ESSU

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.

 

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.

Third edition, May 2019, including appendix 2 with comments on CHPI’s revised paper and Appendix 3 with comments on CHPI paper.

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.

 

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 (February 2018).

JLIF Takeover

However, a few months later a consortium of funds led by Dalmore Capital Limited funds managed by Equitix Investment Management Limited (Tetragon Financial Group Limited, Guernsey) made a £1,448m cash offer for JLIF which was accepted by shareholders. Since the Bid Company was based in Guernsey its is expected the renamed JLIF will remain offshore in Guernsey.

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.

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.

 

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

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

The European Services Strategy Unit is pleased to launch a radical redesign of the website — www.european-services-strategy.org.uk. Many thanks to Chris Croome of Webarchitects Coop (who have hosted and supported the website since 1998) and Mina Nielsen, Sheffield for the redesign. Hopefully the website is easier to navigate and access the large volume of evidence. If you experience any problems, please contact us.

The old site has been archived — european-services-strategy.org.uk.archived.website.