from Sunday Herald, 18 May 2008
Private companies could pocket up to £50 billion in profits from investing in schools, hospitals and other public building projects, an investigation by the Sunday Herald has revealed.
Local authorities, health trusts and other public agencies will end up paying up to twice as much as they need to for the 700 developments planned or built under the UK government’s Private Finance Initiative (PFI).
The revelations, based on tens of thousands of pages released under freedom of information laws, have confirmed critics’ worst fears. PFI has turned out to be “a huge scam”, “a total taxpayer rip-off” and “a cynical accounting fiddle”, they say.
Internal financial projections for six PFI schemes show that investors are expecting to recoup 12 times more than they invested. In some cases shareholders are predicted to make truly astronomical gains.
Equity of just £100 invested in rebuilding the historic Hairmyres Hospital in East Kilbride is projected to earn £89 million in dividends over 30 years. Half a million pounds equity in the new Edinburgh Royal Infirmary is expected to win dividends of £168 million.
PFI was introduced under Conservative Prime Minister, John Major, in 1992 and then pursued by Gordon Brown after he became Chancellor in 1997. It was designed as a way of injecting private capital into public projects in an attempt to get debts off the Treasury’s books.
The idea was that capital would be raised on the private market to fund developments that would built and run by private companies. Although the projects would cost public authorities little up front, they would have to pay for them in instalments over the next 25 or 30 years.
Despite the fact that PFI has delivered hundreds of new hospitals, schools, sewage works and roads across the country, it has provoked a prolonged storm of controversy. But until now, there has been little hard information on which to judge the schemes because they have been shrouded in commercial secrecy.
A series of recent requests under freedom of information legislation have, however, begun to lift the lid. For the first time the detailed analyses done for the backers of six PFI schemes, five in Scotland and one in England, have been released.
The resulting piles of paperwork have been studied over the last year by two Scottish economists, Jim and Margaret Cuthbert. Jim was the chief statistician with the Scottish Office while Margaret was an academic at three Scottish universities. Now the husband-and-wife team run their own consultancy in Edinburgh.
Using investors’ own projections, the Cuthberts have been able to calculate exactly how much profit was predicted from the six schemes. As well as the new Edinburgh and Hairmyres hospitals, they included James Watt College campus in Kilwinning, eleven Highland schools, new Perth Council offices and County Hospital in Hereford.
After stripping out the payments made for servicing the buildings and the normal commercial lending by major banks, they uncovered what they describe as “eye-catching” returns on investment. They have submitted their findings as evidence to the investigation into the funding of capital projects being carried out by the Scottish Parliament’s Finance Committee.
Overall, the Cuthberts found that £42 million of “subordinate debt” invested by the companies building the six schemes was predicted to yield £517 million. Included in that, the profits on the £717,297 put in as equity by shareholders were projected to reach a massive £350 million (see tables below).
They calculated that the internal rate of return being earned by investors varied from 17% to 23% on debts that were often more than double the capital originally invested. Even when the profits are converted to reflect the effects of possible future inflation, they look very healthy.
What’s more, the Cuthberts’ calculations suggest that the projects represent very poor value for money. The Edinburgh Infirmary, Hairmyres Hospital and James Watt College could all have been built for half the cost if the money had been borrowed in the normal way from the government’s national loan fund, they say.
Huge saving could also have been made on the Highland schools, the Perth offices and the Hereford hospital, they argue. “What this suggests about the costs of PFI is extremely worrying,” said Jim Cuthbert.
“No country, whether it be Scotland or the UK as a whole, could long support funding its major public infrastructure on a ‘one for the price of two’ basis,” he argued. “There has clearly been a systemic failure in the existing mechanisms designed to secure value for money from PFI schemes.”
The Scottish Nationalist MSP and member of the Finance Committee, Alex Neil, went further. “It’s been a total rip-off of the taxpayer,” he said. “It’s morally criminal that this information has been deliberately hidden for years.”
PFI was one of the biggest cons ever perpetrated, he claimed. “The PFI merchants make the great train robbers look like amateurs who stole from a collection plate in a small church.”
Neil also dismissed suggestions from investors that profits had now dropped to a more reasonable level. “The scale of the rip-off is unprecedented,” he alleged. “They have fiddled the figures to make it look as if they are not making the profits they have been making.”
Detailed financial information on the vast majority of the 700 plus PFI schemes agreed across the UK is still confidential. But if their projected profits were only a proportion of those from the six schemes on which data is now available, they could reach a massive £50 billion.
On similar assumptions, the profit from more than 60 completed PFI projects in Scotland - including around 200 schools, 12 waste projects, nine hospitals, three roads and two prisons - could rise to over £5 billion. Private investors accepted last week that profits for initial projects might have been high, but insisted they were lower now.
“There were good profits to be made,” said Jo Elliot, the deputy chief executive of the Edinburgh investment bank, Quayle Munro. “These deals were put together with complete integrity when the world was very different. The returns reflected the risk that we and others assessed.”
On-Yee Tai, a spokeswoman for the Public Private Partnership Forum representing over 100 companies, said: “Whilst the industry would accept that there have been a handful of projects where significant profits have been made, the genuine risks inherent in these early schemes cannot be underestimated.”
Other evidence uncovered by the Cuthberts, however, undermines companies’ claims they they were taking a substantial risk. In 1998 the then Secretary of State for Scotland, Donald Dewar, gave a written guarantee that if any health trust defaulted on payments, the government would step in to make sure that liabilities were met “on time and in full”.
Serious flaws in the PFI business case for the Edinburgh Royal Infirmary were also discovered in a 1998 report by Moores Rowland Health Consulting for the Dutch bank, Rabobank International. There was some “double counting” of risks by Edinburgh NHS Trust, the report said.
A crucial £42 million interest rate risk transferred to the private sector had been wrongly included, the report pointed out. Overall the analysis was “incomplete” and “poor”, it said.
The case for embarking on a PFI project had not been made by the Trust, the report contended. “It is impossible to rely on the Trust’s analysis of risk,” it concluded. “Evidence of substantial risk transfer is weak.”
The implication was that the financial risk taken on by investors was significantly less than the Trust realised. “There have been major failings in the value for money, risk transfer, and affordability tests for PFI schemes,” said Margaret Cuthbert.
“In the case of the new Royal Infirmary in Edinburgh, we now know that many of the problems were actually identified by the consultants acting for the lenders to the PFI scheme. Why was the public sector, which was acting on our behalf, not able to identify and act on these problems at the time?”
For the Green MSP, Patrick Harvie, the evidence is now conclusive. “The PFI project is a cynical accounting fiddle, the discredited legacy of New Labour's slavish and misplaced devotion to the marketisation of public services,” he said.
“The SNP is right to oppose it, but their Scottish Futures Trust alternative is starting to look like a mere rebranding of PFI, not least because they have been unable to provide a clear explanation of how it would work.”
The Scottish government insisted, however, that the futures trust would be a more effective than PFI in funding vital public infrastructure. “Ministers are considering the views of those who responded to our recent consultation and these will inform our work as we move towards its establishment,” said a government spokesman.
Two key papers submitted to the Scottish Parliament's Finance Committee by Jim and Margaret Cuthbert are available here (104Kb pdf) and here (116Kb pdf).
THE MONEY MADE FROM PFI SCHEMESscheme / capital invested by companies / projected cash return
New Royal Infirmary, Edinburgh / £20m / £228m
County Hospital, Hereford / £9m / £92m
Hairmyres Hospital, East Kilbride / £8m / £145m
Council offices and car park, Perth / £2m / £31m
Eleven schools, Highland / £2m / £12m
James Watt College, Kilwinning / 0.7m / £9m
TOTAL / £42m / £517mscheme / equity invested by shareholders / projected dividend
New Royal Infirmary, Edinburgh / £500,000 / £168m
County Hospital, Hereford / £1,000 / £56m
Hairmyres Hospital, East Kilbride / £100 / £89m
Council offices and car park, Perth / £136,000 / £24m
Eleven schools, Highland / £197 / £6m
James Watt College, Kilwinning / £80,000 / £7m
TOTAL / £717,297 / £350m
source: J & M Cuthbert
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