ADAM SMITH BULLETIN
LEAD ARTICLE Private Finance Scheme May Fail
FUTHER ARTICLES IN THIS EDITION: José Piñera to speak | Spinning the Web
Publications Two good | Hard labour | Power house | More good fortune | Pining away
Activities Sir Roger's rule | Economical with the government | St James seminar
THE NEXT GENERATION GROUP Regular meetings | Forth they went together
Adam Smith helps the former Communist economies The Adam Smith profile | Mining and metals in the FSU | Financing oil & gas | The media industry | Healthcare in Russia, Ukraine & Belarus | Telecoms in the Western FSU | Pipeline transmission systems
The Private Finance Initiative (PFI), hailed as a flagship of government reform, is in danger of becoming an embarrassing failure. This is the interim finding of an ASI working party looking over the whole progress of the initiative since it was launched. The problem is principally that it takes longer than it should, costs more than it ought to, and results in less successful ventures than anyone supposed it would. Indeed, for the effort and cost which private firms have expended, the results have been paltry.
Large numbers of projects are being held up in a lengthy pipeline of delay as several Departments poke their oar in, each having to be satisfied individually. The civil servants in charge of drawing up project specifications In many cases have no idea how to do it. (quite inappropriate procurement activities are being drawn into the bureaucratic net of the PFI and are being held back accordingly.
The lead time for PFI tenders Is dispiritingly long, and adds to the huge costs faced by contractors wanting to bid. The whole process is dominated by a 'rule-book' approach, with tenders being over- specified Instead of contractors being allowed to innovate. To this bleak catalogue of errors can be added the fact the whole process is too oriented toward physical buildings, instead of to the question of what the end service is designed to be.
The Adam Smith Institute team is now preparing a report which spells out the detail on these failures, drawing on the experiences of some of the private firms which have pulled out in disgust from the whole process. The report itself will specify the remedial measures which will have to be implemented now if the PFI scheme is to be saved.
The Institute's first report will be completed and published within the next few weeks, and followed by a seminar designed to bring out the issues identified and increase the pressure for change to the way in which the process is implemented.
The architect of the pension reforms in Chile will give a lecture to the Adam Smith Institute and attend a reception in his honour. Dr José Piñera will address the subject of Moving to Funded Welfare - The Chilean Experience. The lecture, held at the Royal Institution of Chartered Surveyors, at 12 Great George Street In SWI. will be on Monday May 20th, starting at 6 pm prompt. It will be followed by a drinks reception. Those wishing to attend should contact the ASI office, tel 0171-222 4885.
The Adam Smith Institute's home page is taking shape on the Internet. Web surfers may care to browse through what Mark Griffin of Cyberpoint has put together so far. Go from the home page into the ASI lobby, and browse through our publications, grouped by subject. Scan The Next Generation sheets for an outline purpose & history and an application form. Those who do not already do so can find how to support the ASI. Pages on International and Conference activities are being put together, as is the ASI's record of achievements. The Bulletin itself will be put on line in future, together with a brief schedule of coming events. The ASI home page can be found at http:/ /www.cyberpoint.co.uk/asi
Continuing its campaign to have Britain's welfare state replaced by a fully funded system, the ASI published Singapore versus Chile. looking at two different examples of funded welfare. The report, by Eamonn Butler, Mukul Asher and Karl Borden, shows how each country's policy has strengths and weaknesses, but that each is light years ahead of Britain's welfare state. Both countries require their citizens to save toward their future needs in special accounts. In Singapore this is a government monopoly, but the scheme is very flexible and has grown into personal funding which can be used towards housing and education once welfare needs have been met.
In Chile the funds are privately run, but are only for pensions. They have spectacularly out- performed Singapore's government monopoly, and have built up a huge investment fund of great benefit to the Chilean economy. The ASI's report suggests that Britain can learn something from each, adapting the best elements of each when its own welfare reform is shaped.
They privatized, they cut spending drastically, they deregulated. They executed a slash and burn policy on government programmes. No, it was not the wicked Thatcherites; this was the Labour government of New Zealand. And It worked. It put the New Zealand economy in better shape than it had ever been. Robert O'Quinn and Nigel Ashford have documented that story in The Kiwi Effect, published by the Institute, and subtitled What Britain can learn from New Zealand.
In many areas the New Zealand reforms went further than ours. They abolished agricultural subsidies, slashed tariffs and ended import restrictions. They halved income tax rates, and granted the Reserve Bank the autonomy to pursue price stability as its declared goal, with its governor personally accountable if it fails. They unbundled their Crown Departments, spinning them off into commercial entitles without subsidies, and eventually privatizing most of them. The new report suggests what Britain might do to emulate some of the success enjoyed by the Kiwis.
The privatized utilities have been taking a fair amount of stick recently, with pay increases for directors used to discredit privatization. The actual record should be looked at. With this in view the Institute has published A Power of Good - the Verdict on Electricity Privatization. The report, by Peter Young, Andrew Shutler and Andrew Kuhn of the Institute's International Division, gives the first objective overview of the lndustry's performance after privatization.
The ASI examines the record of each of the various sections of the electricity industry, generators and distributors. It looks at gains in efficiency and profitability, and asks what benefits have accrued to share-holders, to customers, to society at large, to the government, to the British economy, and to the environment. Its verdict is overwhelmingly favourable. By any standard of measurement, privatization has brought major improvements in all of these areas. Although some employees lost jobs in the restructuring that went on, the severance terms were among the most generous. The book provides a wealth of statistical support for its assessment of the successful outcome of a complex privatization.
Having made welfare reform its theme of the year, the Institute has now published its first thoughts on the process of moving from an unfunded pay- as-you-go system to fully funded personal Fortune Accounts. Its latest publication, Over To You - the transition to funded fortune accounts, explores the questions, financial and political, which such a changeover will have to address.
Six contributors give their thoughts on the subject. ASI President, Dr Madsen Pirie, tackles the safety net aspect, showing how the Fortune Accounts would have to be made universal and foolproof. Bernard Jenkin, MP, explores the political issues involved in moving from a tax supported system to one of personal savings. John Willman of the Financial Times examines the opportunity for restructuring to bring out greater efficiency and fairer benefit distribution.
Steve Pollard, the Social Market Foundation's head of research (and the Fabian Society before that) suggests how a 'bottom-up' approach to welfare, as characterized by the early Friendly Societies, would enable the Left to back a funded system consistent with its own intellectual heritage. Dario Paya, a Chilean MP, points out some of the lessons learned in the process of implementing just such a transition 15 years ago in his country. Dr Eamonn Butler of the ASI itself deals with some of the technical questions raised by the pensions industry and the Treasury about the transition arrangements.
Britain's forests could be headed toward the private sector if the Adam Smith Institute's new report is acted upon. Instead of any kind of commercial sale, the principal suggestion of Forests for the People is that ownership and administration of the forests should pass from the quangocracy of the Forestry Commission directly Into the hands of nearby communities. The authors, Miles Saltiel and Allan Stewart, MP, point out that the forests would be more sympathetically managed, with access guaranteed, and exploitation carried out at sensible levels.
It took a public outcry and twenty years of abuse before action was started about the dreadful rows of identikit conifers which the Forestry Commission thought fit to create. This kind of problem simply would not arise under community ownership, the authors point out. Coupon or voucher privatization has been successfully tried in Russia, in Poland and especially in the Czech Republic, but has not yet been used in Britain. Since the majority of the forests are in Scotland, it would represent a real transfer of ownership rights from a remote bureaucracy direct to the Scottish people.
Not content with publishing The Kiwi Effect to document the market reforms in New Zealand, the Institute entertained the principal architect of those reforms at a House of Commons lecture In late March. Sir Roger Douglas, as economics minister, piloted the changes through the New Zealand cabinet in the 1980s, to such an extent that the system became known as Rogernomics in his honour. Sir Roger gave his audience a summary of what had been done, why it was important, and what the results had been.
As a tribute to the ASI's campaign to promote funded welfare in Britain, Sir Roger devoted much of his address to the welfare system in New Zealand, and the urgency of moving to a funded system. He thought it the next and most logical reform, and the one which should now claim highest priority.
The ASI's 1996 Economy in Government Competition was launched on March 26th at a reception held by Ernst and Young, co-sponsors of the competition. Entrants are invited to submit ideas for saving public funds, and the proposals are vetted by a high-powered team led by Lord Parkinson. The winning three receive cash prizes (top prize £1,500), with the knowledge that all of the ideas are received seriously and considered by the departments concerned.
Past winners have initiated big savings to public funds, to the tune of several hundred million pounds, and both Ken Clarke and John Major himself have testified to the competition's value and importance. This year for the first time the project is co-sponsored by the Daily Express, who will be featuring it to their readers and inviting them to participate in the process of suggesting ideas. Ernst and Young will be active in providing the expert help to refine the short-listed entries into firm proposals.
The Institute returned to its distinctive lunchtime seminar format for a meeting at the St James Hotel on the subject of welfare state reform. An audience of 20 heard four speakers crammed into the lunchtime slot between 12 noon and 2 pm. This, including time for questions, discussion and debate, effectively squashes a half-day conference into a lunch break. As one might suppose, it takes ten minute speeches and tight planning. This was even more true of the welfare state seminar because the BBC's On the Record team decided they wanted to film part of it for their next Sunday broadcast.
There were excellent audience contributions from Lord Vinson and Dario Paya, a visiting Member of Parliament from Chile. Bernard Jenkin rapidly made arrangements with his Chilean opposite number regarding the planned visit to Chile in September by the entire Commons Select Committee on Social Security. John Willman and Steve Pollard contributed to the discussion, and Peter Barnes, special adviser to the Rt Hon Peter Lilley, was there to make sure that what was said was conveyed to the Secretary of State.
The April meeting of The Next Generation was held on the second Tuesday in order to avoid Easter. Paul Reynolds was featured as the ten minute speaker. He spoke of the trials and tribulations of advising foreign governments on market reform and privatization, and strongly recommended avoiding the fermented yak's milk offered by Mongolian hospitality. His view was that there will be job opportunities for new graduates for many years to come in the business of exporting Britain's unrivalled experience of achieving market economic reforms.
The May meeting features a lecture (as part of the cycle, alternating with receptions). The speaker, Peter Clarke of Financial Dynamics, deals with the privatization of money. Few people realize that the Bank of England was private for 250 of its 300 years, or that it did a better job of controlling inflation when it was private.
A new series of meetings on education was launched in mid April with an address by Eric Forth, Minister of State for Education. Included in the audience was a group of sixth form teachers. In his address, Mr Forth set the background for reform, challenging many of the hitherto accepted assumptions on the subject. He stayed to exchange ideas with the audience at an ASI reception held immediately afterwards.
The profile of Adam Smith is very high indeed in the former Socialist countries. Part of that profile is achieved by the high standing of the Institute itself. Immediately following the demise of Communism, the ASI saw the need for intensive training in the restructuring of individual industries. Those which had operated under the rules of a command economy would need to acquire new skills to thrive under market conditions.
The ASI's contribution has been an ongoing programme of high level conferences held in Russia, in the former Soviet republics, and in the one-time Warsaw Pact countries of central Europe. The purpose of this programme has been to bring together the managers who operate what used to be Communist monopolies, in order to learn the techniques of a free and competitive economy, and, equally importantly, to meet with potential investors and joint venture partners from outside. It is a tribute to the ASI that government ministers, officials and International regulators choose to attend to explain and discuss their programmes. It is not unusual to see a dozen ministers at one of these events, together with central bankers and industry chiefs.
ASI personnel have had to grapple with some details less familiar in the West. Should they take action about the heavy guys in leather coats which clearly show the outline of a machine gun bulging through? Should they pay the sleaze bribe demanded by a corrupt ministry? Is it really wise to allow them that much vodka to drink before the discussion?
On neutral ground in Vienna, the conference looked at the impact of new legislation, the investment opportunities which followed, and the technological needs of the Former Soviet Union's metal industry. Participants included Prof M Kobichtchanov, president of the Russian Board of Trade, and M Bazhanov, President of the Russian Gold Club.
How the oil and gas sector of the FSU republics can be adequately financed for development and expansion was the topic of a February conference. Vienna was again chosen because the event featured East and West. The PM of Azerbaijan, F Kuliev was present, with N Balgimbaev, Khazakhstan's oil minister. The Westerners included J Cheatham, president of ARCO, and R G Rich, vice- president of AIOC/AMOCO.
The legal jungle of establishing media ventures in Central & Eastern Europe and the CIS was one of the features examined at a Warsaw conference In March. Intellectual property rights of broadcasters, and the impact of cable and satellite technology were also scrutinized. Senior figures attended from the major media groups of Poland, the Czech Republic, Hungary, Romania and Slovakia, plus the chairman of RTR Russia, 0 Poptsov, and the Chairman of Ukraine's state committee of TV & radio, Z Kulyk.
This St Petersburg event, on market development of healthcare & pharmaceuticals, read like a roster of big players. The health ministers of Russia, Ukraine and Belarus all took part, together with the Russian economics minister. Western companies which participated at top level included Glaxo- Wellcome, Ciba Geigy, Smith Kline Beecham, Siemens and Hoffman-La-Roche.
The ASI put together an event in Moscow to explore joint venture opportunities in telecoms, with a view to speeding up the development of the modern system of telecommunications so essential to a market economy. Taking part were the Ministries of Telecommunications of the Ukraine, Belarus, Armenia, Georgia and Moldova, plus nearly all of the regional telecommunications operators from the region. Western merchant banks and telecoms companies explored forthcoming development areas and any opportunities to act together.
Many of the oil and gas pipeline distribution systems in the FSU republics need to be rehabilitated or reconstructed, and to have modern methods of management and operation brought in. The ASI's Moscow conference brought together the Chairmen and CE0s of most of the big operators in the FSU, together with Russia's energy minister, E Minaev. Since oil and gas play so large a part in the FSU's economy, the emphasis was on maximizing a safe and friendly exploitation of resources.
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