PFI/PPP the UK scandal worth investigating

PFI/PPP the UK scandal worth investigating

The European Services Strategy Unit maintains a database of PFI projects and tracks changes. In June 2011 it stated that in excess of 90 PFI deals had been moved to the offshore tax havens of Jersey and Guernsey. Why is this bad? Well, HSBC Infrastructure sold 33 projects to HICL Infrastructure and so £38m of profits only attracted £100,000 of UK tax.

The Public Accounts Committee (PAC) in September last year stated “Some of the government’s case for using PFI has not been based on robust analysis but on ill-founded comparisons and invalid assumptions”. The Treasury could not tell the committee if PFI investors had paid any tax on profits or the equity gains or even corporation tax contributions, although one investor admitted 72% of their portfolio was offshore.

With over 700 PFI’s in the UK the loss to the tax payer is unacceptable.

There is a buoyant and highly profitable secondary PFI market which urgently needs investigation and naming and shaming. These projects include hospitals, schools, police stations and courts. A NAO report refers to a Treasury view that initial investors in the secondary market typically anticipate 13% to 15% returns. However as you will read below, actual average profits are 50.6%, with two sectors averaging higher profits, health (66.7%) and criminal justice (54.9%)

Can this be right – How can government have allowed this profiteering on 20 even 30 year contracts?

Is this new? No it is not. One prominent legal firm’s website in August 2006 quoted this “investors in the original project SPV (are) selling their shares in the SPV to financial investors who are attracted by the potential return on investment available over the remaining (usually lengthy) term of the project. The levels of return in this type of project have been attractive relative to other asset classes and a number of specialist infrastructure funds have been established to exploit this market”. So what actions has Government taken since then? Absolutely nothing of significance is the answer.

HSBC were the first to set up an offshore fund of this kind with its portfolio predominantly in hospitals and schools. It also has outright ownership of three NHS Hospitals in Barnet, Central Middlesex and West Middlesex. You need to remember that PFI contracts are legally protected from cuts, which has the effect of ensuring their sustained profitability. If faced with shortfalls in revenue, PFI contracts force hospitals to re-shape around the contractual needs, rather than the clinical ones. The net effect is that frontline services like beds, doctors and nurses will be cut before non-essential items such as maintenance are.

In June 2011, written evidence submitted by Dexter Whitfield, Director, European Services Strategy Unit to the Treasury Committee, highlighted the following: –

1. Government monitoring of the sale of equity in PFI companies is inadequate, infrequent and under-estimates the scale of transactions. Meanwhile banks and construction companies are extracting large profits from what is ultimately publicly financed investment

2. The sale of equity is significantly higher than that the sales identified in the HM Treasury PFI/PPP equity database and estimated by the National Audit Office. The ESSU PPP Equity Database identifies:
• 240 PPP equity transactions involved 1,229 PFI projects (including multiple sale of some projects) valued at £10.0 billion.
• Average profit was 50.6% (compared to average operating profits in PFI construction companies of 1.5% between 2003-09).
• £517.9 million profit from a sample of 154 PFI projects. If the same level of profit were maintained for the 622 PPP project equity transactions the total profit would be £2.2 billion.
• Profits could be as high as £4.2 billion if the same level of profits is obtained by the sale of secondary funds as in the direct sale of equity in PFI companies.
• Two sectors had higher than average profits, health (66.7%) and criminal justice (54.9%) with transport (47.1%) and education (34.1%) below average.

Is it not time to stop this scandal? With countries like Sweden and others looking to enter the PFI/PPP market you would hope that they at least will learn from the UK’s damning experiences.

Meantime the coalition Government urgently needs to understand how to stop not only the obscene profiteering but also the calculated tax avoidance in the secondary PPP/PFI market especially with something like 60 planned PPP/PFI’s coming to the UK market in the next 12 months

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One Response to PFI/PPP the UK scandal worth investigating

  1. fqnqmhrTDM says:

    You produced some decent points there.

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