Committee of Public AccountsFurther written evidence from HM Treasury
FOLLOW UP NOTES—PAC HEARING ON EQUITY IN PRIVATELY FINANCED PROJECTS,
20 FEBRUARY 2012
Q150 Mr Bacon: Right. Well, that is an enormous amount of money. We have just been talking about how 3%—300 basis points rise in the cost of debt finance—has thrown into stark relief, right up to the threshold, whether it is worth doing many of these projects any more. You are saying that the tax implications alone are at a minimum of 300, and possibly up to 800, basis points. To start with, you do not know whether—like Mapeley did with HMRC buildings—they are going to run off to Bermuda.
In parenthesis, is the Exchequer partnership number one PFI project for the back half of the Treasury building offshore?
Sharon White: I have no idea.
Q151 Mr Bacon: We looked at the competition for the financing of it seven or eight years ago—perhaps longer.
Geoffrey Spence: Can we come back to you on that, because I do not have a recollection—
Q165 Mr Bacon: Could we have a note on the question I asked earlier about Exchequer partnership? Make it Exchequer partnership 1 and Exchequer partnership 2 because I know they were done separately.
Sharon White: Yes, certainly.
Response From HM Treasury on Exchequer Partnership PLC
HM Treasury’s PFI contract for 1 Horse Guards Road is with Exchequer Partnership plc. Exchequer Partnership plc is a UK registered company, company registration no. 03810527.
Response From HMRC on Exchequer Partnership (No.2) PLC
HMRC’s PFI contract for 100 Parliament Street is with Exchequer Partnership (No.2) plc. Exchequer Partnership (No.2) plc is a UK registered company, company registration no. 4426513.
FOLLOW UP NOTES—PAC HEARING ON EQUITY IN PRIVATELY FINANCED PROJECTS,
20 FEBRUARY 2012
Q166 Mr Bacon: Finally, Miss White, the Committee asked the Treasury to provide us with a note last November on the exercise you were undertaking to achieve savings from PFI contracts already in operation. Can you tell us why we have not had it yet?
Sharon White: A couple of things. We heard in the evidence session before that some of the savings are already coming on stream but we are still in the process of putting together a team of ourselves and the Cabinet Office to help and support some of the local PFI schemes. We would be very happy to give you an update, but it has taken us more time to get together the relevant expertise.
PAC REPORT LESSONS FROM PFI AND OTHER PROJECTS—FROM HEARING ON 15 JUNE 2011
6. The Treasury must address the scope for greater efficiencies from PFI projects. Any savings on existing contracts will be dependent on voluntary agreements by the private sector which may involve service cuts. The Treasury should update us by November 2011 on the extent of the savings to be achieved, where and how they have been achieved, and how it is minimising the risk of compromising service quality in individual PFI projects and across the programme. We wish to be advised of any companies that do not agree to make savings and expect the Treasury to consider whether the Government should continue to do business with these companies.
Response:
The Government as a whole has taken significant steps to improve the cost effectiveness and transparency of Private Finance Initiatives (PFI), supporting the commitment to deliver £1.5 billion savings across operational PFI projects in England. These savings will be fully recycled back into frontline services by the contracting authorities. This operational savings programme will drive the sharing of good practice across public sector authorities, recognising that local delivery capability is essential both to deliver savings now and to ensure better value from the use of private finance in public infrastructure in the future.
Operational savings guidance was published by HM Treasury on 19 July 2011 following pilot cost saving reviews of operational PFI projects. Following the conclusion of the pilots the Government announced on 19 July 2011 that it intended to make £1.5 billion of savings across the stock of operational contracts in England.
HM Treasury has almost completed forming the Operational Savings Programme team with skills in contract renegotiation, commercial, financial, legal, technical and programme management to support the identification and delivery of savings by public sector bodies with PFI contracts. The team will be made up of around eight full time equivalent staff. The team will work alongside HM Treasury’s current activity to reform the PFI model, into which lessons learnt from the reviews of current projects will be fed.
The programme will aim to protect the quality of services by targeting savings from the effective management of contracts, making efficient use of space and reviewing soft service requirements. These areas were identified by pilot reviews as providing the best opportunities for savings in operational PFI contracts. This will ensure that the public sector is not paying for more than it needs.
It will be for each authority to make final decisions on how best to make savings in their PFI contracts, including the level of services they require. However, at this stage we are not excluding any potentially beneficial areas for investigation.
The programme’s role is to create momentum, to identify good practice and develop processes which can be implemented at a local level. The team has engaged with departments and will build on the existing relationships with contracting bodies and the supplier markets, to support the effective use of scarce resources, avoid re-creation of the wheel and minimise the cost and effort of the activities.
In addition the team will monitor delivery and realisation of potential savings and support intervention to remove blockages.
HM Treasury has developed a voluntary code of conduct which it is discussing with investors, contractors and funders. As part of this programme the code of conduct will continue to evolve over the next couple of months as further information and data is gathered by the operational savings team. Amongst other things, the code will seek agreement from industry to introduce measures to enhance the financial transparency of existing PFI projects. It covers implementing current cost transparency provisions and fit-for-purpose change procedures to older contracts which do not have them, will provide greater flexibility and improve value for money when variations to contracts are required in order to achieve savings.
The team will work with elements of the Efficiency and Reform Group in Cabinet Office, including the Crown Representatives, to engage with suppliers across their portfolios of PFI contracts, and with those teams carrying out cross cutting savings activity on areas such as Energy and Consumable Commodities.
Significant levels of activity are already underway within departments, local authorities and NHS Trusts and the initial focus of the team will be to consolidate and co-ordinate the work, gather market information and build stakeholder commitment, so that the greatest savings are achieved across all potential categories in a consistent and cost effective manner, and in a realistic timescale.
At this time the team is still in the process of gathering data on savings from current activity and it is not possible to provide numbers on specific savings achieved to date. As part of the current work programme this data will be collated and validated and, together with the forward outlook based on the wider review programme, give a rolling view of progress and future expectation.
The team is still developing a detailed programme plan. In outline, the intention is to carry out in-depth engagement activities, embed information collection and management strategies, create standardised processes and develop first stage implementation plans between now and early summer with first stage rollout over the following months. This will allow early lessons to be taken on board for full programme commencement during the third quarter of this year and to progress in stages thereafter.
FOLLOW UP NOTES—PAC HEARING ON EQUITY IN PRIVATELY FINANCED PROJECTS,
20 FEBRUARY 2012
Austin Mitchell: Just briefly, Chair. My optimism quotient has diminished in the course of the session. Can you supply us, since future tax returns are going to be part of the calculation, with a list of how many of these contracts have been migrated overseas?
Mr Bacon: You do not have to say which ones.
Austin Mitchell: No, 700.
Mr Bacon: Just the value; the number and the value.
Austin Mitchell: How many and what value?
Q170 Mr Bacon: That cannot be breaking any kind of taxpayer confidentiality; neither is it likely to be a small enough pool that they could all be identified—out of 700 or 800, it wouldn’t be, would it?
Sharon White: We could look into the feasibility of providing the information, but we would need to look at whether we are compromising taxpayer confidentiality. We can commit—
Austin Mitchell: Not the individual contractor. The number.
Q171 Chair: If you talk to the new permanent secretary at HMRC, she is looking at providing us with much more generic data. I think you should follow her example.
Sharon White: We can commit to looking at the question.
Response:
For each PFI project, a special purpose project company is established by the private sector equity sponsors. It is with this project company that the public sector authority contracts under PFI for the delivery of an asset and services over the project term. However, for most sectors, the project contract requires the project company to confirm that it is a UK resident company, and to undertake that it will remain so for the duration of the contract. Private sector investors have told us that their project companies are UK registered companies and subject to UK corporation tax, and central government departments have also confirmed to us that they believe this to be the case. Treasury does not hold information on any PFI contracts that would indicate that project companies have migrated overseas, however Treasury and HMRC cannot verify this as the Treasury does not hold the names of the special purpose project company for each PFI project—this information is held by each procuring authority.
UK resident PFI contractors, facilities management services and fund management companies, regardless of their shareholders’ registered jurisdiction, are within the charge to UK corporation tax on profits earned within the UK.
The Committee expressed the view that the tax assumptions made in the value for money appraisal of PFI projects had subsequently proven incorrect due to a change in outcome over the project life. The Treasury does not agree that this is the case. The Green Book sets out guidance for the appraisal of alternative options when considering public spending proposals, including PFI projects and programmes. It recommends that the adjustment of market prices is appropriate where it may make a material difference to the appraisal decision. Where the differential corporation tax receipts that arise from the use of PFI, compared to traditional public sector procurement, are expected to make a material difference to the appraisal decision, a tax adjustment should be made in order to ensure a like-for-like comparison.
The adjustment is only made in relation to assumed corporation tax receipts from the special purpose project company. It does not consider capital gains tax or seek to reflect the tax position of investors. As capital gains tax receipts are not part of the value for money assessment, a subsequent change to investor liability for capital gains tax would not impact on the original value for money judgement.
The issue that the ultimate ownership of some PFI projects lies with offshore investors, meaning that capital gains are not subject to UK taxation, has been raised by the Committee. However, UK based investors also benefit from a number of capital gains exemptions. For example, the substantial shareholding exemption for UK trading companies is available for PFI companies where they meet the relevant tests, and UK pension plan schemes who invest in PFI are exempt from tax. This reflects UK tax legislation applying to all UK based activity, it is not a PFI specific issue
The Government is committed to effective anti-avoidance rules to ensure that profits arising on UK activities are not artificially diverted to low tax jurisdictions. At the same time, it needs to ensure that the tax system is competitive for all companies and has set out its plans to make the UK an attractive place to do business while retaining this proportionate anti-avoidance protection. The Treasury recognises that investors will seek to legitimately minimise their liabilities to tax and may use non-UK entities to do so. These points are not unique to PFI but apply equally to non-PFI companies and investors.
FOLLOW UP NOTES—PAC HEARING ON EQUITY IN PRIVATELY FINANCED PROJECTS,
20 FEBRUARY 2012
Austin Mitchell: Just briefly, Chair. My optimism quotient has diminished in the course of the session. Can you supply us, since future tax returns are going to be part of the calculation, with a list of how many of these contracts have been migrated overseas?
Mr Bacon: You do not have to say which ones.
Austin Mitchell: No, 700.
Mr Bacon: Just the value; the number and the value.
Austin Mitchell: How many and what value?
Q170 Mr Bacon: That cannot be breaking any kind of taxpayer confidentiality; neither is it likely to be a small enough pool that they could all be identified—out of 700 or 800, it wouldn’t be, would it?
Sharon White: We could look into the feasibility of providing the information, but we would need to look at whether we are compromising taxpayer confidentiality. We can commit—
Austin Mitchell: Not the individual contractor. The number.
Q171 Chair: If you talk to the new permanent secretary at HMRC, she is looking at providing us with much more generic data. I think you should follow her example.
Sharon White: We can commit to looking at the question.
Response:
For each PFI project, a special purpose project company is established by the private sector equity sponsors. It is with this project company that the public sector authority contracts under PFI for the delivery of an asset and services over the project term. However, for most sectors, the project contract requires the project company to confirm that it is a UK resident company, and to undertake that it will remain so for the duration of the contract. Private sector investors have told us that their project companies are UK registered companies and subject to UK corporation tax, and central government departments have also confirmed to us that they believe this to be the case. Treasury does not hold information on any PFI contracts that would indicate that project companies have migrated overseas, however Treasury and HMRC cannot verify this as the Treasury does not hold the names of the special purpose project company for each PFI project—this information is held by each procuring authority.
UK resident PFI contractors, facilities management services and fund management companies, regardless of their shareholders’ registered jurisdiction, are within the charge to UK corporation tax on profits earned within the UK.
The Committee expressed the view that the tax assumptions made in the value for money appraisal of PFI projects had subsequently proven incorrect due to a change in outcome over the project life. The Treasury does not agree that this is the case. The Green Book sets out guidance for the appraisal of alternative options when considering public spending proposals, including PFI projects and programmes. It recommends that the adjustment of market prices is appropriate where it may make a material difference to the appraisal decision. Where the differential corporation tax receipts that arise from the use of PFI, compared to traditional public sector procurement, are expected to make a material difference to the appraisal decision, a tax adjustment should be made in order to ensure a like-for-like comparison.
The adjustment is only made in relation to assumed corporation tax receipts from the special purpose project company. It does not consider capital gains tax or seek to reflect the tax position of investors. As capital gains tax receipts are not part of the value for money assessment, a subsequent change to investor liability for capital gains tax would not impact on the original value for money judgement.
The issue that the ultimate ownership of some PFI projects lies with offshore investors, meaning that capital gains are not subject to UK taxation, has been raised by the Committee. However, UK based investors also benefit from a number of capital gains exemptions. For example, the substantial shareholding exemption for UK trading companies is available for PFI companies where they meet the relevant tests, and UK pension plan schemes who invest in PFI are exempt from tax. This reflects UK tax legislation applying to all UK based activity, it is not a PFI specific issue
The Government is committed to effective anti-avoidance rules to ensure that profits arising on UK activities are not artificially diverted to low tax jurisdictions. At the same time, it needs to ensure that the tax system is competitive for all companies and has set out its plans to make the UK an attractive place to do business while retaining this proportionate anti-avoidance protection. The Treasury recognises that investors will seek to legitimately minimise their liabilities to tax and may use non-UK entities to do so. These points are not unique to PFI but apply equally to non-PFI companies and investors.
6 March 2012