Supplementary note to Question 43
Q43 Dr Taylor: Finally, going to Tables 12a
and 12b, which are about the rate of return, could you translate
for me out of those a figure that an investor in a PFI firm does
actually get for his investment? Is it really sort of 10-14%,
or am I misreading that, because they do seem to be incredibly
high rates of return when we think what you can get in a building
society at the moment? Am I over-estimating those, or are we looking
at returns of 8 or 14%?
Answer
The table below includes in explanation of the
figures in Tables 12a and 12b with reference to an example NHS
trust.
| Barking, Havering and Redbridge Hospital NHS Trust PFI scheme
| Explanation of Figures |
| Blended Equity Internal Rate of Return (Table 12a)
— Pre-tax nominal: 15.16%
— Pre-tax real: 12.35%
— Post-tax nominal: 12.62%
— Post-tax real: 9.90%
| This shows the return that equity investors forecast (at the start of the project) that they will receive over its whole life. The currency of return is shown in a variety of ways to take account of tax and inflation.
|
| Project Internal Rate of Return (Table 12b):
— Pre-tax nominal: 7.51%
— Pre-tax real: 4.89%
— Post-tax nominal: 7.05%
— Post-tax real: 4.44%
| This shows the return on the total value of the project. As about 90% of PFI funding is from loans (Senior Debt) paid at a low rate of interest (compared to equity), the Project Internal Rate of Return is much lower than just the Blended Equity Internal Rate of Return
|
The overall, risk adjusted cost to the private sector of
raising all the finance are therefore the figures in Table 12b.
The cost effectiveness of this investment against a public sector
comparator—which reflects the risk adjusted cost of long
term Government borrowing—is fully tested in the
business case process.
As stated, the Blended Equity Internal Rate of Return is
the return on the equity component of the PFI funding; typically
about 10% of total funding. This is paid as equity share capital
or equity-like loans from very specialist investors. It is not
possible to fund a project entirely through senior debt; the provision
of equity finance enables projects to be financed where there
are risks which bank lenders are unwilling to bear. So sufficient
equity is needed to be able to absorb risks, such as deductions
occurring to the income stream through poor performance by the
PFI consortium—it is the "risk capital" in the
project.
Therefore, the equity component of funding is an investment
and can not be compared in anyway with putting money in a building
society, which is essentially a deposit.
An investment has risk attached ie it will only give a return
if the PFI company performs to plan. A deposit has no such risk—the
only risk with a building society is if it goes bust. No building
society has ever gone bust and failed to return money to depositors—building
societies get taken over by bigger ones.
The blended equity rate of return is forecast at the beginning
of the contract and there are examples where investors have lost
their money completely or the overall return has reduced. The
investment is long term—the stated return is over the life
of the investment and not necessarily paying that % each year—
again in comparison, deposits are short term.
The investment returns in health PFI are comparable to the
investment returns in other PFI projects. They are the result
of substantial competition for the contract—they are not
just a number selected by the investor.
11 February 2010
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