Children in Knowsley, near Liverpool, may be enjoying newer school buildings thanks to Gordon Brown’s public private partnership (PPP) scheme, but that is nothing to the pleasure of the contractor that built them.
Balfour Beatty, which won the area’s Building Schools for the Future programme for a £19m equity investment in 2007, has just sold its stake for £42m. It sold up, even though the project to build and run the seven sites had barely started its 25-year life.
The company said yesterday the price had been even higher than managers had expected. The deal is likely to raise again the argument that public projects were awarded to the private sector too cheaply.
It was not only the schools in Merseyside that turned a huge profit for Balfour Beatty. It also yesterday flipped its half of a PPP project to design, build and operate the University Hospital of North Durham. That profit did not come so quickly – the original 30-year contract was signed in 1998 and was one of the first hospitals to be built under the PPP model.
North Durham has proved highly controversial in its early years, particularly over the issue of bed shortages and redundancies. But Balfour Beatty has managed to sell its 50 per cent stake for £55m. While the company did not break down the profit, it said that, combined, the schools and hospitals sold yesterday “exceed the directors’ valuations by £44m, representing an uplift of 82 per cent”.
PPPs, though started by the Conservatives, were eagerly taken up by the Labour government, which saw them as a way to get major public infrastructure built without the cost going on the public balance sheet.
However, the big profits involved have sparked controversy. And that is set to increase as a burgeoning “secondary” market has erupted of investors keen to buy up projects in their early stages. They are attractive because of the decades of reliable income the contracts provide.
Because of the lack of new infrastructure projects in recent years, these funds are chasing ever fewer schemes to buy, and are therefore boosting prices. In Balfour Beatty’s case, it was funds managed by Dalmore Capital that was the buyer.
Balfour has made huge profits in the past two years selling hospitals and schools. Kier and Interserve, two other major players, have done the same.
Dexter Whitfield, of the European Services Strategy Unit think tank, has claimed: “The Treasury conceded there have been excessive profits and windfall gains on secondary market sales, yet did absolutely nothing to change this situation for over 700 existing PFI projects.”