BBC NEWS Americas Africa Europe Middle East South Asia Asia Pacific
BBCi NEWS   SPORT   WEATHER   WORLD SERVICE   A-Z INDEX     

BBC News World Edition
 You are in: In Depth: ppp  
News Front Page
Africa
Americas
Asia-Pacific
Europe
Middle East
South Asia
UK
Business
Entertainment
Science/Nature
Technology
Health
-------------
Talking Point
-------------
Country Profiles
In Depth
-------------
Programmes
-------------
BBC Sport
BBC Weather
SERVICES
-------------
EDITIONS
ppp Monday, 3 September, 2001, 08:24 GMT 09:24 UK
Private company bonanza
Tony Blair speaking with NHS workers
Tony Blair tries to win over NHS workers to the PFI
Rarely do companies have such good fortune as the government's private finance initiative (PFI), a key policy platform of the Labour government which moves the provision of public services like health and education into the private sector.


There is no evidence of companies making outlandish returns, but there are many suppliers to the public sector that make outlandish margins

John Gains
Construction Confederation
UK plc, or more accurately, a small number of the country's largest companies have reported healthy profits from their involvement in PFIs, which analysts estimate could be worth 30bn in revenues a year.

The basis of the PFI is risk transfer, where the private sector supplies a public services at a fixed cost and must absorb any overruns but is entitled to any profits that it can generate.

But criticism over excessive profits, enforcement of penalties, quality of service and has plagued the process.

What risk?

"Risk transfer is about the transfer of obligations which otherwise sit with public sector to the private sector," said John Gains, chief executive, John Mowlem and president of the Construction Confederation.

"The risk all sits with the PFI incumbent. There can be no dispute. Once the requirements are defined, it is up to the private sector to deliver the product," he adds.

In exchange, the private sector charges a premium for designing, building, financing, operating and maintaining facilities for up to 30 years for a fixed cost.

PFI forces the public sector client to specify exactly what infrastructure and services it wants in advance and what it is prepared to pay per year.

The private sector has the incentive to deliver the buildings on time, or face penalties, and within budget, or absorb the overruns, and to keep the cost of services down to make a profit.

But when contracts have failed to deliver, as happened at the Passport Agency and other IT contracts, the penalty clauses against the companies ended up being unenforceable because the government had to rely on the companies that created the mess to get them out of it.

Finance initiatives

Initially financiers underwriting PFIs were worried that they had no recourse to recoup costs from the public sector if things went wrong.

But their fears were allayed once contractors started delivering on time and the revenues for the 30 year service agreements started to come in.

"The City is catching up fast. There's been a tremendous uplift their understanding of PFI," said John Gains.

He thinks profit margins are unlikely to shrink through competition because of the sheer number of new PFIs the government plans to bring onto the market.

Norfolk and Norwich Hospital
Refinancing the hospital deal provided a health profit
Funding for PFIs has now become cheaper, as the profits roll in, allowing some of the early deals to be refinanced, further enhancing profits.

When the consortium behind the Norfolk and Norwich NHS Trust PFI refinanced their debts it gave it a 70m profit boost, which will come out of the taxpayers pockets. It is the equivalent cost of building a new NHS hospital.

But consortiums argue that the bonus from refinancing recognises the risks they took when initially bid for the contracts.

Company benefits

A Treasury budget report shows that the first 14bn of PFI deals signed will give the private sector a guaranteed 96bn return over 26 years but industry denies it is profiteering.

"There is no evidence of companies making outlandish returns, but there are many suppliers to the public sector that make outlandish margins," says Mr Gains.

But it is only a select group of companies in the construction and services sector, backed by the major financial institutions, that benefit from PFI projects

"Only big companies with hefty asset levels are allowed to bid for PFIs and the need for consortiums demonstrates that even big companies sometimes have trouble meeting the PFI rules," says James Hastings of the Construction Forecasting and Research group.

"It's only once a PFI has been signed that small companies get any work and then its just like any other subcontracting job," he adds.

An example is engineering and construction group Balfour Beatty, one of the preferred bidders for London Underground PPP, which reported in August that PFIs underpinned its 17% rise in underlying profit growth.

Balfour Beatty has 11 PFI deals but failed to gain any new ones in the first half of this year but chief executive Mike Welton said that even if it signs no more the existing ones will provide a steady stream of earnings over the coming years.

Similarly AMEC reported a 20% rise in first half profits also underpinned by the governments PFI programme.

Other big construction groups like Carillion, Alfred McAlpine and Laing are reinventing themselves to take advantage of the PFI contracts as are service companies like Capita, Serco and Amey.


Key stories

Background

Case studies

From the grassroots

CLICKABLE GUIDE
See also:

15 Aug 01 | Business
19 Sep 00 | Business
04 Sep 01 | Business
Internet links:


The BBC is not responsible for the content of external internet sites

Links to more ppp stories are at the foot of the page.


E-mail this story to a friend

Links to more ppp stories

© BBC ^^ Back to top

News Front Page | Africa | Americas | Asia-Pacific | Europe | Middle East |
South Asia | UK | Business | Entertainment | Science/Nature |
Technology | Health | Talking Point | Country Profiles | In Depth |
Programmes