Refinancing and the Profitability of UK PFI Projects

Abstract

Using information collected by the National Audit Office, a comparison of several aspects of performance on recent Private Finance Initiative (PFI) contracts is conducted. The first aspect is a sector by sector comparison of refinancing profits, bearing in mind differential risk levels and in house expertise when negotiating contracts. Secondly profits from refinancing are analysed at firm level. Thirdly the trend of profitability on refinancing contracts is examined through time. Fourthly relative public sector shares of refinancing profits by are analysed by sector and compared to private sector profits. Fifthly, differential levels of disclosure about the financial details of PFI contracts are compared by sector. An important reason why little analysis of this sort has been conducted hitherto is that the disclosure of information about the profitability of PFI contracts has been very limited. The information analysed here was, but even so produced very different levels of response to the request. Differential disclosure levels provide the opportunity to examine which sectors and which companies are concerned with greater relative secrecy. Results show that excessive returns were obtained in the Health sector where there was also greater secrecy. All private sector participants have made healthy profits from PFI refinancing deals, with the average private sector risk premium in the middle of a distribution of returns which are always positive. Much of the profit has been the result of using levels of leverage that would be unusual in private sector settings. From the point of view of government and public officials involved in PFI, there is little evidence of a learning curve in contract specification, at least as far as the trend in negotiated profit levels is concerned.