A very private partnership

Banks and construction companies are ratcheting up vast profits from public private partnerships under a system that is inadequately monitored by government and plagued by offshore accounting, says a new report
Accident and Emergency Department of Chase Farm Hospital, Barnet.
Hospitals are a great example of public private partnerships in action but there are shadows lurking says a new report. Photograph: Gary Calton

Banks and construction companies are ratcheting up vast profits from public private partnerships under a system that is inadequately monitored by government and plagued by offshore accounting, according to new figures.

While public private partnerships (PPP) were intended to improve the way in which contracts between the public and private sectors were delivered and bring better value for money for the taxpayer, a report by Dexter Whitfield for the European Services Strategy Unit, reveals that there are huge profits to be made from the sale of equity once a PPP project is operational.

The report found that about 240 equity transactions, involving more than 1,000 PPP projects generated £10bn, which amounted to an average profit of around 50% – compared to average operating profits in construction companies of 1.5% in the five years to 2009.

It added that a sample of 154 PPP projects recorded profits of £518m which, if applied across all transactions would amount to £2.2bn. The sale of secondary market infrastructure funds, where bought equity is sold on, has also generated further profits for the private sector.

The sale of PPP equity, in which contractors and other investors sell on their interest instead of taking smaller, longer-term dividends offers investors lower-risk, guaranteed returns, which in turn has driven up prices.

The increasing number of companies that own PPP equity and based in tax havens is also highlighted in the report, which looks at transactions from 1998 to 2010.

In one example. HSBC acquired full ownership of Barnet hospital through four equity transactions over eight years, transferring its initial stake of 30% to a new publicly floated company called HSBC Infrastructure (HICL), based in Guernsey, and acquiring further shares up to 100%.

The report notes that 91 PPP projects with over half, to full equity ownership, were with funds registered in tax havens; equity in three of seven large PPP project in Newcastle sold in the last five years – three quarters of the city's operational PPPs – were owned by companies registered offshore.

Whitfield said that based on the findings, PPP projects were "little more than money-making ventures."

"The level of profiteering from PPP equity transactions makes a nonsense of the original value for money assessments," he said. "If these profits had been taken into account at the evaluation stage then few projects would have been approved. PPP projects are little more than money-making mechanisms for builders and banks," he said.

The two highest profiting sectors were health and criminal justice, with averages of 67% and 55% respectively, with transport and education falling below the 50% average for PPP, the report said.

The report is also critical of the government's monitoring of equity sales, which it says underestimates the scale of the transactions and is inadequate and infrequent.

The level of sales were "significantly higher than [the number] identified in the Treasury PFI equity database and estimated by the National Audit Office," Whitfield said, adding that while the Treasury only began tracking changes in equity ownership in 2008 despite an expansion in sales from 2003, both it and Partnership UK, which supports PPP projects, had "gaps and inconsistencies" in their databases.

"Among other things," Whitfield said, "the Treasury database has no information for 68 projects – 10% of the 677 projects in their database."
In evidence to a 2010 House of Lords investigation into PFI and off-balance sheet finance, the NAO ceded that while PPP had a positive effect on the availability and cost of equity, "the lack of visibility over the secondary market [means] it is difficult to ascertain the effects [it] has had to date."

But some financial experts have defended the role of PPP profits and the trading of public assets as crucial to driving investmentand downplayed the scale of the secondary market – with one infrastructure expert saying this had peaked two years ago.

"You can have a philosophical or conceptual issue with the model but there's been a social benefit through PPP," said a spokesman for HICL. "If the government wants to build a hospital costing £10bn, it's got to raise that from the taxpayer but there are cost overuns and a lack of financial capacity ... PPP is an effective way of improving infrastructure."

He added that while HICL was managed by HSBC it was owned by shareholders and investors and operated no differently to any other offshore funds.

Whitfield has called on the NAO to research the longer-term effects of the secondary market on PPP projects and the "marketisation of public services" more effectively.

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