Exclusive: How private firms make quick killing from PFI

Companies earn hundreds of millions by selling on 25-year contracts for hospitals and schools awarded to them by the last government

Private contractors have pocketed hundreds of millions of pounds of profits in the past four years by exploiting deals that were controversially awarded to them by the last Labour government.

Companies that were awarded contracts to build and maintain state schools for 25 years have been doubling their money by “flipping”, or selling on, the Private Finance Initiative (PFIs) projects just four years after finishing them.

The chair of the Commons Public Accounts Committee, Margaret Hodge, described the huge profits as “a total scandal” and said it meant “we have all been ripped off”. The Independent’s findings shine a new light on how private companies have made fortunes in pure profit from the rising value of the schools and hospitals they have built – value which critics say could have been retained by the taxpayer.

Four contractors alone made profits of more than £300m. Of the companies studied – Balfour Beatty, Carillion, Interserve and Kier – Balfour Beatty is by far the biggest beneficiary of the rising value of its Private Finance Initiative and Public Private Partnership deals. It alone has made profits of £188.9m.

Only this week, it flipped the University Hospital of North Durham and seven schools in Knowsley, near Liverpool, generating a gain of £51m. In the case of the schools, it doubled its money from the £19m investment made when the 27-year contracts were awarded in 2007 and 2011.

The Durham hospital, which was one of the first hospitals to be built under PFI-style private financing, was dogged with controversy about bed shortages and poor design when it opened.

Carillion has made £12.2m, Kier £20.7m and Interserve £90m, according to stock market filings and company documents.

Balfour Beatty is the biggest beneficiary of its PFI deals, making profits of £188.9m (Getty) Balfour Beatty is the biggest beneficiary of its PFI deals, making profits of £188.9m (Getty)
Ms Hodge said: “It is a scandal, a total scandal that the public sector has privatised these projects so badly. We have all been ripped off.”

The Labour MP acknowledged that many of the worst PFI and PPP cases were negotiated by the Labour government under Tony Blair and Gordon Brown, saying: “I’m afraid we got it wrong. I was a supporter at the time but I have completely gone off the whole concept. We got seduced by PFI.”

She added that it was especially “scandalous” that many of the funds that are buying up the contracts are based in tax havens. One of the early arguments in favour of PFIs was that taxpayers would benefit from contractors’ profits due to the corporation taxes they would pay. “But now the profits are going offshore and to shareholders,” she said.

One of the biggest so-called infrastructure funds buying the contracts, HICL, has its tax domicile in Guernsey and was specifically set up by HSBC to buy up such contracts. Another, Dalmore Holdings, is run by a team of former bankers and accountants in London with shareholders including a number of Cayman Island investment funds. AMP Capital, an Australian fund manager, is also a major investor in such deals.

NHS experts said that, in the case of the hospitals, the profit from selling the contracts could be matched by the amount the companies have made in their annual charges for running the sites.

Known as unitary charges, these are fixed with a guaranteed increase every year for the term of the contract. While paid to cover non-clinical service charges like maintenance, they can also be topped up with big profits from revenues from shops and cafes on site, as well as lucrative car parking revenues.

Prime Minister David Cameron visiting University College Hospital in 2011 (Getty) Prime Minister David Cameron visiting University College Hospital in 2011 (Getty)
Among the most profitable contracts to be flipped were Balfour Beatty’s project to build and run University College London Hospital, which turned a profit of £44m, and Kier’s West Berkshire Hospital and Hinchingbrooke Hospital, which together made a £6.8m profit. Interserve flipped a group of 19 separate investments in schools, hospitals and prisons to Dalmore in one batch bringing in a combined profit of £60m.

John Lister, of NHS pressure group Health Emergency, said: “We now have a situation where several major hospitals are in major financial difficulties because of the debts and fixed unitary charges they are saddled with from PFI deals.”

Kier Project Investment said in a statement: “The profit that Kier Project Investment has realised over the last three financial years (June 2011 to June 2013) is £20.7m.

“This figure was realised across nine different schemes that are all designed to deliver significant benefits to local communities – including schools, hospitals, fire stations, a library and a care home – and reflects the fact that when the initial investment is made we take on significant development risk in designing, building and delivering a bespoke community facility.”

Case study: North Durham

University Hospital of North Durham was one of the first and most controversial to be built under PFI. Balfour Beatty’s Consort Healthcare PFI division contracted with the local NHS trust to design, build and run the hospital for 30 years under a trailblazing contract signed in 1998. It replaced the local Dryburn hospital in 2001 and was described by the trust chairman Kevin Earley as “an absolutely huge leap in healthcare”.

But the leap seemed to go backwards – after 14 weeks, the hospital was short of 54 beds. Unison, a union, claimed patients were kept waiting for up to 12 hours in A&E because of staff shortages. Despite its mixed local reputation, University Hospital of North Durham managed to earn Balfour Beatty £51m this week in probably its most successful PFI “flip” to date.

Richard Holmes

Start your day with The Independent, sign up for daily news emails
Have you tried new the Independent Digital Edition apps?
ebooks
ebooksAn introduction to the ground rules of British democracy
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
SPONSORED FEATURES
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs General

Recruitment Genius: Account Manager - Media Sales - £36,000 OTE

£28000 - £36000 per annum: Recruitment Genius: This award-winning company, whi...

Recruitment Genius: C# .NET Developer / Application Support - Junior

£21000 - £25000 per annum: Recruitment Genius: This business has an industry r...

Recruitment Genius: Office Administrator

Negotiable: Recruitment Genius: They make daily deliveries to most foodservice...

Recruitment Genius: Transport Planner

Negotiable: Recruitment Genius: They make daily deliveries to most foodservice...

Day In a Page

Turkey's conflict with Kurdish guerrillas in Iraq can benefit Isis in Syria

Turkey's conflict with Kurdish guerrillas in Iraq can benefit Isis in Syria

Turkish President Erdogan could benefit politically from the targeting of the PKK, says Patrick Cockburn
Yvette Cooper: Our choice is years of Tory rule under Jeremy Corbyn or a return to a Labour government

Our choice is years of Tory rule under Corbyn or a return to a Labour government

Yvette Cooper urged Labour members to 'get serious' about the next general election rather than become 'a protest movement'
Singapore's domestic workers routinely exploited and often abused in the service of rich nationals

Singapore's hidden secret of domestic worker abuse

David Cameron was shown the country's shiniest veneer on his tour. What he didn't see was the army of foreign women who are routinely exploited and often abused in the service of rich nationals
Showdown by Shirley Jackson: A previously unpublished short story from the queen of American Gothic

Showdown, by Shirley Jackson

A previously unpublished short story from the queen of American Gothic
10 best DSLRs

Be sharp! 10 best DSLRs

Up your photography game with a versatile, powerful machine
Solved after 200 years: the mysterious deaths of 3,000 soldiers from Napoleon's army

Solved after 200 years

The mysterious deaths of 3,000 soldiers from Napoleon's army
Every regional power has betrayed the Kurds so Turkish bombing is no surprise

Robert Fisk on the Turkey conflict

Every regional power has betrayed the Kurds so Turkish bombing is no surprise
Investigation into wreck of unidentified submarine found off the coast of Sweden

Sunken sub

Investigation underway into wreck of an unidentified submarine found off the coast of Sweden
Instagram and Facebook have 'totally changed' the way people buy clothes

Age of the selfie

Instagram and Facebook have 'totally changed' the way people buy clothes
Not so square: How BBC's Bloomsbury saga is sexing up the period drama

Not so square

How Virginia Woolf saga is sexing up the BBC period drama
Rio Olympics 2016: The seven teenagers still carrying a torch for our Games hopes

Still carrying the torch

The seven teenagers given our Olympic hopes
The West likes to think that 'civilisation' will defeat Isis, but history suggests otherwise

The West likes to think that 'civilisation' will defeat Isis...

...but history suggests otherwise
The bald truth: How one author's thinning hair made him a Wayne Rooney sympathiser

The bald truth

How thinning hair made me a Wayne Rooney sympathiser
Froome wins second Tour de France after triumphant ride into Paris with Team Sky

Tour de France 2015

Froome rides into Paris to win historic second Tour
Fifteen years ago, Concorde crashed, and a dream died. Today, the desire to travel faster than the speed of sound is growing once again

A new beginning for supersonic flight?

Concorde's successors are in the works 15 years on from the Paris crash