News (22/8/11)
Britain Gets Back On Its Bike British Cycling (22/8/11)
‘Gross Cycling Product’ worth £2.9bn to UK economy says LSE Road.cc (22/8/11)
Report
The British Cycling Economy: ‘Gross Cycling Product’ Report LSE, Dr Alexander Grous
Questions
- How is the figure of £2.9bn derived? Explain whether it is a ‘value-added’ figure?
- Which of the benefits can be regarded as externalities?
- Are there any external costs from cycling? If so, what are they and how might they be minimised?
- How might incentives be changed in order to encourage more people to cycle?
- Assume that you are a government or local authority considering whether or not to increase investment in cycle paths. What factors would you take into consideration in order to make a socially efficient decision?
Following a 38% increase in profit margins made by energy companies towards the end of 2010, Ofgem (the energy and gas regulator) began an investigation into the activities of energy companies. The review by Ofgem was aimed at determining whether or not consumers should be better protected from the powerful energy companies, many of whom had previously raised prices, forcing some consumers to pay an extra £138 per year. At the time, it was believed that Ofgem might request support from the Competition Commission, but it seems as though the big size energy companies have had a lucky escape. They will not be referred to the Competition Commission, even though critics, in particular First Utility – Britain’s largest independent energy supplier – suggest that Ofgem’s proposals are unlikely to be effective. It seems that the big six have shown sufficient co-operation with Ofgem.
A key reform that Ofgem hope to implement will try to reduce the power of this oligopoly by making it easier for new entrants to gain market share. One such proposal would see the big six auctioning off up to a fifth of the electricity they generate. As the owners of Britain’s power stations, new companies cannot buy gas and electricity on the open market and this reform aims to change that. However, there are concerns that this will be ineffective, as the big six may simply outbid the smaller companies or even just buy and sell electricity from each other, thereby keeping their dominant positions in the market. Although the big six have received constant criticism from all sides, the lack of government support for a Competition Commission inquiry may be related to the need for these companies to invest £200bn in Britain by 2020 to help create and build new energy sources, including wind farms and nuclear power. Without this investment, Britain’s energy supply could be in jeopardy. The following articles consider this energetic debate.
Articles
Ofgem may be blown away by the power of the ‘Big Six’ energy companies Telegraph, Rowena Mason (23/6/11)
Ofgem pledges to get tough with ‘big six’ energy companies Guardian, Miles Brignall (22/6/11)
Scottish power investigated over ‘misleading’ marketing campaign Independent, Sarah Arnott (23/6/11)
Ofgem and ‘Big Six’ need to put some energy into cleaning up their acts Telegraph, Richard Fletcher (23/6/11)
In search of a coherent energy policy Independent, David Prosser (23/6/11)
UK suppliers face tough power auction reforms Reuters (22/6/11)
Ofgem: ‘We are watching energy companies closely’ BBC News (22/6/11)
Data
Energy price statistics Department of Energy & Climate Change
Energy statistics publications Department of Energy & Climate Change
Questions
- What is the role of Ofgem? How does it relate to the Competition Commission?
- What factors have contributed to the investigation by Ofgem into the ‘big six’ energy companies?
- How much power does Ofgem actually have to implement reforms?
- What are the characteristics of an oligopoly? To what extent does the energy market fit into this market structure?
- What are the main barriers to entry that prevent new companies from competing with the ‘big six’? Are the reforms likely to help them?
- What other proposals have been suggested by parties other than Ofgem in bid to help new competitors and customers? Are any likely to be more effective than those proposed by Ofgem?
Whilst perhaps not an essential in the sense of needing it to live, petrol is about as close as you can get to a ‘non-essential necessity’ these days. Most families have a car (many have more than one) and despite the hikes in petrol prices we’ve seen across the UK, demand for petrol has remained high: it is a prime example of a good with a highly inelastic demand.
Over the past few years many families have chosen to forego their holidays abroad and instead have taken to summer vacations across the UK in a bid to save money. However, with the summer season approaching and families beginning to think about where to go or plan their trips, one thing that should be considered is the cost of travel. Petrol prices across Europe have risen faster than those in the UK over the past year and this may pose a significant cost and possibly deterrent to European travel. As Sarah Munro of the Post Office said:
‘The high fuel price increases in Europe mean that UK holidaymakers should plan their routes carefully in advance to cut costs’.
Petrol prices were found to be the lowest in Luxembourg at 128p per litre and the highest in Norway at 182p – a definite deterrent to filling up your tank in Scandinavia. Despite motorists’ constant exclamations of the price of petrol in the UK, of the 14 countries surveyed the UK came in as the 4th cheapest at 136p. It also had the smallest increase since 2010 of 14p, compared to the average of the countries surveyed of 27.8p.
Although the higher fuel prices have been fuelled (no pun intended) by rising wholesale oil prices, when crude prices started to fall, petrol prices didn’t decline to match. This has sparked an inquiry into petrol prices, with demands for more transparency into the price setting behaviour of firms. The British Petrol Retailers’ Association is planning on referring its concerns to the Office of Fair Trading. So the moral of the story: petrol prices are high in the UK, but if you’re going on holiday this summer, you’ll probably find that many other countries across Europe have even higher prices, so planning is essential.
Holiday hike: European petrol prices soar by up to 35 per cent Daily Mail Online, Sarah Gordon (10/6/11)
UK holidaymakers ‘face high petrol prices’ BBC News (10/6/11)
Petrol prices are 35% higher in Europe than last summer Mirror, Ruki Sayid (10/6/11)
Motoring coalition calls on EU to investigate soaring price of petrol Telegraph, Rowena Mason (10/6/11)
Motoring groups demand petrol price investigation BBC News (30/5/11)
Questions
- How are European petrol prices set?
- Why does the exchange rate against the dollar have a big impact on oil prices?
- Why have petrol prices in the UK not increased by as much as other European countries over the past year?
- Why is there likely to be an investigation into how prices are set? Which factors do you think will be considered?
- The Telegraph article talks about the sport market. What is this and how does it affect how petrol prices are set?
- Why does petrol have such inelastic demand?
- If a higher tax is imposed on petrol, why is it that much of the cost will be passed on to consumers in the form of a higher price? Illustrate this on a diagram.
Economics studies the choices people make. ‘Rational choice’ involves the weighing up of costs and benefits and trying to maximise the surplus of benefits over costs. This surplus will be maximised when people do more of things where the marginal benefit exceeds the marginal cost and less of things where the marginal cost exceeds the marginal benefit. But, of course, measuring benefits and costs is not always easy. Nevertheless, for much of the time we do make conscious choices where we consider that choosing to do something is ‘worth it’: i.e. that the benefit to us exceeds the cost.
When we make a choice, often this involves expenditure. For example, when we choose to buy an item in a shop, we spend money on the item, and also, perhaps, spend money on transport to get us to the shop. But the full opportunity cost includes not only the money we spend, but also the best alternative activity sacrificed while we are out shopping.
Then there are the benefits. Not all pleasurable activity costs us money. The sight of beautiful contryside or the pleasure of the company of friends may cost us very little, if anything, in money terms. But they may still be very valuable to us.
If we are to make optimal decisions we need to have some estimate of all costs and benefits, not just ones involving the payment or receipt of money. This applies both to individual behaviour and to collective decisions made by governments or other agencies.
Cost–benefit analysis seeks to do this to help decisions about new projects, such as a new road, a new hospital, environmental projects, and so on. But just how do we set about putting a value on the environment – on the pleasure of a walk in bluebell woods, on protecting bird life in wetlands or sustaining ecosystems?
For the first time there has been a major study that attempts to value the environment. According to the introduction to the report:
The UK National Ecosystem Assessment (UK NEA) is the first analysis of the UK’s natural environment in terms of the benefits it provides to society and the nation’s continuing prosperity. Carried out between mid-2009 and mid-2011, the UK NEA has been a wide-ranging, multi-stakeholder, cross-disciplinary process, designed to provide a comprehensive picture of past, present and possible future trends in ecosystem services and their values; it is underpinned by the best available evidence and the most up-to-date conceptual thinking and analytical tools. The UK NEA is innovative in scale, scope and methodology, and has involved more than 500 natural scientists, economists, social scientists and other stakeholders from government, academic and private sector institutions, and non-governmental organisations (NGOs).
The following podcast and webcast look at the report and at some of the issues it raises in terms of quantifying and incorporating environmental costs and benefits into decision taking.
Podcast and Webcast
‘The hidden value’ of our green spaces BBC Today Programme, Tom Feilden (2/6/11)
Report puts monetary value on Britain’s natural assets BBC News, Jeremy Cooke (2/6/11)
Articles
NEA report highlights need for biodiversity Farmers Guardian, Ben Briggs (2/6/11)
Nature is worth £19bn a year to the UK economy – report Energy & Environmental Management Magazine (2/6/11)
In praise of… the unquantifiable Guardian (3/6/11)
Priceless benefits of bluebell woods Guardian letters, Dr Bhaskar Vira and Professor Roy Haines-Young (4/6/11)
Nature ‘is worth billions’ to UK BBC News, Richard Black (2/6/11)
Putting a price on nature BBC News, Tom Feilden (2/6/11)
Value of Britain’s trees and waterways calculated in ‘ground-breaking’ study The Telegraph, Andy Bloxham (2/6/11)
Nature worth billions, says environment audit Financial Times, Clive Cookson (2/6/11)
Nature gives UK free services worth billions Planet Earth, Tom Marshall (3/6/11)
UK scientists put price on nature with National Ecosystem Assessment GreenWise, Ann Elise Taylor (2/6/11)
Report
UK National Ecosystem Assessment: link to report DEFRA
UK National Ecosystem Assessment (June 2011)
The UK National Ecosystem Assessment: Synthesis of the Key Findings
Questions
- How would you set about valuing the benefits of woodlands?
- According to the report, the health benefits of living close to a green space are worth up to £300 per person per year. How much credance sould we attach to such a figure?
- What do you understand by the ‘ecosystem approach’ and the term ‘ecosystem services’?
- Explain Figure 2 on page 3 of Chapter 2 of the report.
- Should decision makers quantify only those benefits of ecosystems experienced by humans? Would all environmentalists agree with this approach?
- What are the advantages and disadvantages of quantifying all costs and benefits in money terms?
- Compare the consequences over the next 50 years of a ‘world markets’ scenarios with that of a ‘nature at work’ scenario.
- What policy implications follow from the report?