Some of the biggest operators in the private finance initiative were condemned for making gains that are “unacceptable, even for an early PFI deal” from the refinancing of Norfolk and Norwich hospital.
Even as that row erupted on Tuesday, the focus on how money is being made out of PFI contracts is shifting to the newer secondary market in PFI – the sale of the equity investments in them.
Last month the National Audit Office raised concerns about how transparent those deals are.
John Bacon, a Conservative MP and leading member of the Commons public accounts committee, which condemned the gains made at Norfolk and Norwich as “unacceptable”, said: “I am sure we will be taking a closer look at the secondary market and its impact.”
David Metter, the chief executive of Innisfree, which has a 25 per cent stake in the Norfolk and Norwich hospital project, defended the refinancing. It was an early deal, said Mr Metter, struck in 1998 when interest rates were much higher and banks saw the PFI as much riskier than they do now.
That combination of circumstances, he said, had indeed “given rise to some very large refinancing gains of which Norfolk and Norwich was one”.
But those big gains – £95m for the Octagon consortium, which built and runs the hospital, after it had given the hospital a £34m share under the Treasury’s voluntary code of conduct – had to be offset against losses elsewhere, he said.
He noted that John Laing, a member of the Octagon consortium, had lost £80m on the PFI contract for the National Physical Laboratory, a loss that contributed to the destruction of its construction arm.
Most of the other members of the consortium ran for cover in the face of the committee assault. But Mr Metter, who is chairman of the PFI trade body the PPP Forum, said such volatile gains and losses now looked to be a thing of the past as the PFI market had matured and interest rates had fallen.
According to the National Audit Office, up to February this year there have been 47 refinancings, most on the first 500 deals where the public sector gets roughly a 30 per cent share of any gains under a voluntary code.
On deals signed since July 2002, the public sector is contractually entitled to a 50 per cent share.
Those 47 refinancings have resulted in internal rates of return for the private investors ranging from a mere 10 per cent to more than 70 per cent on Debden Park school and the Bromley PFI hospital and to returns of 56 and 60 per cent on the Darent Valley and Norfolk and Norwich hospitals respectively.
The NAO has warned that refinancings carry risks for the public sector, often, as in Norfolk and Norwich, in longer contracts and bigger termination costs, plus the theoretical risk that providers will run the contract less well when they have taken big early profits from it.
Mr Metter said refinancings were becoming rarer because market conditions had changed. Furthermore, he said, the “private sector has been frightened away to some extent because of the bad press that has come with Norfolk and Norwich and some of the others. People see that it has not been helpful to get this kind of flak”.
Instead, investors have increasingly been releasing money through the so-called secondary market, selling on their equity shares in projects.
That, he argued, like the refinancings, released cash for investment in future PFI projects, keeping the show on the road.
People investing in secondary funds were also investing for long-term income, he said – 30 or 40 years – and had less interest in taking their gains out early, as has happened in the refinancings.
However, there are signs that the National Audit Office is becoming increasingly concerned about the secondary market. Last week it pointed out that the ownership of 40 per cent of a sample of 102 projects that it had examined had changed hands.
“Profits and losses are not disclosed,” the NAO said, “because the contract is between two private sector parties.” But it still called for greater transparency so that the “full range of costs and benefits which investors experience” from being involved in PFI became clear.
Mr Bacon said any takeover “represents a moment of change for a company and could have a large impact on the operational effectiveness of the services provided. If it happened frequently it could damage operational effectiveness seriously.
“At the very least, there needs to be much greater transparency about what is going on in the secondary market. If there is nothing to hide, why hide it?”
