Terminate the Capita Contracts and Redesign the Council

A demand to terminate Barnet Council’s Capita Contracts and Redesign the Council has been made by Barnet UNISON.

Barnet Council plans to carry out a review of three options – either to maintain the status quo, return some services in-house or to terminate both the back-office services and regeneration contracts and return to in-house provision. However, the Branch are convinced that Capita’s contract performance failures warrant immediate termination of both contracts which makes a review pointless. This should be accompanied by a redesign of the Council to integrate services and abolish commissioning; service planning with users and staff participation; social, economic, equality, environmental impact assessment and rebuilding the capability and capacity of the Council.

Further Internal Audit evidence is provided of Capita’s continuing poor performance and its failure to fully implement the Adult Social Care IT system which now has to be replaced.

See earlier report in 2018 on How the London Borough of Barnet was stopped from becoming the capital of outsourcing and privatisation.

Offshore links to Scottish private finance deals with pension fund investment

An investigation into the ownership and offshoring of Scotland’s NPD and Hub Projects reveals that 60% of NPD (Non-Profit Distributing) and hub projects have shareholders with corporate relationships with offshore tax havens of Jersey, Guernsey, Cayman Islands, British Virgin Islands, Dubai International Financial Centre, Luxembourg and Cyprus. The investigation was commissioned by The Guardian and by The Ferret investigative journalism platform, both of which have published detailed analysis of the findings. Public sector pension funds are heavily involved, for example, Strathclyde Pension Fund has £80m investment in Equitix (Tetragon Financial Group Limited, Guernsey).

In addition to the report, a spreadsheet summary of NPD and Hub equity ownership a summary of Tetragon:Equitix Company ownership as revealed in company annual reports, and a spreadsheet of NPD and Hubco Auditors and lawyers is also available.

 

Nationalising Special Purpose Vehicles to end PFI: A discussion of the costs and benefits

The paper by Dr Helen Mercer and Professor Dexter Whitfield is available via the Public Services International Research Unit, University of Greenwich.

Abstract

The article’s principal purpose is to provide an initial set of costings relating to the proposal to end PFIs in the UK through nationalising the Special Purpose Vehicles. The article uses book value to estimate that the cost of compensating the shareholders of the SPVs on HM Treasury database would be between £2.3bn and £2.5bn. It further analyse the potential savings to public authorities. The article proposes that service contracts are renegotiated so that the public authorities contract directly with the providers, not via the SPV. This secures significant annual savings from the elimination of operating profits, of £1.4bn, indicating that nationalisation will pay for itself within two years. Further the article proposes to honour all outstanding liabilities but to secure substantial refinancing through a new body in which ownership of the SPVs will be vested.

Finally the article suggests that as service contracts are ended, either through break clauses or other reasons, the public authorities must bring provision ‘in-house’, ending outsourcing and also providing further savings from more rational and integrated provision. The approach has been developed on the basis of significant research into how PFIs operate and consideration of the range of alternative solutions to the PFI problem that have been put forward so far. These issues are also explained and developed in the article.

Damming report into easyCouncil outsourcing

Barnet UNISON and ESSU have published a damming assessment of the London Borough of Barnet’s attempt to become the capital of outsourcing and privatisation. The report, ‘Future Shape’ ‘easyCouncil’ and ‘One Barnet’ = Failure, is highly critical of commissioning and 356% rise in its cost; the £24m spent on the One Barnet programme, mainly the cost of management consultants; the performance problems of the two large multi-service contracts with Capita; and the additional £112m for both contracts in less than half the contract period, which questions the savings claims (Word version also available).

The last four services to treated be with the Alternative Delivery Model approach – Street Scene, Adult Social Care, Libraries and Children’s Services all remained in-house.

Capita is still in crisis – it had a £513m pre-tax loss last and plans a multi-million transformation, investment and cost saving programme over the next three years. It still has £1.1bn debt and a pension deficit of over £400m. Capita will almost certainly intensify financial extraction from its existing and new contracts, which could have a very significant impact on service users, staff and local authorities.

An important lesson is that every outsourcing proposal should be challenged from the start whilst promoting alternatives, workplace organising, building community support and taking selective industrial action. The report sets out an immediate action plan for Barnet Council and a national plan for remunicipalisation – bringing services back in-house. It centres on a commitment to in-house provision with public service innovation and improvement plans and the abolition of commissioning.

Online access to a list of Barnet UNISON reports published 2008-2018 is also available.

 

Infrastructure fund to abandon offshore tax haven status

The John Laing Infrastructure Fund (JLIF) has decided to terminate its Guernsey offshore registration and become a UK investment trust. Announcing the results and annual report for 2017 on 23 March 2018, the chair, David MacLellan, cited recent problems in JLIF PFI projects such as the serious defects at Roseberry Park Hospital, fire safety enforcement notices at Peterborough Hospital and fire safety issues at Camden Social Housing following the devastating Grenfell Tower fire in London. He also referred to the liquidation of construction company Carillion plc; and the impact of tax changes under the OECD’a Base Erosion and Profit Shifting (BEPS) initiative.

The risk of nationalisation and/or a shift in public policy away from the PPP model were given a triple red risk rating by the JLIF Risk Committee.

“The Board has therefore concluded that it would be in the best interests of the Company and its shareholders to become a UK Investment Trust to mitigate the impact of both treaty changes and changes to future tax provisions. As a result, a proposal will be put to shareholders in May to amend the Articles of Incorporation such that Board and Annual General meetings can be held in the UK, with the aim, subject to regulatory approval, of implementing the tax residency change to the UK on 1 January 2019 so that the Company may be treated as a UK investment trust from that date.” (JLIF Annual Report 2017)

JLIF has 52 UK Private Finance Initiative projects with an average 67.5% equity stake including 23 projects with 100% equity ownership.

Carillion made £500m in revenue from selling PFI projects and netted annual returns of up to 39%

Research by the European Services Strategy Unit has exposed the fact that Carillion plc sold equity in 49 PFI projects between 2003 and 2017 gaining a revenue of £500m. Most of the transactions were to offshore infrastructure funds.

Carillion currently has 25%-90% equity stakes in 12 PFI projects with a capital value of £1,281m. In addition, it has a 33.33% equity in the Aberdeen Western Peripheral Route (a Scottish Non-Profit Distributing (NPD) project with a capital value of £469m. It is involved in joint ventures, such as a 50% equity in Aspire Defence Services Limited, which had a £94m turnover in 2016 delivering the MoD Allenby-Connaught PFI project (£1.6bn capital value).

The Independent article:

http://www.independent.co.uk/news/business/news/carillion-made-500m-in-revenue-from-pfi-projects-with-annual-returns-of-up-to-39-research-finds-a8180986.html

See spreadsheet of Carillion PFI Equity sales

 

New evidence of the scale of UK PFI/PPP equity offshoring and tax avoidance

ESSU research has consistently focused on the offshore infrastructure funds, which are liable for corporate tax in the country in which they are registered. Each PFI/PPP project has Special Purpose Vehicle (SPV) or company that is registered in the UK and liable to pay UK corporation tax.

Twelve offshore infrastructure funds had equity in 547 UK PFI/PPP projects. These offshore infrastructure funds had equity in 74% of the 735 UK PFI/PPP projects (October, 2016).

Furthermore, the offshore funds have a significant influence when they own a majority of the equity in a SPV. Nine funds owned 50%-100% of the equity in 334 PFI/PPP projects or 45.4% of PFI projects in the UK. Education and health projects account for two thirds of PFI/PPP projects in which offshore infrastructure funds have 50%-100% of the project equity (Whitfield, 2016).

The Table Annual profit and taxation of listed infrastructure funds 2011-2017 details the annual pre-tax profit and tax paid by five offshore registered infrastructure funds – HICL Infrastructure Company Limited (Guernsey), John Laing Infrastructure Fund Limited (Guernsey), 3i Infrastructure plc (Jersey), International Public Partnerships Limited (Guernsey) and Bilfinger Berger Global Infrastructure SICAV (Luxembourg).

PFI: five firms avoid tax despite £2bn profits, BBC learns

Special Purpose Vehicle or company

Each PFI/PPP project has an SPV, together with a holding company, which is responsible for the design, finance, construction and maintenance of new public buildings. The construction company, bank or financial institution and facilities management contractors are the shareholders of each SPV. They also usually contribute a portion of subordinate debt at relatively high interest rates to the project, although this is small relative to the senior debt provided by banks.

Local authorities, NHS Trusts and other public bodies repay these costs via regular unitary payments. The SPV pays UK corporation tax, but receives significant investment allowances which reduce the level of tax paid. It also pays annual dividends to the SPV shareholders financed out of profits.

The sale of equity in SPVs has soared.

The updated ESSU PPP Equity Database records 462 transactions between 1998-2016 involving the direct sale of equity of 1,003 projects (including those where equity was sold multiple times) at an estimated cost of £10.3bn.

The average annual rate of return was 28.7% in 1998-2016 more than double the 12%-15% annual rate of return in PFI/PPP Final Business Cases.

In 2016, 100% of equity transactions involved offshore infrastructure funds registered in Jersey, Guernsey and Luxembourg, based on the ESSU sample of 334 projects. The percentage in 2011 and 2014 was 70% for both years and 60% and 61% in 2015 and 2013 respectively.

All or part of a SPV shareholders equity and subordinate debt is sold in a transaction. After the sale of equity, the SPV pays dividends to the new equity owners that has led to an increasing flow of money going offshore.

SPV equity also changes ownership when secondary market infrastructure funds takeover or merge with other similar funds. The Financial Commodification of Public Infrastructure details 33 transactions involving 1,151 SPVs between 2003-2016.

Large-scale tax avoidance

The five largest listed offshore infrastructure funds made a total profit of £2.9bn in the five-year period 2011-2017. They paid a total of £13.5m taxes or a tax rate of 0.47%, when the £21.2m of tax credits is included. The five funds collectively paid ZERO corporate tax in the offshore territories where they have been registered for six years. Two of those funds published accounts to include 2017 and jointly paid no tax in the seventh year.

This represents a potential loss of over £600m in UK tax revenue had these companies been registered in the UK (based on UK corporation tax rates of that have declined from 26% in 2011 to 19% in 2017.

Table of Updated annual profit and taxation of offshore listed infrastructure funds 2011-2017

Offshore infrastructure funds

OWNERS OF 22 CANADIAN P3s USE TAX HAVENS TO AVOID TAXES

Ottawa (06 Nov. 2017) — Because of their use of tax havens, 4 companies with extensive investments in Canadian P3 privatization schemes paid less than 1 per cent in income tax in 2016. A lot less.

Between them — International Public Partnerships, HICL Infrastructure Company Limited (HICL), Bilfinger Berger Global Infrastructure (BBGI) and John Laing Infrastructure Fund (JLIF) — own, or partially own, 22 P3 privatization schemes in Canada. These include P3 schools in Alberta and the Vancouver General Hospital Academic Ambulatory Care Centre.

In 2016, the before-tax profits of these 4 companies added up to $981.5 million. However, the total tax bill was only $1.2 million or 0.12 per cent. The reason for such low tax bills is that all of these investment companies have their headquarters in tax havens — 1 in Luxembourg and 3 on Guernsey in the Channel Islands.

“Thanks to P3 privatization schemes, money that should be funding quality public services is ending up in tax havens,” said Larry Brown, President, National Union of Public and General Employees (NUPGE).

PPP Profiteering and Offshoring: New Evidence and updated ESSU PPP Equity Database 1998-2016

PPP Profiteering and Offshoring: New Evidence reports on the findings of the updated ESSU PPP Equity Database 1998-2016:

  • The updated ESSU PPP Equity Database records 462 transactions between 1998-2016 involving the direct sale of equity of 1,003 projects (including those where equity was sold multiple times) at an estimated cost of £10.3bn.
  • A sample of 334 projects, a third of the total number of projects engaged in the sale of equity in 118 transactions, a quarter of the transactions between 1998-2016, provides information to determine the annual rate of return. The average annual rate of return was 28.7% in 1998-2016 more than double the 12%-15% annual rate of return in PFI/PPP Final Business Cases.
  • Education and health PPP projects account for 62.7% of projects in equity transactions followed by transport with 10.4% and criminal justice with 8.4%.
  • In 2016, 100% of equity transactions were to offshore infrastructure funds in Jersey, Guernsey and Luxembourg, based on the ESSU sample of 334 projects. The percentage in 2011 and 2014 was 70% for both years and 60% and 61% in 2015 and 2013 respectively.

 

Labour will nationalise PFI projects

In a speech at the Labour National Conference today, John McDonnell, Shadow Chancellor, announced:

“It’s not just students and households with credit cards who are being ripped off. The scandal of the Private Finance Initiative, launched by John Major, has resulted in huge, long-term costs for tax payers, whilst handing out enormous profits for some companies. Profits which are coming out of the budgets of our public services.

Over the next few decades, nearly two hundred billion is scheduled to be paid out of public sector budgets in PFI deals. In the NHS alone, £831m in pre-tax profits have been made over the past six years. As early as 2002 this conference regretted the use of PFI.

Jeremy Corbyn has made it clear that, under his leadership, never again will this waste of taxpayer money be used to subsidise the profits of shareholders, often based in offshore tax havens. The government could intervene immediately to ensure that companies in tax havens can’t own shares in PFI companies, and their profits aren’t hidden from HMRC.

We’ll put an end to this scandal and reduce the cost to the taxpayers. How? We have already pledged that there will be no new PFI deals signed by us. But we will go further. I can tell you today, it’s what you’ve been calling for.

We’ll bring existing PFI contracts back in-house.”

Labour Press Notice, 25 September 2017

Labour today commits to signing no new PFI deals, to look to bring existing contracts back in-house and to develop alternative public sector models for funding infrastructure, saving the public money and improving services and working conditions. Labour will review all PFI contracts and, if necessary, take over outstanding contracts and bring them back in-house, while ensuring NHS trusts, local councils and others do not lose out, and there is no detriment to services or staff. On top of the billions of pounds paid out to shareholders, an estimated £28bn is being lost through costs incurred by problems associated with PFI, including higher interest rates, bail outs and management fees.

A Labour Briefing contained further details:

1.  Review, in conjunction with local authorities, NHS Trusts and other public bodies, all PFI contracts to assess the SPVs’ performance on:

– safety, including fire risk, in PFI buildings;

– labour and equalities impacts, and wages;

– changes in equity ownership;

– quality of delivery on service and construction contracts.

2.  Consult on amending or repealing legislation which provides government underwriting of unitary payments to PFI companies whilst ensuring the sustainability of public sector budgets reliant upon previous forms of PFI credits and payments. Existing PFI schemes were supposed to remove risk from the public sector but have failed to do so.

3.  Consult on appropriate methods for returning the ownership and responsibilities of SPVs [special purpose vehicles] to the public sector, with shares-for-bonds nationalisation (via an Act of Parliament) the presumed preferred approach. Shares held in countries deemed tax havens may be compensated at a different rate from others. Differential compensation rates for equity held by pension funds will also be considered.

4. Ownership of assets and responsibilities for services will be returned to the bodies who have been paying for them, and who no longer need to make unitary payments.

5.  Develop a new public sector design/construction model based on public investment that enhances public sector capabilities to plan, design, manage and operate public infrastructure. Examples we will consider include the USA’s construction management at-risk. Our intention is not just to take over existing assets but to build the capacity to deliver projects better in future.

6.  Enshrine the rights of staff to have rights kept or enhanced to comparable public sector standards on transfer to public sector bodies.

7.  End the UK government’s financial and advisory support for similar projects overseas.

The political economy of social impact bonds

The Political Economy of Private Financed Social Services – an international perspective is the title of a chapter by Dexter Whitfield in a new book Privates Kapital für soziale Dienste? Wirkungsorientiertes Investment und seine Folgen für die Soziale Arbeit edited by Monika Burmester, Emma Dowling & Norbert Wohlfahrt. Further details and an English version of the chapter available https://www.european-services-strategy.org.uk/publications/books-and-articles-by-dexter-whitfield/political-economy-of-private-financed-social-services