Written evidence from Dexter Whitfield
SALE OF
EQUITY IN
PFI COMPANIES
Dexter Whitfield, Director, European Services Strategy
Unit, and Adjunct Associate Professor, Australian Institute for
Social Research, University of Adelaide.
SOURCES OF
PROFITS IN
PFI
1. An average rate of return of 13%-15% is built
into PFI projects before they are signed.
2. Additional profits may be obtained if a project
is refinanced. Once a project is operational, it may be refinanced
with gains shared on a 50%/50% basis between the public and private
sectors.
3. The special purpose company for each PFI project
reports profits and losses annually like any other company. The
financing of PFI projects is complex. A John Laing example illustrates
how equity invested in 2005 and is repaid at the end of the contract
in 2034. Significant loan stock invested in 2007 is repaid between
2008 and 2024. Loan stock interest commences in 2008 and reduces
up to 2023. Dividends commence in 2024 and continue until 2034
with a significant dividend in the final year (Cashflow to Shareholders,
John Laing) http://www.laing.com/top/industry_information/financial_aspects/shareholder_returns.html
4. Additional profits are obtained from the sale
of equity in PFI special purpose companies. Secondary market equity
sales became established in 2003 (see Table 1).
5. The termination or construction/operational
problems of some PFI projects may result in financial losses,
but to date they small compared to speculative profits obtained
from the sale of equity in the secondary market.
6. The sale of equity is significantly higher
than that the sales identified in the HM Treasury PFI database,
the Partnerships UK database or estimated by the National Audit
Office. None report on profits/losses. 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.
— An
increasing number of PFI projects are registered in tax havens.
SALE OF
PFI EQUITY AND
GROWTH OF
THE SECONDARY
MARKET
7. There are basically two types of PFI equity
transactions. Firstly, SPV shareholders selling equity in individual
projects or in a group of projects. Secondly, the sale of secondary
market infrastructure funds that have a portfolio of PFI equity
stakes in SPVs. In both cases the partial or full ownership of
equity in the SPV transfers to a new owner. Four trends are evident
in the secondary market: portfolio building by some construction
companies; recycling and profit-taking by other construction companies;
the growth of joint ventures between PFI construction companies
and banks, infrastructure funds and pension funds; and the growth
of secondary market infrastructure funds (listed and unlisted).
GOVERNMENT ADOPTS
"HANDS-OFF"
ATTITUDE
8. Although public sector consent and profit
sharing is required when PFI projects are refinanced, there are
no requirements when the equity of PFI companies is sold. The
Treasury has regarded the sale of PFI equity as a transaction
solely between private companies in which the government has no
involvement. It argues that a change in the equity ownership of
the project is part of the normal takeover or merger of companies
and is different from refinancing projects.
NEW DATABASE
9. The ESSU Database was compiled from Stock
Exchange Regulatory News Service and Company Notices and Press
Releases; Company Interim and Annual Reports & Accounts; UK
Companies Houses filings; Infrastructure fund share prospectuses;
Construction and PFI company websites; HM Treasury PFI equity
holders database; Partnerships UK Database; Securities & Exchange
Commission 8K filings for US stock exchange companies; and financial,
construction and infrastructure journals and web sites.
10. There are significant problems regarding
access to, and the quality, of equity transactions in PFI companies.
Many publicly listed companies will issue a Regulatory Notice
or Stock Exchange announcement disclosing the acquisition or disposal
of PFI equity, but in some cases companies consider the transaction
is not of material financial interest. Privately-owned companies
and private equity funds have no comparable disclosure requirements.
A company may report the details of an equity sale or acquisition
in their interim or annual report, but may not indicate the price,
level of profit nor to whom they sold their shareholding. There
is no common practice or standard requirement.
11. The SPV shareholders usually have pre-emption
rights, which allow them the right to acquire the shares of other
shareholders who want to sell their equity.
GROWTH OF
PFI EQUITY SALES
1998-2010
12. The Database records 222 UK equity transactions
between 1998-2010 covering 622 PFI projects. The annual rate of
PFI equity transactions, not surprisingly, increased rapidly between
2000-04 during the formative years of the secondary market. There
are inevitably variations in the number, and the total value,
of transactions on an annual basis, reflecting the completion
of PFI projects, recycling decisions of PFI contractors depending
on their contract win-rates and secondary market funds seeking
to expand their portfolios. The financial crisis appears to have
had a minimal effect on PFI equity transactions.
Table 1
ANNUAL RATE AND VALUE OF UK PFI DIRECT EQUITY
SALES
| Year | No. of
equity
transactions
| No. of PFI projects
(includes those
with multiple equity
sales)
| Value of equity sold
(£m)
(No of transactions)
| Estimated total
value based on
average (£m)
|
| 1998 | 1 | 1 |
3.4 (1) | 3.4 |
| 1999 | 1 | 1 |
n/a | n/a |
| 2000 | 5 | 6 |
n/a | n/a |
| 2001 | 5 | 15
| 117.4 (4) | 146.7 |
| 2002 | 3 | 3 |
n/a | n/a |
| 2003 | 16 | 30
| 135.6 (8) | 271.2 |
| 2004 | 33 | 95
| 190.6 (14) | 449.3 |
| 2005 | 38 | 59
| 306.3 (16) | 727.5 |
| 2006 | 35 | 127
| 1,431.7 (24) | 2,087.9 |
| 2007 | 21 | 66
| 401.8 (16) | 527.4 |
| 2008 | 16 | 92
| 333.0 (8) | 666.0 |
| 2009 | 29 | 60
| 370.4 (20) | 537.1 |
| 2010 | 19 | 67
| 586.7 (14) | 796.2 |
| Total | 228 |
622 | 3,876.9 |
6,212.7 |
Sources: ESSU PPP Equity Database, 2011
SECTOR DIFFERENCES
13. Health and Education PFI projects account for half of
individual PFI equity project sales between 1998-2010—see
Table 2. Transport, primarily roads and motorways, public transport
and street lighting projects account for just over 10% followed
by criminal justice—prisons, courts, remand centres—with
9%.
Table 2
INDIVIDUAL PFI EQUITY TRANSACTIONS BY SECTOR 1998-2010
| Sector | No. of PFI projects in
equity transactions
| % |
| Health—hospitals and health centres |
166 | 26.7 |
| Education—schools & collages |
148 | 23.8 |
| Transport—public transport, roads & street lighting
| 65 | 10.5 |
| Criminal Justice—prisons, courts, remand centres
| 57 | 9.2 |
| Waste/Water | 17 | 2.7
|
| Defence | 14 | 2.2
|
| Housing—rehab of council estates & MoD housing
| 10 | 1.6 |
| Leisure | 10 | 1.6
|
| Misc | 35 | 5.6
|
| Unknown | 100 | 16.1
|
| Total | 622 |
100.0 |
| Source: ESSU PPP Equity Database, 2011
|
PFI PROJECTS SOLD
MULTIPLE TIMES
14. The ESSU PPP Equity Database records 370 PPP projects
in which equity in the SPV has been sold. For example, the equity
in the Barnet Hospital PFI project was subject to five transactions
as HSBC Infrastructure increased its equity from 30% to 100%.
The Calderdale Hospital PFI company was involved in nine equity
transactions between 2002-10 (Whitfield, 2011).
Table 3
PFI PROJECTS IN MULTIPLE SALE OF EQUITY
| No. of PFI projects | No. of transactions
|
| 267 | 1 |
| 59 | 2 |
| 24 | 3 |
| 10 | 4 |
| 4 | 5 |
| 3 | 6 |
| 1 | 7 |
| 1 | 8 |
| 1 | 9 |
| Source: ESSU PPP Equity Database, 2011
|
SALE OF
SECONDARY FUNDS
15. Thirteen sales of secondary market funds between 2003-10
had a total value of £3.1 billion and involved an additional
607 PPP projects (Table 4).
Table 4
SECONDARY FUND EQUITY SALES IN UK
| Owner | Sold to
| No. of PFI
projects | Price £m
|
| Grosvenor House Group plc (2003)
| n/a | 5
(estimate)
| 4.0 |
| Babcock Brown and Abbey National (2003)
| Star Capital Partners, Bank of Scotland and AMP Capital Investors
| 23 | n/a
|
| Infrastructure Investors LP (Barclays, Societe Generale and 3i) (2005)
| 3i Group | 31
| 150.0 |
| HSBC Infrastructure Ltd and HSBC Infrastructure Fund (2006)
| HSBC Infrastructure Company (HICL). PFI assets transferred to new listed company.
| 15 | 250.0
|
| Investors in the Community Ltd (2007)
| Trillium (Land Securities)
| 16 | 7.4
|
| PFI Infrastructure Company (2007)
| Infrastructure Investors LP
(Barclays, Societe Generale and 3i)
| 22 | 156.0
|
| Star Capital Partners, Halifax Bank of Scotland, AMP Capital Investors (2007)
| Trillium (Land Securities)
| 79 | 927.0
|
| Land Securities plc (2008)
| Land Securities launches Trillium Investment Partners, a PPP Joint Venture
| 100
(estimate) |
n/a |
| 3i Group plc (2009) |
Placed in market | n/a
| 60.8 |
| Land Securities (2009) |
Telereal | 108
| 750.0 |
| Telereal (2009) | Victorian Funds Management Corporation (Australia) and Transport for London Pension Fund
| 108 | n/a
|
| Infrastructure Investors LP - Barclays acquire Societe Generale (31.7%), 3i (31.7%) and Fleming (4.9%) (2009)
| Barclay Private Equity Integrated Infrastructure Fund
| 84 | 558.6
|
| John Laing (2010) | John Laing Infrastructure Fund (John Laing has 23% stake)
| 16 | 242.3
|
| Total (13 transactions)
| | 607
| 3,106.1
(10 transactions)
|
Source: ESSU PPP Equity Database, 2011
16. When the sale of equity in individual and group transactions
is combined with the transfer of ownership when infrastructure
funds are sold, the total number of equity transactions increases
to 240 involving 1,229 PFI projects, including multiple transactions
of some projects (Table 5).
Table 5
TOTAL OF PFI EQUITY AND SECONDARY FUND EQUITY SALES
| Year | No. of
transactions
| No. of PFI
projects
(includes
multiple
sales)
| Value of equity
sold (£m)
(No of transactions)
| Estimated total
value based on
average
transaction
(£m)
|
| Sale of PFI equity | 228 |
622 | 3,876.9 | 6,212.7
|
| Sale of secondary funds | 12
| 607 | 3,106.1 | 3,727.3
|
| Total | 240 |
1,229 | 6,983.0 |
9,940.0 |
Source: ESSU PPP Equity Database, 2011
17. Joint ventures between PFI companies and infrastructure
funds accounted for about 10% of equity sales. The sale of secondary
funds accounted for only 5% of transactions but nearly half (49%)
of PFI project equity sales.
PROFITS FROM
PFI EQUITY SALES
18. The ESSU Database contains 63 transactions involving 154
PFI projects, where the sale price and profit from the equity
transaction, are identified from reliable sources. The total value
of equity sold was £1,026.6 million with £517.9 million
declared profit (50.6%). The transactions were spread across the
2003-10 period with a diversity of construction companies and
infrastructure funds, types of project, geographic location and
size of project (Whitfield, 2011).
19. There are wide differences in the average profit rates
between sectors with the average profit being 50.6%. Two sectors
have higher than average profits, health (66.7%) and criminal
justice (54.9%) with transport (47.1%) and education (34.1%) below
average. The "multiple" category in Table 6 includes
transactions covering a number of different types of assets and
where the total profit was stated for a group of projects.
Table 6
PROFIT ON SALE OF PFI EQUITY IN UK (INCLUDES MULTIPLE
EXAMPLES)
| Sector | No. of PFI
transactions
| No. of PFI
projects | Value of
equity sold
(£m)
| Total Profit
(£m) | Average %
profit
|
| Health | 14 | 18
| 129.3 | 86.3 | 66.7
|
| Education | 6 | 8
| 47.8 | 16.3 | 34.1
|
| Transport | 8 | 12
| 101.8 | 48.0 | 47.1
|
| Criminal Justice | 6 | 15
| 122.4 | 67.2 | 54.9
|
| Housing | 1 | 1
| 5.2 | 4.2 | 80.8
|
| Waste/Water | 1 | 1
| 12.0 | 8.0 | 66.7
|
| Leisure | 1 | 5
| 6.5 | 5.6 | 86.2
|
| Defence | 2 | 2
| 9.3 | 12.5 | 134.4
|
| Multiple | 24 | 93
| 587.7 | 269.0 | 45.8
|
| Total | 63 |
154 | 1,022.0 | 517.1
| 50.6 |
Source: ESSU PPP Equity Database, 2011
20. If the same profit level of the sample of PFI projects
were maintained for the 622 PFI projects involved in equity transactions,
the total profit would be £2.2 billion.
21. Similarly, if the same rate of profit was achieved in
the sale of secondary funds, the profit from PFI equity sales
would be a further £2.0 billion, giving a total profit of
£4.2billion.
22. The rate of profit achieved by PFI construction companies
is exceedingly high with two companies achieving over 70% (Lend
Lease Corporation and Balfour Beatty) and four companies over
50% (John Laing, Interserve, Kajima Partnerships and Kier Group).
Table 7 includes only the PFI equity transactions where profit
information was available (none declared a loss) and does not
reflect the full performance of PFI equity investment by these
companies.
Table 7
MAJOR SELLERS OF PFI EQUITY IN UK BETWEEN 1998-2010 (BASED
ON TABLE 5)
| Company | No. of PFI
projects
| Sale
value
(£m) | Profit
(£m)
| % |
| Carillion plc | 24 | 278.8
| 114.1 | 40.9 |
| John Laing | 22 | 170.3
| 100.6 | 59.1 |
| Interserve plc | 15 | 70.3
| 37.9 | 53.9 |
| Lend Lease Corporation | 11 |
14.7 | 11.5 | 78.2
|
| Costain Group plc | 8 | 37.1
| 16.2 | 42.9 |
| Serco Group plc | 7 | 79.9
| 16.0 | 20.0 |
| Balfour Beatty plc | 5 | 37.8
| 27.0 | 71.4 |
| Kajima Partnerships | 6 |
30.2 | 18.0 | 59.6
|
| Kier Group plc | 4 | 26.1
| 14.7 | 56.3 |
| Source: ESSU PPP Equity Database, 2011
|
23. The profits in PFI projects contrast sharply with construction
operating profit rates of the same contractors. These have remained
low throughout the last decade. The average operating profit in
UK construction/building activities for four major PFI construction
companies (Balfour Beatty plc, Carillion plc, Costain plc and
Kier Group plc) was 1.5% between 2003-09 (Company Annual Reports).
USE OF
TAX HAVENS
IN PFI EQUITY
TRANSACTIONS
24. The equity in 91 PFI projects is owned by secondary market
infrastructure funds located in tax havens (Table 8).
Table 8
PPP INFRASTRUCTURE FUNDS LOCATED IN TAX HAVENS
| Company | Tax
haven
| No. of
PFI
assets | PFI projects
|
| HSBC Infrastructure |
Guernsey | 33
| Substantial stakes in hospitals, schools, police stations, Home Office Headquarters, London.
|
| John Laing Infrastructure Fund
| Guernsey | 19
| Range of schools, social housing, hospitals, courts, police stations and street lighting projects.
|
| 3i Infrastructure Fund (3i Groups owns 33.2%)
| Jersey | 18
| Norfolk & Norwich University Hospital (26.0), Alpha Schools, Highland (50.0), Elgin Infrastructure Fund (joint venture with Robertson Group)
|
| International Public Partnerships (formerly Babcock Brown Public Partnerships)
| Guernsey | 14
| 100% shareholding in schools and criminal justice PPP companies.
|
| GCP Infrastructure Fund Ltd - Gravis Capital Partners
| Jersey | 7
| 4 investments in Grosvenor PFI Holdings and 3 in Investment in Leisure Infrastructure Investors Ltd
|
| Total |
| 91 |
|
Source: ESSU PPP Equity Database, 2011
TRANSFER OF
PFI EQUITY ASSETS
TO CONTRACTOR'S
PENSION FUNDS
25. At least five companies, Interserve, Amec, John Laing,
Costain and Vinci, transferred PFI equity to their pension funds
in lieu of cash payments or the transfer of other assets. The
pension funds records ownership of the asset in its accounts and
receives future dividends (Whitfield, 2011).
LONGER-TERM
CONSEQUENCES
26. The focus on profits masks other important issues about
the potential effects of the sale of PPP equity and the growth
of secondary market infrastructure funds.
27. Firstly, the scale of profits indicate significant overpayment
for risk transfer and could invalidate the original value for
money assessment at the procurement stage. This can only be addressed
by a new comprehensive and rigorous assessment framework.
28. Secondly, the privatisation of gains from publicly financed
investment and development must be reversed, so that the public
sector has a 50% share in any profit above a specified level.
29. Thirdly, new transparency and disclosure requirements
should be introduced as a matter of urgency to require full public
notification of equity sales.
30. Fourthly, the public sector can only effectively access
benefits from operational efficiencies at five or seven year periods
when facilities management contracts are reviewed either via benchmarking
or competitive tendering of the services.
31. Finally, PFI equity sales and the growth of a secondary
market results in further erosion of democratic control. As infrastructure
funds increase their offshore portfolios of PFI assets, they will
use their power to influence decisions affecting the future management
and provision of key public facilities (Whitfield, 2010).
32. The NAO recognises that the risk of the consolidation
of PFI equity could lead to "…disproportionate market
power, and particular asymmetry of power over small public authorities
tendering and managing single PFI contracts. We would be concerned
if we started to see a few consolidated owners dictating contract
and commercial terms. We do not have evidence that this is happening"
(ibid). It concedes "…the lack of visibility over
the secondary market it is difficult to ascertain the effects
that the secondary market has had to date" (ibid).
RECOMMENDATIONS
1. The standard PFI contract should be re-written to include
a ceiling imposed on the level of profits that can be extracted
from PFI equity together with a requirement that the public sector
should have a 50% share in any profit above a specified level.
2. A new value for money methodology should be devised to
take account of the profiteering in PFI equity transactions and
the other flaws in the current evaluation methodology.
3. New transparency and disclosure requirements should be
introduced as a matter of urgency requiring more expansive notification
about equity sales.
4. The Treasury PFI database should be significantly extended
to include historic and future PFI equity sales, be publicly available
and regularly updated.
5. The National Audit Office and Treasury should research
the longer-term effects of the growing secondary market.
6. Ultimately, the negative effects of the PFI equity secondary
market can only be solved by the termination of the PFI programme
combined with new regulatory controls on existing projects.
REFERENCES
Adetunji, J (2011). A Very Private Partnership, The GuardianPublic,
17 January 2011.
http://www.guardianpublic.co.uk/private-sector-profiteering-from-ppp
HM Treasury (2009). PFI Equity Holders—November, London,
http://www.hmtreasury.gov.uk/ppp_pfi_stats.htm
House of Lords Select Committee on Economic Affairs (2010a) Private
Finance Projects and Off-Balance Sheet debt, Vol. l, HL Paper
63-1 and HL Paper 63-ll, 17 March, London, www.publications.parliament.uk/pa/ld200910/ldselect/ldeconaf/63/63i.pdf
House of Lords Committee on Economic Affairs (2010b) Government
response to Report on Private Finance projects and off-balance
sheet debt, HL Paper 114, April, London, www.publications.parliament.uk/pa/ld200910/ldselect/ldeconaf/114/114.pdf
National Audit Office (2006). Update on PFI Debt financing and
the PFI Equity Market, HC 1040, Session 2005-06, April, London,
http://web.nao.org.uk/search/search.aspx?Schema=&terms=Update+on+pfi+debt
Whitfield, D (2010). Global Auction of Public Assets: Public sector
alternatives to the infrastructure market and Public Private Partnerships,
Spokesman Books, Nottingham. www.spokesmanbooks.com/acatalog/Dexter_Whitfield.html
Whitfield, D (2011). The £10 billion Sale of Shares in PPP
Companies, ESSU Research Report No 4, January, Spokesman Books,
Nottingham.
June 2011
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