Stormont borrowing must leave assets, not handicaps, for future
THE Northern Ireland Executive annually borrows an average of £200m to allow extra increases in the level of capital spending as part of the NI budget. The special Reinvestment and Reform Initiative (RRI) now has outstanding loans of nearly £2bn with loan and interest repayments of more than £100m each year.
In addition, Government departments have committed to 39 Private Finance Initiative (PFI or PPP) deals with an initial capital value estimated at £2bn but with unitary charges for the services of £7bn spread over up to 30 years. These create commitments of nearly £250m each year including the contribution to capital and operational costs.
RRI and PFI payments each year, together, cost some £350m.
The NI Audit Office has reviewed the scale and policy significance of these new and growing sources of funding for the capital budget of Stormont. The Audit Office has also drawn attention to deficiencies in the way in which these funds are used and the inadequate reporting of the process to the Assembly and (by extension) in terms of accountability to the public.
The critical questions relate to the methods of evaluating the merits of increased borrowing either as RRI or in a PFI arrangement. Various forms of justification can be inferred from the arguments deployed.
The easiest to accept is where a project is selected which, with the use of borrowed funds, can provide extra services to the relevant members of the public which would increase the benefits created. In a traded service, the question would be whether the service paid its way. In the public sector, the equivalent calculation is less easily demonstrated although conceptually it remains relevant as, for example, in the PFI investments in the water service.
Less persuasive is the argument which calls on extra funds to update or replace existing facilities. New schools and hospitals to replace older assets can be presented as compelling projects, even when the benefit essentially substitutes for older provision. The new Enniskillen hospital is a welcome new asset which has added a cumulative funding commitment of over £700m. Can the NI economy grow sufficiently to allow these funds to be repaid?
Possibly the least persuasive argument to borrow extra capital sums is when the borrowing is used to meet a current operating cost for which budget provision was inadequate (or needed because the demand was unexpected and unavoidable). The Audit Office reports a concern that, in a recent example, a back-dated pay award for which no funds had been earmarked was funded out of borrowed funds. Even as a one-off devise, this attracts critical comment.
The Audit Office has provided a useful clearly presented overview of the impact of RRI and PFI. Although the Audit Office uses the restrained language of Government officials examining the work of other Departmental officials, an interested reader may well conclude that the Audit Office is being constructively quite critical. In the seven summary recommendations, the first two ask for greater transparency, more robust and comprehensive analysis. Another three centre on issues linked to efficiency, benchmarking, market testing and sharing of expertise. Finally, the Audit Office asks for "clear analysis of the affordability of future borrowings and anticipated RRI commitments".
Possibly there may be some surprise that the initiative to scrutinise RRI and PFI was not initiated by either (or both) the Department of Finance and Personnel (DFP) in its own interests or the Assembly Committee for DFP. These complex funding opportunities are an under-exploited resource which may have the potential for more carefully targeted future spending.
If these resources are used in ways which ensure that the Northern Ireland economy grows, earns higher levels of taxation, this becomes a virtuous circle, and is so much the better. If they are used for soft or popular non-productive projects, tomorrow's generation will inherit a handicap, rather than an asset.