The cost of finance in PFI projects is one of the most expensive parts of the package. As the private sector pays much more for loans than does government and other public bodies, it has always been one of the controversial aspects of PFI.
Companies are keen to reduce the costs of financing a PFI contract as this will obviously boost profits. Changing the terms of a loan - to repay a loan early and at lower rates of interest - can generate additional profits.
Rather like re-mortgaging a house to take advantage of lower interest rates. PFI contractors have increasingly turned to refinancing to boost the value of the contracts and cut their costs. Once the hospital or school is built and staffed, the operators have a guaranteed market and a client who will not go bust. Consequently the risk is less and the cost of the loan can be reduced.
Secondary markets refer to the growth of the market in the buying and selling of the equity part of PFI projects. Shares in PFI projects are increasingly being sold by the original investor - frequently for a large profit.
Geoffrey Spence, former head of the Treasury's PFI Unit (a secondee from Deutsche Bank). Spence addressed a group of PFI executives at the Royal Lancaster Hotel on 'developing a liquid secondary market in PPP investments'. He reassured listeners that the government has no intention of attempting to recoup profits made on the sale of PFI projects (with their 30 year income streams guaranteed by the state, i.e. the taxpayer).
Therefore schools and hospitals will be periodically sold on the demands of their shareholders.
In 2002 Gordon Brown exempted the sale of companies, such as those running PFIs from capital gains tax, allowing windfall profits tax free.
A 2003 refinancing deal on the Darrent Valley Hospital PFI produced £12m for the NHS but the members of the PFI consortium (Innisfree, Tarmac - now Carillion, Barclays and United Medical Enterprises) carved up the rest of the £33m windfall. This, together with other profits from the PFI, enabled the consortium to take out £37m on a £13m investment just three years after the new hospital opened.
Laing made a £35m 'refinancing gain' on its stake in the Norfolk and Norwich PFI hospital in 2003.
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