2 The returns to investors
8. Investors typically provide 10% of the finance
of a PFI project. There are primary investors (developers and
constructors) and secondary investors (those who acquire shares
in operational PFI projects). The secondary investors are typically
specialist PFI investment funds which manage a portfolio of PFI
contracts to generate an income stream for those who have invested
money in the funds.[25]
9. There is little information available on the
returns made by primary and secondary investors on their PFI investments
making it impossible for the public sector, Parliament and the
public to assess whether the investors' returns are reasonable
for the risks they bear.[26]
10. Innisfree told us that there was little money
to be made in the initial stages of a traditional construction
project - contractors on big construction projects typically worked
to profit margins of 2% to 3%.[27]
Yet a recent report[28]
suggested that primary investors in PFI projects could sell their
shares soon after construction is complete and average a profit
of over 50%.[29] Innisfree,
which is involved in developing PFI projects, did not accept the
accuracy and objectivity of the report's findings. They argued
that they had suffered losses on the Cornwall Schools and Dalmuir
PFI projects which had to be balanced against the opportunities
for profits.[30] Innisfree
and Semperian agreed to make information available on the purchase
and sale of their PFI investments.[31]
11. There is no limit to the returns which investors
can make from PFI projects. There is also no requirement for the
gains on the sale of shares in PFI projects to be shared with
the Government other than through the taxation of capital gains
which investors may be able to avoid.[32]
Innisfree argued that any attempt to significantly reduce the
returns of its investors on existing contracts would damage the
UK PFI market's credibility.[33]
Semperian was, however, willing to consider new contract arrangements
which allow the Government to share in investors' returns above
a defined threshold.[34]
12. Innisfree told us that it aimed to achieve
returns of between 8% and 10% per annum for its investors.[35]
Investors in its four funds were predominantly UK pension funds,
looking for low risk investments that offered a good return.[36]
The rewards to investors and managers of the funds appear to us
to mean that the private sector was receiving excessive profits
on the back of Government funded projects at the expense of the
taxpayer.[37]
13. Public scrutiny of investor returns has been
inhibited by the absence of an obligation on investors to disclose
full details of their profits and gains on PFI deals. The
Treasury cited commercial sensitivities for
not allowing freedom of information provisions to apply to the
private sector.[38] While
aspects of some deals may be commercially sensitive, it has been
all too easy for departments and investors to hide behind commercial
confidentiality, rather than provide full disclosure of costs
and benefits to inform value for money.[39]
These are publically funded investments and should be subject
to public scrutiny.
14. We heard that the public sector has not made
full use of available investor and contract information. Normally
it has information on the primary investors' expected rates of
return when assessing bids. In recent contracts the public sector
also has the right to obtain information which investors provide
to the banks which are providing debt finance. However, the public
sector has rarely used this information provision. Whilst these
arrangements, if fully utilised, are helpful they fall short of
full transparency. [40]
25 Q 4 Back
26
Qq 126, 128 Back
27
Q 4 Back
28
European Services Strategy Unit Report Number 4 - http://www.european-services-strategy.org.uk/publications/essu-research-reports/essu-research-report-no-4-the-ps10bn-sale-of-s/10bn-sale-of-ppp-shares.pdf Back
29
Qq 2, 3 Back
30
Qq 44, 45, 64 Back
31
Qq 116-117 Back
32
Q 28 Back
33
Qq 78, 83 Back
34
Qq 84, 108 Back
35
Qq 10, 82 Back
36
Q 72 Back
37
Qq 97-99 Back
38
Qq 124, 125 Back
39
Q 128 Back
40
Qq 14, 15 Back
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