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
Voices
There will be a chance to bid for a rare example of the SAS Diary, collated by a former member of the regiment in the aftermath of World War II but only published – in a limited run of just 5,000 – in 2011
charity appealTime is running out to secure your favourite lot as our auction closes at 2pm today
News
Elton John and David Furnish exchange marriage vows
peopleSinger posts pictures of nuptials throughout the day
News
File: James Woods attends the 52nd New York Film Festival at Walter Reade Theater on September 27, 2014
peopleActor was tweeting in wake of NYPD police shooting
Sport
Martin Skrtel heads in the dramatic equaliser
SPORTLiverpool vs Arsenal match report: Bandaged Martin Skrtel heads home in the 97th-minute
PROMOTED VIDEO
Have you tried new the Independent Digital Edition apps?
ebooks
ebooksA year of political gossip, levity and intrigue from the sharpest pen in Westminster
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

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

iJobs Job Widget
iJobs General

SThree: Trainee Recruitment Consultant

£18000 - £23000 per annum + OTE £40000: SThree: SThree are a global FTSE 250 b...

SThree: Trainee Recruitment Consultant

£20000 - £25000 per annum + OTE £35K - £45K: SThree: SThree Group have been we...

SThree: Trainee Recruitment Consultant

£20000 - £25000 per annum + OTE £35000: SThree: SThree Group have been well es...

SThree: Trainee Recruitment Consultant

£20000 - £25000 per annum + OTE £45,000: SThree: SThree Group have been well e...

Day In a Page

Surrounded by high-rise flats is a little house filled with Lebanon’s history - clocks, rifles, frogmen’s uniforms and colonial helmets

Clocks, rifles, swords, frogmen’s uniforms

Surrounded by high-rise flats is a little house filled with Lebanon’s history
Return to Gaza: Four months on, the wounds left by Israel's bombardment have not yet healed

Four months after the bombardment, Gaza’s wounds are yet to heal

Kim Sengupta is reunited with a man whose plight mirrors the suffering of the Palestinian people
Gastric surgery: Is it really the answer to the UK's obesity epidemic?

Is gastric surgery really the answer to the UK's obesity epidemic?

Critics argue that it’s crazy to operate on healthy people just to stop them eating
Homeless Veterans appeal: Christmas charity auction Part 2 - now LIVE

Homeless Veterans appeal: Christmas charity auction

Bid on original art, or trips of a lifetime to Africa or the 'Corrie' set, and help Homeless Veterans
Pantomime rings the changes to welcome autistic theatre-goers

Autism-friendly theatre

Pantomime leads the pack in quest to welcome all
The week Hollywood got scared and had to grow up a bit

The week Hollywood got scared and had to grow up a bit

Sony suffered a chorus of disapproval after it withdrew 'The Interview', but it's not too late for it to take a stand, says Joan Smith
From Widow Twankey to Mother Goose, how do the men who play panto dames get themselves ready for the performance of a lifetime?

Panto dames: before and after

From Widow Twankey to Mother Goose, how do the men who play panto dames get themselves ready for the performance of a lifetime?
Thirties murder mystery novel is surprise runaway Christmas hit

Thirties murder mystery novel is surprise runaway Christmas hit

Booksellers say readers are turning away from dark modern thrillers and back to the golden age of crime writing
Anne-Marie Huby: 'Charities deserve the best,' says founder of JustGiving

Anne-Marie Huby: 'Charities deserve the best'

Ten million of us have used the JustGiving website to donate to good causes. Its co-founder says that being dynamic is as important as being kind
The botanist who hunts for giant trees at Kew Gardens

The man who hunts giants

A Kew Gardens botanist has found 25 new large tree species - and he's sure there are more out there
The 12 ways of Christmas: Spare a thought for those who will be working to keep others safe during the festive season

The 12 ways of Christmas

We speak to a dozen people who will be working to keep others safe, happy and healthy over the holidays
Birdwatching men have a lot in common with their feathered friends, new study shows

The male exhibits strange behaviour

A new study shows that birdwatching men have a lot in common with their feathered friends...
Diaries of Evelyn Waugh, Virginia Woolf and Noël Coward reveal how they coped with the December blues

Famous diaries: Christmas week in history

Noël Coward parties into the night, Alan Clark bemoans the cost of servants, Evelyn Waugh ponders his drinking…
From noble to narky, the fall of the open letter

From noble to narky, the fall of the open letter

The great tradition of St Paul and Zola reached its nadir with a hungry worker's rant to Russell Brand, says DJ Taylor
A Christmas ghost story by Alison Moore: A prodigal daughter has a breakthrough

A Christmas ghost story by Alison Moore

The story was published earlier this month in 'Poor Souls' Light: Seven Curious Tales'