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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.
This study explores how the stock market reacts to the award of highway concessions using the case of Portugal, a country which awarded 19 highway concessions over the period of 1998 to 2009. We focus on the abnormal returns of both the winning and losing publicly-listed companies that participated in all the tender processes, either individually or in a consortium. The results indicate a positive market reaction, although only for firms that have previously won a highway concession. Based on their experience in winning and operating highway concessions in Portugal, these firms can bid more effectively and present proposals which generate a better value proposition for their shareholders. Accordingly, investors immediately gain from the benefits of the forecast experience and the synergetic gains from operating more than one highway concession. On the opposite, markets react sceptically when the firm starts to operate a highway concession in Portugal. This paper also suggests that markets reward more lengthy contracts positively, as well as if the biding company is not headquartered in the country.
Public Private Partnerships (PPP) have been among the preferred methods for building, operating, and financing highway projects. With PPP comes a higher cost of capital, which, under the theoretical economic rationale for PPP development, is recovered through greater operational managerial efficiency - thus delivering value for money. This paper addresses the cost of financing highway projects, particularly the spreads of project finance loans. The authors attempt to identify which variables related to the project, loan, and macroeconomic context, have a greater impact on spreads, and how they impact on the final spread. To examine the relationship between spreads and variables, this research used a data set of 22 PPP projects in the highways sector in Portugal, with a total of 63 loans, awarded between 1990 and 2010.
The renegotiations of public–private partnership (PPP) contracts are commonly considered to be one of the pitfalls of PPPs, as they tend to undermine their (ex ante) efficiency. A renegotiation occurs when specific events change the conditions of a concession, frequently leading to a financial claim from the private sector on the public sector. This paper examines the Portuguese experience with PPP renegotiations by means of a unique panel data of 254 renegotiation events from 1995 to 2012. We find evidence of opportunistic bidding for PPP contracts, which is ex post – after the contract is won and the competition eliminated - leading to renegotiations to increase revenues. Renegotiations last on average 1.8 years. Majority governments are more prone to renegotiate and have more political clout to limit the renegotiation duration. There is no evidence of more renegotiations in election years or when there is a change in government. A better institutional framework, defined as a low country risk, a strong rule of law, and lower corruption, tends to reduce the probability of renegotiations. There is also evidence that at times of higher corruption, more renegotiations occur. The project’s leverage decreases the renegotiation duration. Strong initial bidder competition for a PPP contract leads to long subsequent renegotiations between the winning private party and the government.
The PFI is one of a range of government policies
designed to increase private sector involvement in the
provision of public services. This paper looks at the
origins of the PFI, expenditure on PFI projects and
discusses the arguments for and against the PFI by
looking at some of the current topics of interest (2003).
Partnerships are the British government’s preferred method of procuring public sector services, and the policy is usually justified in terms of delivering value for money. Ex ante financial methodologies are prescribed to ensure that decision making is based on a sound appraisal of alternatives and the government has called for an evaluation of implemented projects. This paper seeks to contribute to that evaluative process by exploring ex post facto some of the issues and problems that arose in practice. Using a case study approach, the paper considers two failures of information technology partnerships to examine how risk transfer, which is at the heart of the partnership policy, works in practice. The cases show that the contracts failed to transfer risk in the way that had been expected. The public agencies, not the commercial partner, bore the management risk and costs fell on the public at large and/or other public agencies.
Allyson Pollock and her colleagues have long argued that using the private finance initiative to build NHS hospitals is an expensive way of building new capacity that constrains services and limits future options. Here they provide evidence that the justification for using private finance—that it offers value for money through lowering costs over the life of the project and by removing risk from NHS trusts—is a sleight of hand Since 1992 the British government has favoured paying for capital works in the public service through the private finance initiative (PFI)—that is, through loans raised by the private sector. For hospitals this means that a private sector consortium designs, builds, finances, and operates the hospital. In return the NHS trust pays an annual fee to cover both the capital cost, including the cost of borrowing, and maintenance of the hospital and any non-clinical services provided over the 25-35 year life of the contract. The policy has been controversial because of its high cost and impact on clinical budgets.
The article explains the origins of the Private Finance Initiative (PFI) and the way the policy has evolved under the present Labour administration into Public Private Partnership (PPP). The author gives an assessment of the future prospects for the PFI/PPP in the transport sector. He believes that PPPs can make a considerable contribution towards efficient transport service delivery and this will be maximized if there is a better understanding of what the policies are seeking to achieve. Much of the action in the immediate future in transport PPPs will be with the local authorities, including the new Greater London Authority.
The authors explain how the Private Finance Initiative (PFI) has raised the costs of infrastructure development in the health service. They demonstrate that the assumption that higher capital costs would be offset by savings resulting from the involvement of the private sector is wrong—rather, NHS trusts and health authorities have been obliged to make savings on other budgets in order to make the high costs of investment affordable. There is no reason to believe that these problems will disappear as the volume of PFI investment increases.
English
The Private Finance Initiative (PFI), introduced by the Conservatives in 1992, has been enthusiastically embraced by the Labour government, with projects worth £12 billion (capital cost) signed between 1997 and 2000. The charge to the public sector includes the capital cost and a charge for the service, with the resulting ‘unitary payment’ charged over the life of the contract which may extend beyond 20 years. PFI is thought to have advantages over traditional procurement, including risk transfer, innovation and value for money. This article explores these advantages in some depth and concludes that the advantages of PFI may not be as significant as some proponents suggest.
This paper explores the use of appraisal in the development of proposals to use private finance to provide acute hospitals under the Private Finance Initiative (PFI). It addresses the extent to which value for money (VFM) and affordability (which must be satisfied to enable a scheme to be approved) are demonstrated in the documents prepared by hospital Trusts. It identifies a number of issues (such as the transfer of risk and the development of public sector comparators) that pose new problems for investment appraisal, which are specific to its application to PFI.
This paper considers the arguments for and against private-sector financing --as opposed to operational management --of public services. Under certain conditions the costs of public and private finance will be similar, but these conditions are unlikely to hold for many public services. Using examples from the UK, we show how decisions to introduce private financing are often political, with little economic rationale. Copyright 2003, Oxford University Press.
This article outlines and assesses the private finance initiative in the UK. The initiative has been slow to develop despite pressure from governments (anxious to limit the PSBR) and several revamps to facilitate the PFI approach. Within a PFI project there are beneficial incentives to avoid cost over-runs but not to reduce costs where they affect long-run services. These incentives and the limits to their effectiveness are explored. Such contracts require the transfer of risk from the public does not value risk correctly and that the value for money test is biased against private-sector provision. Policy implications are discussed, including a revamp of the value for money test and the introduction of explicit assessment of the impact of potential renegotiation and other contractual difficulties. Copyright 1997 by Oxford University Press.
The newly elected Labour government has pledged to ‘reinvigorate the Private Finance Initiative’, as part of the new emphasis on ‘public/private partnerships’ in the delivery of core public services. This article assesses the merits of using private finance to deliver public services against three criteria: whether it will lead to additional investment in social infrastructure, whether it represents good value for the taxpayer’s money and whether the use of private finance will reduce the public sector’s flexibility to pursue its public service objectives.
En la UE se ha estimado que los costes de la congesti�n representan el 2% de su PIB y que el coste de la poluci�n del aire y ruido supera el 0,6% del PIB, siendo alrededor del 90% de los mismos ocasionados por el transporte terrestre. Ante este hecho y el continuo aumento de la demanda del transporte privado frente al p�blico para los desplazamientos, muchos abogan por una conjunci�n de medidas tanto restrictivas como alternativas al uso del coche. Dentro de las primeras se encuentra el establecimiento de un peaje o una tarifa por el uso de las carreteras, medida que aunque desde el punto de vista de la Teor�a Econ�mica es la manera m�s eficiente para corregir el fallo de mercado que supone la congesti�n, desde la visi�n de pol�ticos y del p�blico no goza de gran aceptaci�n. En este trabajo se pretende hacer una simulaci�n de los efectos que tendr�a sobre el bienestar social de la implantaci�n de una medida de este tipo en la Bah�a de C�diz. In the European Union it has been estimated that the congestion cost are the 2% of the gross domestic product and the cost of pollution and noise is over 0,6%, olso it is known that the 90% of this cost are caused by overland transport. For this reason and for the always increasing demand of private transport, there are professionals who thinks that the solution have to be restrictive measures added to alternatives to the car. road pricing is a restrictive measures that for the economic theory is the most efficient way to solve congestion cost but for politicians and user of transport is not always accepted. In this study we are going to simulate road pricing for commuters in the Bah�a of C�diz and then it will be estimated welfare effects.
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