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National Audit Office puts the UK’s PFI bill at nearly £200bn

The government’s own spending watchdog says that outsourcing public services to private companies is 40 per cent more expensive.

Taxpayers are set to hand over almost £200bn to contractors for at least 25 years, according to a report by the National Audit Office (NAO).

The independent parliamentary body, which carried out its research prior to the liquidation of public service provider Carillion, found that there was little evidence to suggest that the government’s investment in over 700 existing public-private projects, delivered through the Public Finance Initiative (PFI) and Private Finance 2 (PF2), has represented value for money.

In a PFI or PF2 deal, a private finance company is set up and borrows money to construct a new asset such as a school or hospital. The taxpayer subsequently makes payments to cover running costs over the contract term (typically 25 to 30 years). However, the NAO said that the cost of privately financing public projects can be 40 per cent higher than relying on the government pot alone. The spending watchdog also revealed that the government has a £35m equity stake in one of Carillion’s major projects, meaning public money is now under threat.

PFI contracts were first introduced under John Major's Conservative government. Their use boomed under Tony Blair's Labour government, but PFIs fell out of favour after 2008’s global financial crisis, as the price of private finance increased and questions were raised over the costs of using this scheme.

According to the NAO, there are currently 716 private finance deals in operation with a capital value of approximately £60bn. Initial charges for these deals amounted to £10.3bn in 2016-17. Even without any new deals future charges that continue until the 2040s total at £199bn – a sum which the NAO claims could fund the National Health Service for 20 months.

The NAO’s report comes just hours after the Prime Minister claimed that the government was simply a “customer” of Carillion, which collapsed on Monday, after its involvement in various major public projects.

Meg Hillier, chair of the Public Accounts Committee, said: “After 25 years of PFI, there is still little evidence that it delivers enough benefit to offset the additional costs of borrowing money privately.”

The Member of Parliament for Hackney South and Shoreditch added: “Many local bodies are now shackled to inflexible PFI contracts that are exorbitantly expensive to change.”

And at Prime Minister's Questions on Wednesday, Labour Party leader Jeremy Corbyn urged the government to end the “costly racket” of private sector firms running public services.

Rohan Banerjee is a Special Projects Writer at the New Statesman. He co-hosts the No Country For Brown Men podcast.

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The future of financial education

The University of Strathclyde Business School has launched the UK’s first MSc in fintech. Daniel Broby, the course’s convenor, explains its origins and aims. 

Finance has always attracted the rocket scientists, drawn by the promise of wealth and riches. The technological revolution brought with it many breakthroughs in financial theory, allowing market participants to slice and dice, as well as leverage and diversify, financial risk. Now, as the world is migrating towards a distributed internet architecture, a new revolution is upon us. Fintech has blended finance and technology together and is changing the way companies and consumers interact. Not only will the way we conduct transactions change, but so too will the way we educate finance professionals in the future.

Fintech is a much-used buzzword, but essentially it boils down to using programming code to effect efficient transmission of financial assets cheaply and securely over the internet. Financial transactions and history can be stored in an immutable way on distributed ledgers, moving from double-to-triple entry book-keeping. The next generation of accountants and auditors will have to embrace this added level of complexity, and the way they are trained will change.

The core technologies behind fintech include blockchain or distributed ledgers. Essentially, a blockchain is a network of blocks of programming code joined together by a secure unique key. This allows transmission of financial assets from one party to another whilst avoiding the double spending problem. The latter is best understood if you imagine being able to copy and paste financial assets into a shared document.

Essentially, your money can be duplicated by anyone with a personal computer or tablet, unless it is secured cryptographically. Blockchain is secure and as such gets over this problem, facilitating the sending and storage of financial assets all over the internet. Armed with a wallet, on either a PC or mobile device, it is possible with such technology to disintermediate the banks and other financial institutions.

The University of Strathclyde Business School, recognising how the fintech revolution will change finance, launched the first Masters degree in fintech in the United Kingdom. Ranked first in the UK for accounting and finance by the Complete University Guide Subject League Table, the decision was made to future-proof its graduates. In a multidisciplinary approach, the new course combines expertise in finance, computing and management science. The resultant programme is a truly practical course encompassing, programming, big data, analytics, finance theory, distributed ledgers and regulation.

Professor David Hillier, the executive dean of Strathclyde Business School, endorses the idea that finance teaching is fundamentally changing. He observes that “the degree is not only an exciting first but we are pleased to be at the cutting edge of financial market development. It reinforces our core vision to be a place of ‘useful learning’ focused on innovation.”

The curriculum creation was based on fundamental pillars that combine front-office theory with middle and back-office practice in the fields of operations, clearing and settlement. It was designed to provide students
with an understanding of finance and analytical methods. The aim is to integrate programming and big data techniques. In this way, it extends the students’ core finance skills and enhances their understanding of rapidly evolving financial markets.

The MSc in fintech received letters of support from Scottish Investment Operations (SIO) and Skills Development Scotland (SDS), as well as a number of leading financial institutions who recognised that programming skills need to be taught to finance graduates.

Other educational institutions are also leading the educational charge into fintech. Tatja Karkkainen, for example, is the first person in the UK to undertake a PhD in Fintech. Her research is supervised by Glasgow University’s Adam Smith Business School and co-mentored by Strathclyde and Stirling Universities. Most of the educational initiatives at this stage are, however, on the research front. Professor Julian Williams at Durham University Business School, a case in point, is undertaking pioneering research into financial blockchain.

Karkkainen points out: “One has to be one step ahead in finance. The amount of data that financial markets generate requires processing by computers and advanced techniques. A degree in pure finance is no longer sufficient.” Karkkainen further observes that she is “thrilled to be part of an initiative that contributes to efficiency, cost-cutting and the introduction of new financial services that improve the quality of life.” Future-proofing financial education is essential in a world of big data and evolving business models. Teaching the new method of financial analysis and modus operandi are key to the career success of the next generation of graduates. The success of our banks and financial institutions depends on them.