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Does the private sector receive an excessive return from investments in health care infrastructure projects? Evidence from the UK Veronica Vecchi a,∗ , Mark Hellowell b,1 , Stefano Gatti c,2 a b c

SDA Bocconi School of Management, Milan, Italy University of Edinburgh, School of Government, Edinburgh, United Kingdom Bocconi University, Finance Department, Milan, Italy

a r t i c l e

i n f o

Article history: Received 20 April 2012 Received in revised form 13 December 2012 Accepted 17 December 2012 Keywords: Capital investment Private finance initiative Hospitals Project finance Internal Rate of Return

a b s t r a c t This paper is concerned with the cost-efficiency of Private Finance Initiatives (PFIs) in the delivery of hospital facilities in the UK. We outline a methodology for identifying the “fair” return on equity, based on the Weighted Average Cost of Capital (WACC) of each investor. We apply this method to assess the expected returns on a sample of 77 contracts signed between 1997 and 2011 by health care provider organisations in the UK. We show that expected returns are in general in excess of the WACC benchmarks. The findings highlight significant problems in current procurement practices and the methodologies by which bids are assessed. To minimise the financial impact of hospital investments on health care systems, a regulatory regime must ensure that expected returns are set at the “fair” rate. © 2012 Elsevier Ireland Ltd. All rights reserved.

1. Introduction This article is concerned with the use of private finance in health care capital investments. Where capital financing methods are efficient, the impact of investment on the revenue budget is minimised and the budget available for additional capital expenditure is maximised. Conversely, where financing methods are inefficient, more resources must move from revenue to capital, and the opportunity for additional investment is curtailed. In most countries, funds can be borrowed by governments from the capital markets at a lower interest rate than is available to the private sector in those countries. Consequently, where a health care system’s capital assets are owned by the state,

∗ Corresponding author. Tel.: +39 0 2 58363590. E-mail addresses: [email protected] (V. Vecchi), [email protected] (M. Hellowell), [email protected] (S. Gatti). 1 Tel.: +44 0 131 6511330. 2 Tel.: +39 0 2 58366106.

the cheapest and most appropriate source of funds will often be government borrowing [1]. However, the use of private finance may allow health care systems that are constrained by an absence of public capital to undertake investments that would otherwise never materialise, or materialise only with a substantial delay [2]. In addition, involving private finance in capital projects may offer efficiency benefits – for example, in construction and operations – that may sometimes offset the higher financial cost of this form of financing [3]. Since 1993, the Private Finance Initiative (PFI) has been the dominant form of large-scale buildings procurement used by National Health Service (NHS) organisations in the United Kingdom [1]. As of April 2012, 123 PFI projects for new hospital facilities had been agreed between NHS organisations and private sector ‘special purpose vehicles’ (SPVs),3 representing private sector investment of £16

3 As clarified in Section 3, the typical structure of a PFI hospital involves the creation of a new company, a Special Purpose Vehicle (SPV) by one or more shareholders (project sponsors). The SPV designs, builds, operate

0168-8510/$ – see front matter © 2012 Elsevier Ireland Ltd. All rights reserved. http://dx.doi.org/10.1016/j.healthpol.2012.12.010

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billion (in 2012 prices), and a projected long-term nominal cost to the NHS of £70.5 billion [4]. Five additional hospital PFI schemes were being procured or prepared for tender as of April 2012, with a combined capital investment value estimated at £1 billion [5]. Most investments have been highly geared, with debt providing circa 90% of capital drawn down, against 10% equity [1]. This debt-heavy capital structure is widely believed to minimise the Weighted Average Cost of Capital (WACC)4 for the SPVs, thereby reducing the cost to the public sector [6]. However, changes in financial sector regulation and concerns about the quality of assets held by banks have restricted long-term lending in the UK, as elsewhere. New Basel III stability ratios, in particular, make PFI loans very expensive in terms of banks’ risk-weighted capital adequacy requirements. In response, most banks are reducing, rather than expanding, their infrastructure assets. Even where funds are available, loan margins have tripled relative to pre-crisis norms [3]. In this context, the merit of such a high level of gearing is no longer clear. In December 2012, the UK government published the outcome of a year-long inquiry into the PFI – resulting in the introduction of a slightly amended model, called PF2. The UK government’s policy is to rely less on commercial banks in future PF2 projects and attracting funds from alternative financial institutions, primarily pension funds and insurance companies [3]. However, appetite for infrastructure assets – which require dedicated teams capable of assessing and monitoring credit risk – is limited among such institutions, due to information asymmetry, scarce data about project performance and the lack of internal specialist expertise [7]. The implication of the UK government’s desire to shift from a bank lending model to one that engages with a broader range of financial institutions is that project risk must, in some way, be re-allocated from creditors to other contractual parties. This change in the model is likely to have a major impact on PFI/PPP policy across the EU [8], in which PFIs with an investment value of D 185 billion have been signed since 2003 [9]. One option for de-risking private finance contracts is for governments to provide guarantees to debt-holders. However, the provision of guarantees to creditors is likely to distort the incentive structure associated with such transactions, and increase the state’s exposure to risk [10]. Reflecting this, the review favours a model in which the contribution of equity is increased, relative to debt [3]. The providers of equity are the owners of the SPV established to develop the project and earn a revenue stream relating to it. They have a lower priority for receipts of cash flows than the debt-holders and bear greater risk. Therefore, a greater proportion of equity in the capital structure of the project provides a “buffer” for debt-holders and reduces overall risk, which may provide financial institutions with

the facility under a concession agreement and is responsible for collecting financing from banks or on the capital markets (DBFO, design-buildfinance and operate scheme). The financing is based on a project finance technique, implying that bank creditors’ have the possibility to be repaid only by means of the cash flows of the PFI hospital and without any recourse on the sponsors’ balance sheets. See Gatti [66]. 4 See Box 1 for the WACC definition.

the comfort they require to invest. The new policy is to encourage a capital structure of circa 75% debt to 25% equity [3]. However, if the market responds as the government expects, and equity begins to play a more important role in the capital structure of PFIs, it is important to understand how efficiently equity has been priced within the PFI programme to date. This is our focus here. Initially, we propose an analytical framework grounded in corporate finance literature for estimating the WACC of private sector equity investors. We use this as a benchmark against which to evaluate the expected rates of return on investments in SPV equity. The framework is used to measure and evaluate returns on 77 PFI projects (out of the total population of 123) commissioned by NHS organisations in England and Scotland between 1997 and 2010 [4]. The results confirm the existence of returns that are in each case significantly in excess of the sponsors’ WACC. The average difference between investor WACCs and expected rates of return is 9.5%, indicating a high degree of rent extraction by investors. The results call for a substantial revision of the methodologies applied by the public sector in terms of the procurement of PFI contracts and the appraisal of private sector bids. The rest of this paper is organised as follows. After a brief summary of the theoretical and empirical literature on equity returns in PFI contracts (Section 2), we outline in Section 3 the main institutional features of PFI transactions and the extent to which project risks are borne by equity investors. Section 4 presents the theoretical framework underpinning the study and Section 5 outlines the methodology we have developed to derive the WACCs for the 77 projects in the sample. In Section 6, we discuss the principal findings of the study, and in Section 7 we identify some implications for policy-makers in health care systems.

2. The equity return in PFI contracts: theory and empirical evidence Identifying the return to equity has been an important focus of both academic research and public audit in the UK [11–16]. The findings in these studies are consistent with data reported in the financial statements of large corporate investors (e.g. [17,18,38]) and large infrastructure funds (e.g. [19]) in identifying a normal rate of return within the range 13–18%.5 In addition, a succession of reports have compared the rate of return on equity expected by investors at the point of contracts being signed against that expected after bank loans have been refinanced or equity assets have been sold to secondary market investors.6

5 Our review of the literature here relates only to the health sector. Detailed evaluative studies have been carried out in relation to the roads sector, for example Shaoul et al. [63] and Acerete et al. [53,54]. 6 Refinancing frequently takes place after the hospital or health care facility has passed through the construction phase without any major deviation from the expected budgeted capital expenditures. In these cases, project sponsors can seek to lower their interest rate, reduce required cover ratios (allowing cash to be taken out of the project and distributed to shareholders) and/or increase the term of the debt, thereby reducing the amount of debt capital to be repaid annually.

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In many cases, the increase in the expected return following such transactions has been substantial. For example, on the Norfolk and Norwich University Hospital Trust’s PFI contract, the expected rate of return increased from 18.9% at financial close to 60.4% after investors refinanced their loan [14]. Returns to primary investors can also be increased by selling their equity assets. So long as the buyer of the asset is willing to accept a lower return on their money than that expected by the vendor, these sales can result in large capital gains. A recent study found that investors secured rates of return of up to 40% upon selling equity assets [20]. A number of recent studies [21,22] have attempted to evaluate the rate of return forecast by investors through the application of capital budgeting techniques – i.e. those techniques that are most commonly used by corporations to estimate the minimum return acceptable on their investments [23]. To illustrate this process, we can consider the case of an all-equity firm with surplus cash. The firm has two options: it can use the cash for a new investment, or hand the cash to shareholders. In the first case, the expected cash flows are redistributed as dividends. In the second case, shareholders use the cash to purchase a financial asset with the same degree of risk as the investment. The first option increases shareholders’ wealth only if the expected return on the investment is greater than that offered by securities in the same risk class. This latter return is what is meant by the cost of capital – i.e. the return the firm must pay shareholders to persuade them to retain the firm’s shares. On this theory, the firm will maximise shareholders’ wealth by investing in all projects with an Internal Rate of Return (IRR)7 above the cost of capital [24]. To estimate the cost of capital for a project or a firm, it is necessary to consider how expected returns on financial securities are determined in the capital market. In conventional finance theory, risk is normally measured from the perspective of an investor with a diversified portfolio. Computing the variance of a portfolio involves estimating the variance of individual assets and the extent to which they vary together, or covary. If the returns move in opposite directions, this reduces risk. By contrast, if the returns on the assets tend to move in the same direction, risk is increased. In a perfectly diversified portfolio, the risk relating to individual investments (called idiosyncratic, or project-specific risk) is eliminated and the variance of the portfolio reduces to the covariance – i.e. the component of risk that is common to all investments. This is called systematic risk. The Capital Asset Pricing Model of Sharpe [25] and Lintner [26] formalises this idea. It states that the cost of capital for a firm (assuming that it carries no debt) is calculated by summing the return associated with a zero-variance asset (normally referenced to the return on government bonds) along with a premium for the systematic risk, as follows: r¯ i = rf + ˇi (rm − rf ) where r¯ i is the expected return on investment i, rf is the return on a zero-variance asset, ˇi measures the

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See Box 1 for the definition of the IRR.

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Box 1: The main financial term used in the paper (adapted from Gatti [66]) IRR – Internal Rate of Return: the Internal Rate of Return on a project is the rate that, when applied as a discount rate to a stream of projected cash flows, produces a Net Present Value (NPV) of zero. As an alternative, a firm may calculate the NPV with a discount rate set equal to its cost of capital. A positive NPV project increases the value of the firm. When considering an investment, a rational investor will choose those investments whose IRR is above the cost of capital for that project – i.e. the rate of return on financial assets with equivalent risk. IRR is calculated using the cash flows generated by a project. In this paper we consider a blended equity IRR. This IRR is calculated taking into account the cash inflows and outflows for project sponsors in their dual role of equity providers and financiers with subordinated (or junior) loans. WACC – Weighted Average Cost of Capital: this considers both debt capital and blended equity capital, their relative cost (Kd , cost of the debt and Ke cost of the equity) and weight (financial leverage – the degree to which an investor or business is utilising borrowed money). Cost of equity: this is the expected return by equity providers. It is defined, according to the Capital Asset Pricing Model theory, as the sum of (i) the rate of return available on risk-free investments (the risk-free rate), and (ii) a premium for the amount of systematic risk that is involved in the equity investment (the Equity Risk Premium). Beta (ˇ): this is a measure of the volatility, or systematic risk, and is the weighted covariance of the projected excess return on the investment (or a security or a portfolio) with the average excess return on the market as a whole. A beta of 1 indicates that the security’s price will move with the market. A beta of less than 1 means that the security will be less volatile than the market. A beta of greater than 1 indicates that the security’s price will be more volatile than the market.

covariance of returns on investment i with those of the market portfolio divided by the variance of the latter, and rm is the return on the market index. Consequently, in conventional finance theory, the cost of capital for equity is determined by the value of ˇ (beta). This is a measure of the extent to which the returns on the investment are estimated to covary with those of the market portfolio, thus contributing to portfolio risk [25]. In practice, the key element in the process is the identification of a financial asset that falls in the same class of risk as that of the project being evaluated. A common approach is to look at securities issued by firms whose main activity is of a similar nature to the investment being evaluated and use the historical data on the return to estimate beta. This was the approach used in Vecchi and Hellowell [22], in which reference betas were drawn from a range of comparable sectors, including construction, facilities management, real estate and private health care to evaluate equity returns on 10 PFI projects signed by NHS organisations. The “spread” between the cost of equity and the blended equity IRR (i.e. the rate of return on all forms of equity capital – both share capital

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and junior/subordinated debt) expected by investors in their financial models provided the focus of evaluation. On average, across the 10 projects, the spread between equity IRR and the cost of equity was estimated to be within the range 8.46–10.46%, indicating a significant degree of excess return to equity. An alternative approach to evaluating projects in this data set was provided by Hellowell and Vecchi [21], in which cost of equity benchmarks were constructed according to project-specific discount rates used by 10 leading PFI investors in order to estimate the Net Present Values (NPVs) of equity portfolios. Adjusting these for the specific characteristics of the PFI model used in the UK health sector, the authors applied these benchmarks to evaluate projected returns. The focus of evaluation was the Benefit Cost Ratio on equity cash flow (i.e. the ratio of the present value of the revenue cash-flows to that of the initial investment) calculated on the basis of the expected cash flows and discounted using the benchmark cost of equity. Benefit Cost Ratios were found to be in the range 3.62–4.86, implying that the mean present value of the revenue component of cash flow was three-and-a-half to almost five times that on the investment. They interpret these results as indicating that, were an equity investor to sell their equity immediately after financial close, the price would be up to five times greater than the original investment committed. However, interview evidence collected by the UK National Audit Office shows that equity investors evaluate projects using corporate hurdle rates, based on the betas of their core businesses, rather than cost of capital benchmarks appropriate to specific investments [20]. Corporate betas will normally be higher than is appropriate for DBFO projects because the level of systematic risk associated with their ordinary business activities is higher. For example, a recent study of UK construction firms [27] estimated the beta for the industry to be 1.05, implying a level of systematic risk slightly higher than the average for the market index as a whole – which seems implausibly high for PFI/PPP schemes where market risk is largely borne by the public sector [21]. As revenues on a DBFO contract are more likely to vary according to endogenous factors, such as the ability of subcontractors to deliver contracted assets to time and to budget, rather than exogenous factors, such as changes in user demand, interest rates or inflation, the correlation with other asset classes is low. Consequently, it seems likely that a hurdle rate will produce a target return for investments above that implied by the formal CAPM. However, a hurdle rate approach to evaluating equity returns may be an illuminating one for policy-makers. For if it is the case that expected returns exceed cost of capital estimates derived on the basis of corporate hurdle rates, this is very strong evidence of inefficiency in the design of the procurement process, and is indicative of a need for a comprehensive policy response. A non-CAPM analytical framework, based on the use of corporate hurdle rates, was utilised by the National Audit Office in its most recent report on equity returns [20]. This made use of the prices paid by secondary market investors for equity assets relating to three PFI contracts as a baseline for the evaluation of the returns earned by primary investors. This framework explicitly takes into account the

idiosyncratic risks borne by investors. For each contract, the auditors subtracted from the sale price: (i) Estimated changes in the value of equity between financial close and the point of sale, due to changes in expected cash flows and the return required by secondary investors; (ii) Adjustments for the time value of money (i.e. the fact that the secondary market sales took place years later than the initial investment, so the effect of discounting is reduced); (iii) Adjustments related to the fact that by the time of sale some of the cash flows had already been distributed; (iv) Adjustments related to the fact that the primary investor bears certain types of risk (primarily those associated with competitive bidding and building the asset) which the secondary investor does not. Had the primary equity returns been priced fairly, the sum of the values above would equal the cash value of the initial stake by the primary investor. Yet the auditors found that for each project the sale price was roughly 10% higher than the initial stake, implying a level of excess return equal to 1.5% and 2.5% of the annual service charge. These excess returns were identified despite the auditors’ adoption of a highly conservative methodology for assessing the level of construction risk – i.e. the main category of risk borne by primary investors and not by secondary market investors. The report acknowledges that, because most of the construction risk is passed to the construction contractor, the investor’s main construction risk is the risk of the contractor defaulting. The auditors therefore estimated the probability of a default and multiplied it by the estimated impact on equity cash flow. To calculate the probability of default it assessed the construction contractor’s credit default risk by using Standard & Poor’s generic investment grade ratings, assuming that the project had a minimum investment grade rating at financial close of BBB− – i.e. the minimum investment grade rating. Further, it assumed that the construction contractor had a lower-than-minimum investment grade rating of BB+. Standard & Poor’s average one-year global corporate default rates for BB+ rated entities is 0.68% and this was applied to the length of the construction phase to calculate a probability of default. To capture the potential for ratings of contractors to change over the construction phase the auditors’ doubled the probability of default. To calculate the impact of insolvency during the construction phase the auditors assumed a uniform impact over the entire construction period. The size of impact adopted was a 15% increase in build costs and the complete loss of revenue in the first full operational year. The result of this approach is that, for the Queen Alexandra Hospital PFI project, which had a construction cost of £260 million, the estimated impact of default is estimated at some £78 million and the estimated probability of default at 6%, giving an estimated value of construction risk of £4.7 million. This implies a very high rate of contractor default and a willingness among equity investors to put substantial amounts of additional capital into struggling projects. As the auditors acknowledged, neither of

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these assumptions is supported by the experience of actual projects. Given the extreme conservativeness of the auditors’ approach to risk assessment, and the quality of data to which they (as the supreme audit institution of the UK) had access, its conclusion that there is a non-trivial excess return to equity in the projects studied is significant. Although the number of case studies in the report is small, they add to an accumulation of evidence that equity in DBFO projects represents an element of cost inefficiency for the public authorities involved. Below, we make use of the corporate hurdle rate approach, but unlike the above, we retain our focus on CAPM, reflecting its status among practitioners and finance scholars. 3. Institutional background In a typical hospital PFI, the private sector party is constituted as an SPV, which manages and finances the design and build of a new facility [10,21,28]. The financing of the initial capital expenditure (i.e. the capital required to pay start up transaction costs, buy land and construct the facility) is provided by a combination of equity from SPV sponsors (accounting for about 10% of the total investment at the point that contracts are signed) and senior debt from banks or bondholders [29], according to a project financing approach. On completion of construction, the SPV is responsible for maintaining the facility and running a suite of support service functions such as catering, cleaning and laundry, while clinical care remains the responsibility of the NHS commissioner. In return for the capital investment by the SPV, along with its management of the construction process and the provision of buildings maintenance and ancillary services, the NHS pays a periodic “unitary charge” to the SPV, which is typically indexed by some ratio to the Retail Price Index (RPI).8 The contract between the public authority and the SPV formalises the transfer of risk. This follows the Standardisation of PFI Contracts (SoPC) approach adopted in July 1999 [30] and transfers construction and availability risk to the private sector counterparty, as well as the general risks of asset ownership (often managed through insurance provisions) [31]. The full unitary charge is paid from the point at which the building is operational and services are delivered at the specified standard. A delay in payment due to an overrun in construction, or a reduction in payment due to lower-than-agreed service quality, reduces the amount of cash flow available for the SPV to pay its costs and remunerate its share- and debt-holders [10,21]. However, the likelihood that “downside” risks – i.e. those that may adversely affect returns – will impact on the cash-flow to investors (as opposed to other firms within the private sector counterparty) is constrained by risk allocation mechanisms within the SPV contractual structure. Specifically, where the actual costs of design and build,

8 The ratio is either 100% or set to equal the proportion of the unitary charge that relates to those elements of the SPV’s costs that are subject to inflation – in other words, operational, rather than financial, costs.

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maintenance or service provision vary from those projected, these risks are borne by (i.e. “passed through” to) the subcontractors responsible for delivering those functions [32]. In addition, where payment from the public sector is delayed or reduced due to problems in the delivery of the construction works, or poor performance in maintenance or services, the exposure of equity investors is limited by the inclusion of liquidated delay or performance damages in the construction agreement with the contractor and subcontractors [33]. As a result, the perception of major market participants and credit rating agencies involved in analysing the risk profile of projects on behalf of debt investors is that the extent to which transferred risks are borne by equity investors is very limited. More specifically, this is due to: 1. predictable yields, which are attractive relative to the risk [34]; 2. the fact that unitary charge deductions owing to service failures are small and capped so that returns are unlikely to be affected [35]; 3. the solid creditworthy nature of counterparties [i.e. public sector authorities] [36]; 4. the ability to transfer project related risks, including construction and operational risks to the SPV counterparties ([33,37,45]); 5. the low exposure to changes in the economic cycle [17,18,38]; and 6. the low correlation of returns to other investment classes ([34], p. 2; [10,21,39]). 4. Blended equity IRR and sponsors’ WACC: a reference model Our premise is that, in a non-recourse project financing, the lowest acceptable blended equity IRR on sponsors’ investment is the sponsors’ WACC. Given the relatively low level of systematic risk to which equity returns are exposed (and thus the relatively low beta), the WACC of each sponsor must determine the IRR in a competitive market. It follows that the calculation of the “fair” equity IRR of a PPP–PFI project is based on the calculation of the WACC of each sponsor. This logic is summarised in Fig. 1. The interpretation of the figure is intuitive. The SPV manages a project (in this case a hospital project) that – based on the investment costs and the expected cash flows during the operational life – will generate a project IRR. In order for the project to provide an equity return above the sponsor’s cost of capital, the project IRR must be higher than the weighted average cost of capital of the SPV. The SPV’s WACC is, in turn, a function of the cost of the sources of funds used by the SPV: namely, the cost of senior debt, the cost of the subordinated debt and the cost of equity. Now, consider the private sponsors’ standpoint. In Fig. 1, we suppose that three sponsors provide subordinated debt and equity to the SPV. The equity stakes plus the subordinated portion of debt will end up in each sponsor’s balance sheet. The remuneration for these investments is represented by the blended IRR of the SPV. In fact, the SPV bears a cost that represents the return required by the project sponsors.

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Special Purpose Vehicle Senior Debt

Project IRR

A

Sub. Sub Debt

E

SPV’s cost of debt (Kd SPV)

Sponsor 1 Blended equity

D WACC Sponsor 1 Equity in E SPV (+) Sub. credit WACC Sponsor 2

Sponsor 2

Equity in SPV (+) Sub. credit WACC Sponsor n

Blended Equity IRR

D E

Sponsor n

Equity in SPV (+) Sub. credit

D E

Fig. 1. The SPV cost of equity as a function of sponsors’ WACC. This figure illustrates the main intuition behind our proposed methodology. The SPV manages a privately-financed hospital that generates a given project IRR. In order for the project to provide an equity return above the sponsor’s cost of capital, the project IRR must be higher than the WACC of the SPV. The SPV’s WACC is, in turn, a function of the cost of the sources of funds used by the SPV (senior debt, subordinated debt and equity). In the figure, we suppose that three sponsors provide subordinated debt and equity to the SPV. The equity stakes plus the subordinated portion of debt end up in each sponsor’s balance sheet. The remuneration for these investments is represented by the blended IRR of the SPV. Since sponsors must assess whether or not the project will increase the wealth of their shareholders, they will compare the blended equity IRR with their respective WACC. If this difference is positive, the project is economically attractive for each of the sponsors. Source: adaptation from Gatti [66].

Since sponsors must assess whether or not the project will increase the wealth of their shareholders, they will compare the blended equity IRR with their corporate WACC. If the difference is positive, the project enhances shareholder wealth. Both share capital and subordinated debt provided by SPV sponsors are financed with a combination of debt and equity that is linked to the cost of capital of each of the sponsors. And, as these projects are “non-recourse” (such that the liability of the sponsor is limited to the amount of their equity committed to the project), and the amount of equity committed is limited (due to a debt-heavy capital structure, the investment by each sponsor in the SPV has a marginal impact (i.e. contamination risk is low, Esty [40]) on the overall value of the investment company assets (and thus on its WACC). This reinforces the premise that the comparison of blended equity IRR and WACC of each sponsor is a good proxy for the value extraction that the private sector imposes on public entities. Although this line of reasoning is simple and intuitive, there are grounds for caution must be given in the interpretation of results. In particular, we highlight two issues:

1. Our analysis considers only the existence of a positive spread between equity IRR and the WACC of each project sponsor. In principle, this spread could reflect a high level of risk borne by the private sponsor, rather than a high degree of rent extraction that the private sector yields in these projects [41,42].

2. The spread does not take into account any extra profit margin that sponsors can extract from the project. Corielli et al. [32] demonstrate that many project finance deals are sponsored by industrial counterparties that invest equity in the SPV and provide additional services (for example, construction, operation and maintenance.9 Not only can the private sector extract value from the procurement authority by imposing a blended equity IRR higher than its own WACC, but it can also get additional value by imposing excessively high prices for the construction of the facilities or the provision of these operational services to the SPV.

While these issues are difficult to be resolved empirically due to the absence of data – ideally, one would need access not only to the financial model with which the business plan of the SPV has been prepared but also key data regarding profit margins of every sponsor involved in the deal on an ongoing basis – it is important to recognise that at least point 1 is less of a methodological concern for our paper, given the aforementioned risk mitigation strategies undertaken by SPV shareholders and through the standardised risk-allocation model adopted in the UK. The second

9 In the case of financial sponsors (e.g. infrastructure funds) this is obviously not the case. Such investors do not extract any value from the SPV other than the spread between the Blended Equity IRR and their WACC.

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point may indicate that our assessment of the blended equity spread over WACC is subject to underestimation. 5. Data and methodology Our analysis is based on a sample of 77 PFI projects (with a total capital value of £7.3 billion), signed between 1997 and 2011 by NHS authorities and now in the majority of cases operational. Basic project data have been extracted from the HM Treasury database [4].10 Equity IRRs were provided to the authors in a request made under the UK’s Freedom of Information Act [43], alongside information contained within the Full Business Cases of PFI schemes in England and Scotland that have signed since this date. Table 1 shows the main features of the projects in this data set. In order to derive the WACC of the project sponsors of our sample, we collected data relating to the cost of equity (Ke ) and the cost of the debt (Kd ) of each company. The following subsections illustrate the methodological steps that we have applied here. 5.1. Estimation of sponsors’ cost of equity

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performance over time and a regression time period set equal to the decade prior to the closing of each specific PPP–PFI project. In order to minimise the bias of Beta coefficients appraised with the historical returns regression approach, we use the “adjusted”13 value provided by Bloomberg instead of the “raw” variant. b. Beta coefficients for unlisted companies14 are calculated as the average of comparable companies (see Table 2) chosen according to the following steps: i. Selection of comparable companies, applying the Bloomberg function and a criteria incorporating: nature of core business, reference market and geographical presence using official information released by each company websites and Hoover’s Online. ii. Calculation of levered Beta for the derived comparables, using Bloomberg and then de-leveraging these to calculate an average beta to be applied to the group of unlisted sponsors. iii. Calculation of the re-leveraged betas resulting, using the sponsor’s capital structure at the financial close of the 77 PFI projects under assessment.

Using CAPM, we estimate the components of the cost of equity as follows.

The resulting cost of equity for our sample is reported in Table 3.

1. The risk free rate (rf ) figures are calculated as the average of the gross return rates,11 expected at each project’s closing date, on UK government bonds (gilts) maturing in 15, 20, 25 and 30 years. 2. The market risk premium (rm − rf ) is assessed through a conventional approach [44], according to which an average of the historical market index returns over the relevant risk free asset is the best unbiased estimation of the market risk premium expected by rational investors, at least for strong and mature stock markets. The market risk premium used for the sample is 5.10%, as appraised by Ibbotson and associates. This value represents the arithmetic mean of historical returns of UK stock market over long term government gilts. These are obtained by regressing annual data over a time period of almost 100 years (1900– 2003).12 3. Beta coefficients have been found using two different approaches: one for listed sponsors and one for unlisted ones. a. Beta coefficients for listed sponsors are extrapolated from Bloomberg, as regressions of sponsors’ share monthly extra- returns over market indexes; with the FTSE UK Index as a proxy of UK market

5.2. Estimation of sponsors’ cost of debt

10 The HM Treasury database contains for each project the following data: capital investment value, contract length, the name of the SPV and a list of project sponsors (SPV shareholders). 11 Daily prices and yields, as reported by the UK Debt Management Office (http://www.dmo.gov.uk/index.aspx?page=Gilts/Daily Prices). 12 The soundness of Ibbotson & Associates’ estimation is confirmed by both statistical research (e.g. Dimson et al. [55] estimate an MRP for UK of 5.29%) and qualitative work (e.g. a recent survey conducted by Fernàndez et al. [57] found that the average market risk premium used for UK based analysis is 5.3%).

The cost of debt is calculated as the average yields on corporate bonds maturing in five to seven years (a time horizon in line with the average duration of project loans) from the contract signature date of the projects under assessment, issued by organisations with the same creditworthiness (as indicated by credit rating) of the sponsors of our sample. It is estimated through the two following steps.15 First, the sponsors’ rating is assessed, using Bloomberg. With reference to unrated companies, a proxy creditworthiness merit class (according to the Standard & Poor’s convention) comprised between BBB+ and BBB− is used. Such a hypothesis takes into account the intrinsic features of PFI/PPP projects, which are only concluded among sound and financially robust counterparties, for whom a rating class comprised between BBB+ and BBB− is likely appropriate [32]. Furthermore, debt investments have been shown

13 Bloomberg uses the Blume’s adjustment technique [67], according to which historical betas follow a mean reverting path around market beta: ˇadjusted = 2/3 ˇhistorical + 1/3 ˇmarket = 2/3 ˇhistorical + 1/3. 14 ABN AMRO (delisted on 24 April 2008, following the bank’s takeover by Fortis, Royal Bank of Scotland), Anglian Water, Bank of Scotland, Clugstons, Ideal Cleaning Services, Innisfree, Jarvis, John Laing, Robert McAlpine, Ryhurst, Shepherd Construction. 15 A clarification related to banking sponsors is essential: in liquid money markets, with no financial constraint affecting banks in their borrowing/lending activity, banks fund themselves in the overnight interbank market lending and borrowing at interbank leading rates like Libor/Euribor. As a consequence, a possible alternative methodology could be the use of a weighted marginal (instead of average) cost of funding. We do not report the results for this alternative but these are available upon request.

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Contract date

Contract length

CAPEX

Blended equity IRR

Norfolk and Norwich

Octagon Healthcare (Norwich) Limited Hull Maternity Development Ltd Ayrshire Hospitals Limited

Norfolk & Norwich University Hospital Maternity and acute development – Hull Royal Infirmary Crosshouse Maternity Hospital

3i Group, Barclays, Innisfree, John Laing, Serco Group ABN AMRO, Shepherd Construction

09/01/98

35

158

19.00%

04/05/01

30

22

13.00%

07/10/08

30

20

16.00%

Health Management (Carlisle) plc Consort Healthcare (Edinburgh Royal Infirmary)

Cumberland Infirmary Redevelopment New Royal Infirmary of Edinburgh & University of Edinburgh Medical School Neath Port Talbot Hospital

Allied Irish Banks Plc, Dawn Construction, FES Ltd Amec, Interserve

01/11/97

30

66.7

16.59%

Anglian Water, Balfour Beatty, Royal Bank of Scotland

21/08/98

30

180

19.71%

Baglan Moor Healthcare

13/05/04

30

66

14.88%

Redevelopment of Bishop Auckland General Hospital Redevelopment of Pinderfields General Hospital & Pontefract General Infirmary Wishaw General Hospital

Balfour Beatty, Royal Bank of Scotland Balfour Beatty, Royal Bank of Scotland

10/03/98

30

48

18.11%

29/06/11

35

311

15.31%

Bank of Scotland, Robert McAlpine

01/07/98

27.5

100

15.00%

Craig Phadrig Psychiatric Unit (New Craigs) Nuffield Orthapaedic NHS Trust

Bank of Scotland

01/04/03

25

16.5

16.02%

Barclays, Semperian PPP Investment Partners Barclays

21/04/06

30

37

13.42%

31/03/07

25

10

15.00%

Barclays

09/07/08

32

58

13.50%

Barclays, G4S, Impregilo SpA

02/12/09

30

129

14.00%

Avon & Western Wiltshire: Modernising Mental Health expanding regional Secure Services Cardiothoracic & Neurosciences Development Tiverton & District Community Hospital New Hospital Development

BDP Holdings Ltd, JEIB Ltd, Semperian PPP Investment Partners, Staveley Industries BIIF Bidco Ltd

02/03/08

30

83

14.69%

13/03/04

32

46.1

18.00%

BIIF Bidco Ltd

01/04/06

30

10

14.14%

Bouygues UK Ltd

03/08/11

31

129

14.75%

Queen Mary’s Hospital Roehampton – Redevelopment Project Wharfedale General Hospital Development Larkfield Geriatric Assessment Facility

Bovis Lend Lease Holdings Ltd

07/05/08

30

75.4

13.27%

Bovis Lend Lease Holdings Ltd

16/10/08

27

17

13.00%

Canmore Partnership, Quayle Munro Holding Plc, UME Group

01/06/03

25

10

16.00%

Hull & East Yorkshire NHS Ayrshire & Arran North Cumbria NHS Lothian

Baglan Moor Healthcare Ltd

Abertawe Bro Morgannwg Health Board Durham & Darlington

Criterion Healthcare plc

Mid Yorkshire Hospitals NHS Trust

Consort Healthcare (Mid Yorkshire)

NHS Lanarkshire (Wishaw)

Summit Healthcare (Wishaw) Ltd Craig Phaidrig Healthcare Limited

NHS Highland Nuffield Orthopaedic Centre NHS Trust NHS Tayside

JarvisCare Dundee Ltd.

The Lewisham Hospital NHS Trust Oxford Radcliffe Hospitals NHS Trust Avon & Wiltshire Mental Health Partnership NHS Trust

Ravensbourne Health Services Ltd OCHRE Solutions Ltd.

St George’s Healthcare NHS Trust Devon PCT

Blackshaw Healthcare Service Limited

North Middlesex University Hospital NHS Trust Wandsworth PCT

Bouygues Consortium (Bynorth) Catalyst Healthcare (Roehampton) Limited

Leeds Teaching Hospitals NHS Trust NHS Greater Glasgow & Clyde

Ryhurst First Priorities Ltd

Carseview Psychiatric Unit at Ninewells University Hospital Lewisham – Redevelopment Churchill Hospital PFI Project

ARTICLE IN PRESS

Sponsors

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Project name

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SPV

V. Vecchi et al. / Health Policy xxx (2013) xxx–xxx

Commissioning authority

8

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Table 1 Sample key data. This table presents data regarding the sample of 77 PFI hospitals commissioned by National Health Service (NHS) organisations in the United Kingdom with a total capital value of £7.3 billion, signed between 1997 and 2011. 60 of them are operational and 17 under construction. The capital value of projects is in £million.

HEAP-2953; No. of Pages 28

NHS Greater Glasgow & Clyde (SGH)

Stobhill Healthcare Facilities Lmiited Town & Country Hospitals

Arden Partnership

Worcestershire Acute Hospitals NHS Trust East Lancashire Hospitals NHS trust Kirklees PCT

Catalyst Healthcare (Worcester) plc Catalyst Healthcare (Burnley) Ltd NK Facilities Ltd

Nottingham University

Century Health (Nottingham) Ltd

Barts & the London NHS Trust

Capital Hospitals

Maidstone and Tunbridge Wells NHS Trust NHS Forth Valley

NHS Fife

Kent & Sussex Weald Hospital Company Robertson Health (Clackmannanshire) Prime Care Solutions (Kingston) Ltd Morrison

County Durham PCT

Grosvenor House Group

Kingston Hospital NHS Trust

The Hospital Company

Brent PCT Sandwell/Birmingham West Middlesex University Hospital NHS Trust East Lancashire Hospitals NHS trust North West London Hospitals NHS trust Buckinghamshire Hospitals NHS trust North Middlesex University Hospital NHS Trust

Bywest Limited Consort Healthcare (Blackburn) Limited Bouygues Enterprise Healthcare Limited Bouygues Consortium (Bynorth)

North Kirklees Primary Care Centres Queens Medical Centre Nottingham University NHS Trust ENT and Opthalmology Redevelopment of the Royal Hospital of St Bartholomew and the Royal London Hospital Pembury Hospital Redevelopment Clackmannanshire Community Health Services Project Redevelopment of Kingston Hospital St Andrews Community Hospital & Health Centre PFI Lanchester Road Hospital & Stanley Primary Care PPP Willesden Community Hospital – Mental Health Facility Birmingham Ambulatory Care Centre West Middlesex University Hospital DBFO Royal Blackburn Hospital – Delivering a Single Site Acute Hospital Central Middlesex Hospital Modernisation Stoke Mandeville Hospital – Redevelopment Project North Middlesex University Hospital NHS Trust – New Hospital Development

Canmore Partnership, Quayle Munro Holding Plc, UME Group Carillion Plc, UME Group

15/07/09

35

17

15.00%

01/08/03

28

11

16.00%

Carillion Plc

02/12/09

31.5

256

14.90%

Carillion Plc, Costain Group Plc

02/05/11

30

29

14.25%

Catalyst Investment Holdings Ltd

19/03/03

30

86.6

16.00%

Catalyst Investment Holdings Ltd

14/10/07

30

30.1

14.89%

Chiltern Securities Ltd

22/04/08

30

25

15.00%

Bank of Scotland, Clugstons, Ideal Cleaning Services

25/05/99

30

16.6

15.00%

Commonwealth Bank of Australia, Innisfree, Skanska AB

28/04/10

35

1149

17.00%

Commonwealth Bank of Australia, Interserve, John Laing Commonwealth Bank of Australia, John Laing Costain Group Plc, Infrastructure Investors Ltd Dutch Infrastucture Fund PPP UK Ltd, Galliford Try Plc Grosvenor House Group Plc, Quayle Munro Holding Plc, UME Group Guildhouse Holdings

27/03/11

30

304

14.00%

17/05/11

28

18

15.60%

24/11/08

30

33

15.02%

22/11/11

30

27

16.00%

02/05/11

30

30

14.00%

06/12/06

30

21

14.89%

HSBC, Jarvis

19/12/02

30

26.1

14.00%

HSBC

31/01/05

32.65

60

15.30%

Balfour Beatty, HSBC

10/07/07

35

109.6

14.00%

HSBC

07/11/07

30

69.3

15.00%

HSBC, Sodexo

22/05/08

30

46.6

15.00%

HSBC

03/08/11

31

129

14.75%

ARTICLE IN PRESS

Portsmouth Hospitals NHS trust Lincolnshire Teaching PCT

Greater Glasgow Health Board – Stobhill Psychiatric Unit Southern General Hospital Geriatric Medicine & Assessment Facility Queen Alexandra Hospital Redevelopment Three Shires Hospitals PFI Project – Spalding Community Hospital Project Worcester Acute Hospitals NHS Trust New District General Hospital Burnley Hospital Phase V

G Model

NHS Greater Glasgow & Clyde

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Table 1 (Continued)

9

Project name

Sponsors

Contract date

Contract length

CAPEX

Blended equity IRR

Mid Essex Hospital Services NHS Trust NHS Dumfries & Galloway

BY Chelmer

Broomfield Hospital

HSBC

07/12/11

32

148.1

12.65%

Canmore Partnership

Provision of Day Care and Maternity Services St David’s Community Hospital Royal Wolverhampton Hospitals NHS Trust Radiology unit Specialist Services Reprovision at John Radcliffe Hospital Barnet General Hospital Modernisation South Buckinghamshire NHST Site Rationalisation Princess Royal University Hospital

i2 Group Ltd

01/06/03

30

10

16.02%

Impregilo SpA, Macob Impregilo SpA, Semperian PPP Investment Partners Infrastructure Investments General Partner Ltd, Royal Bank of Scotland Infrastructure Investors Ltd

01/04/04 21/03/06

31 30

13.8 12.8

17.00% 10.66%

20/12/07

30

02/02/03

33

54.3

18.00%

Innisfree

15/12/01

30

45.1

20.70%

Innisfree, Semperian PPP Investment Partners Innisfree, Semperian PPP Investment Partners Integral UK Ltd, Kajima, Nisbet LLP, Westwind Capital Partners Ltd

20/11/02

30

117.9

23.00%

21/11/11

34

169

15.00%

30/06/10

30

32

16.00%

James Walker (Leith) Ltd

24/12/08

30

18.7

16.02%

Queen Elizabeth Hospital

Innisfree, John Laing

02/07/02

30

96.1

20.00%

Redcar and Cleveland Primary Care Trust New Hospital North Staffordshire Acute Psychiatric Unit Whitehills Health and Community Care Centre Royal Alexandra Hospital for Sick Children Hairmyres Hospital

John Laing, Ryhurst

02/04/11

30

40

13.65%

John Laing, Sodexo, UME Group

02/06/11

30

28.1

15.00%

Johnson Service Plc

01/08/03

30

12

15.00%

BDP Holdings Ltd, JEIB Ltd, Kajima, Staveley Industries Kier, Innisfree

11/06/08

30

36

13.00%

20/03/98

30

68

23.00%

HSBC, Kier

28/03/10

30

36.1

14.50%

Kintra Ltd

14/02/02

25

3.3

15.99%

Land Securities Group Plc, Semperian PPP Investment Partners Lloyds Banking Group

01/04/03

30

64.1

18.10%

09/10/06

28

38.4

14.38%

South West Essex Teaching PCT

Nottinghamshire Healthcare NHS Trust South London NHS Trust (Queen Elizabeth) Redcar and Cleveland PCT North Staffordshire NHS Trust/Stoke PCT NHS Tayside Brighton & Sussex University Hospitals NHS Trust NHS Lanarkshire (Hairmyres)

IMC St. David’s Ltd

Carillion Metier Healthcare Limited United Healthcare (South Buckinghamshire) Ltd United Healthcare (Farnborough Hospital) Ltd The Walsall Hospital Company Brentwood Healthcare Partnership Limited

Meridian Hospital Company PLC Ryhurst McAlpine

Robertson Health (Forfar) Holdings Limited Children’s Ark Partnerships Ltd

Ipswich Hospital NHS trust

Prospect Healthcare (Hairmyres) Limited Prospect Healthcare

Aneurin Bevan Health Board

Honeywell Control Systems Ltd

Hereford Hospitals NHS Trust

Mercia Healthcare Ltd

The Whittington Hospital NHS Trust Newham University Hospital NHS Trust DHSSPS – Western HSC Trust NHS Greater Glasgow & Clyde

Walsall Hospitals NHS Trust – Redevelopment Project South West Essex Primary Care Trust – Brentwood Community Hospital Elderly & Mental Health Units

Garrett Anderson Treatment and Critical Care Centre Neville Hall Hospital Energy Management Project Hereford County Hospital

Whittington Hospital

Northern Ireland Health Group (NIHG) Robertson Health (Gartnavel) Limited

Acute Services Reprovision at Newham General Hospital Acute Hospital For The South West (Enniskillen) Gartnavel Royal Hospital

134

15.30%

John Laing, Newham Investment Company Ltd NIHG South West Health

28/01/08

35

32

14.97%

21/05/11

30

223.9

14.00%

Barclays, Robertson Group

01/12/09

30

17

15.10%

ARTICLE IN PRESS

Cardiff & Vale Health Board The Royal Wolverhampton Hospitals NHS trust Oxford Radcliffe Hospitals NHS trust Barnet & Chase Farm Hospitals NHS trust Buckinghamshire Hospitals NHS trust South London NHS Trust (Bromley) Walsall Hospitals NHS Trust

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SPV

G Model

Commissioning authority

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10

Table 1 (Continued)

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Leeds Teaching Hospitals NHS trust

Catalyst Healthcare

East/North Hertfordshire

Young Herts

Dartford and Gravesham NHS Trust Hampshire PCT

The Hospital Company (Darent) Ltd Ryhurst (New Forest) Ltd

Northamptonshire Teaching PCT

United Medical Enterprises

University Hospital Coventry & Warwickshire NHS Trust Barking, Havering & Redbridge Hospitals NHS trust St Helens Hospitals NHS Trust

The Coventry & Rugby Hospital Company Catalyst Healthcare (Romford) Ltd NewHospitals (St Helens and Knowsley) Limited

NHS Highland (Mid Argyll) NHS Greater Glasgow & Clyde (Stobhill & Victoria)

Canmore

New Acute Hospital for Forth Valley St James University Hospital & Leeds General Infirmary Redevelopment Hertfordshire County Council – Young Herts Childrens, Schools & Families PFI Project Darent Valley Hospital Lymington New Forest Hospital Daventry and South Northants Primary Care Trust Community Hospital Coventry New Hospitals Project Oldchurch Hospital Site Rationalisation – Queens Hospital St Helens and Whiston Hospitals Strategic Redevelopment Project Mid Argyll Community Hospital Greater Glasgow NHS Board – Phase 1: Stobhill and Victoria Ambulatory Care and Diagnostic Hospitals

Robertson Group

11/07/11

30

293

15.00%

Royal BAM Group

21/09/06

30

265.02

15.02%

Barclays, Ryhurst

21/07/00

25

24.6

15.00%

Innisfree, Semperian PPP Investment Partners Semperian PPP Investment Partners Semperian PPP Investment Partners

31/07/01

32

94

13.98%

19/11/08

30

36

14.73%

04/03/09

30

28.02

13.17%

Innisfree, Skanska AB

28/11/06

35

378.9

15.00%

Sodexo, Uberior Infrastructure Investors Ltd Innisfree, Taylor Woodrow Construction Ltd Canmore Partnership, Quayle Munro Holding Plc, UME Group UME Group

16/01/08

36

304

15.16%

02/06/10

35

338

14.75%

05/02/08

31

24/08/10

30

19.2 178

15.00% 15.10%

Source: HM Treasury [5] and Department of Health [43].

ARTICLE IN PRESS

NHS Forth Valley

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Table 1 (Continued)

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Table 2 comparable companies for the unlisted sponsors of the sample. This table presents comparable companies for unlisted sponsors. Comparable firms are used in order to derive beta coefficients for unlisted companies. Bold fonts indicate unlisted sponsors; plain text refers to listed comparables. Catalyst Investment Holding Ltd 3i Group Plc Aberdeen Asset Management Plc Arbuthnot Securities Ltd Brewin Dolphin Holdings Plc F&C Asset Management Plc HgCapital Plc HSBC ICAP Plc Investec Man Group Plc Numis Corporation Plc Panmure Gordon & Co. Plc Rathbone Brothers Plc Schroders Plc St. James’s Place Plc Standard Chartered Plc The Evolution Group Plc Walker Crips Group Plc Anglian Water Dee Valley Group Plc Pennon Group Plc Severn Trent Plc United Utilities Group Plc Jarvis Atkins (WS) Plc Balfour Beatty Plc Carillion Plc Serco Group Plc WSP Group Plc Clugstons Balfour Beatty Plc Billington Holdings Plc Carillion Plc Costain Group Plc Galliford Try Plc Gleeson (M.J.) Group Plc Kier Group Plc Morgan Sindall Group Plc North Midland Construction Pochins Plc Renew Holdings Plc JEIB Allianz Aon Arthur J. Gallagher & Co Assicurazioni Generali Aviva Plc AXA UK Lloyds Swiss Reinsurance Company Integral UK Ltd Babcock International Group Plc Berendsen Plc Johnson Service Group Plc May Gurney Mears Group Plc Mouchel Group Serco Group Sodexo Ideal Cleaning Services Babcock International Group Plc Berendsen Plc Johnson Service Group Plc

Innisfree – BIIF Bidco Ltd Uberior Infrastructure Investors Ltd Dutch Infrastucture Fund PPP UK Ltd Infrastructure Investments General Partner Ltd Infrastructure Investors Ltd Uberior Infrastructure Investors Ltd Newham Investment Company Ltd Westwind Capital Partners Ltd Semperian PPP Investment Partners 3i Infrastructure Plc Brookfield Infrastructure Partners Cohen & Steers Infrastructure funds DWS RREEF Global infrastructure ING Infrastructure Macquarie Infrastructure Partners Robert McAlpine Balfour Beatty Plc Billington Holdings Plc Carillion Plc J Smart & Co May Gurney Serco Group Plc Severfield – Rowen Plc Nisbet LLP Amec Billington Holding May Gurney Mouchel Group Plc Quayle Munro ABN AMRO – Bank of Scotland Allied Irish Banks Plc Bank of Ireland Barclays HSBC Investec Plc Irish Life & Permanent Plc Lloyds Banking Group Plc Old Mutual Plc RBS Schroders Plc Standard Chartered Plc John Laing – Sheperd Construction Balfour Beatty Plc Bililngton Holdings Plc Carillion Plc Galliford Try Plc Hyder Consulting Plc Mouchel Group Plc Renew Holdings Plc Severfield – Rowen Plc Bovis Lend Lease Amec Fluor Corporation Foster Wheeler AG May Gurney Morgan Sindall Group Plc Mouchel Group Plc Serco Group Plc Baglan Moor – Kintra Ltd – NIHG Atkins (WS) Plc Carillion Plc Galliford Try Plc Kier Group Plc Serco Group Plc

BDP Holdings – Dawn Construction – FES Ltd Bouygues (UK) Ltd – James Walker (Leith) Ltd Macob – Robertson Group – Taylor Woodrwo Construction Ltd Atkins (WS) Plc Balfour Beatty Plc Billington Holdings Plc Carillion Plc Costain Group Plc Galliford Try Plc Gleeson (M.J.) Group Plc Hyder Consulting Plc J Smart & Co Kier Group Plc May Gurney Morgan Sindall Group Plc Mouchel Group Plc North Midland Construction Pochins Plc Renew Holdings Plc Serco Group Plc Severfield – Rowen Plc WSP Group Plc i2 Group Ltd BMC Software Compuware Corporation IBM Software Microsoft Oracle Corporation Guildhouse Holdings 3i Infrastructure Plc Amec Brookfield Infrastructure Partners Cohen & Steers Infrastructure funds DWS RREEF Global infrastructure Foster Wheeler AG ING Infrastructure Macquarie Infrastructure Partners May Gurney Mouchel Group Plc UME Group Atkins (WS) Plc Carillion Plc Galliford Try Plc Kier Group Plc May Gurney Mouchel Group Serco Group Plc WSP Group Plc Staveley Industries Amec Foster Wheeler AG May Gurney Mears Group Plc Morgan Sindall Group Plc Mouchel Group Plc Serco Group Plc Sodexo Ryhurst Atkins (WS) Plc Carillion Plc Galliford Try Plc Kier Group Plc Serco Group Plc WSP Group Plc

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13

Table 2 (Continued) Mears Group Plc

WSP Group Plc

Chiltern Securities Morgan Sindall Group Plc Pochins Plc Renew Holdings Plc Capital Shopping Centres Group Plc The British Land Company Plc Land Securities Group Plc Hammerson Plc Great Portland Estates Plc Derwent London Plc

Canmore Partnership Balfour Beatty Plc Carillion Plc Costain Group Plc Galliford Try Plc Gleeson (M.J.) Group Plc J Smart & Co May Gurney Mears Group Plc Morgan Sindall Group Plc North Midland Construction Pochins Plc Renew Holdings Plc

Grosvenor House Group Plc 3i Infrastructure Plc Brookfield Infrastructure Partners Capital Shopping Centres Group Plc Cohen & Steers Infrastructure funds Derwent London Plc DWS RREEF Global infrastructure Great Portland Estates Plc Hammerson Plc ING Infrastructure Land Securities Group Plc Macquarie Infrastructure Partners The British Land Company Plc

Source: Our analysis, based on data from Bloomberg.

to be very safe in European PFI/PPP programmes. In a recent study using a sample analysis of 800 PFI/PPP loans, Moody’s found a 10-year cumulative default rate of 3.83%, and a maximum 0.5% probability of default in any given year during the first 10 years of the deal, after which default rates declines to zero [45]. Calculation of the cost of debt using the GBP Euro BFV Curve Bloomberg function,16 as an average on the five and seven year debt maturities. The results for our sample are reported in Table 4. 5.3. Capital structure of project sponsors As a final step, we collected data on the capital structure of project sponsors. For listed companies, the data were retrieved directly from Bloomberg. For unlisted sponsors, we instead applied an average value of comparable companies’ capital structure ratios as a reasonable proxy of the typical debt/equity ratio in a given industry (see Table 5, column D/D + E). 6. Results and discussion By applying the methodology explained in Section 5, Table 5 presents, for each sponsor, the WACC at the contract signature date. The average difference between the WACC and the blended equity IRR is 9.27%, with a minimum of 4.47% for Impregilo in the Royal Wolverhampton Hospitals NHS Trust Radiology unit project and a maximum of 17.43% for Semperian PPP Investment Partners and Innisfree in the Princess Royal University Hospital project. The results confirm that the sponsors of the PFIs analysed have extracted a higher return than their cost of capital. Furthermore, it is notable that the shareholders involved in our sample are also involved in other PFI projects contracted by NHS organisations [4], and across the programme as a whole the mean equity IRRs is 15.11%. These results are striking given that given that PFI is perceived by major PFI practitioners as a relatively lowrisk investment for equity investors [46], being backed

16 With reference to unrated companies the rating inserted as input of the GBP Euro BFV Curve function is BBB+/BBB−.

by government support, with a stable long-term yield and with many of the major risks shifted from investors to construction and facilities management subcontractors [10,21]. Unlike other areas of project finance, PFI has very limited exposure to market risks [36] and projects are structured so as to be highly robust to a wide range of potentially severe adverse events [45]. Although our results cannot be considered statistically significant, the methodology we have outlined can be applied across countries and sectors, contributing to the development of knowledge on this topic and supporting the co-evolution of private and public stakeholders in health systems towards a more equitable and sustainable application of PFI. The method outlined in this paper takes account of the corporate hurdle rate approach which, according to survey evidence from the National Audit Office, is the dominant capital budgeting practice among equity investors. In doing so, we seek to establish whether excess equity returns are present even on this method which in most cases will over-estimate the appropriate risk premium in comparison with a benchmark related to the systematic risk associated with the project. Our results show a consistent pattern of excess profitability across the sample period with the average blended equity IRR some 9.3% above the average benchmark WACC. While the actual corporate hurdle rates applied by investors are not in the public domain (so that we have to make assumptions about the parameter values within the CAPM benchmarks), the scale of the average excess return we have identified implies that the source of inefficiency in pricing does not originate in any difference between our methods and the project evaluation techniques of investors. In our view, the most likely source of excess return is the lack of competition in the market for contracts. Therefore, eliminating complexities in procurement should be a key focus of policy. As noted in Section 1 to this paper, where capital financing processes are inefficient, resources must move from the provision of clinical care to infrastructure spending, and the amount of additional investment that can take place in the health system is curtailed. Had financing for the 77 projects examined here been available at the sponsors’ Weighted Average Cost of Capital rather than the Equity IRR, the unitary charges on each of the 77 projects would

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Table 3 The cost of equity (Ke ) of the PFI sample sponsors. This table shows the beta coefficients for the sponsors of the 77 NHS privately-financed projects. Beta coefficients for listed sponsors are extrapolated from Bloomberg, as regressions of sponsors’ share monthly extra-returns over market indexes; with the FTSE UK Index as a proxy of UK market performance over time and a regression time period set equal to the decade prior to the closing of each specific PPP–PFI project. We use the Blume’s [67] adjusted value provided by Bloomberg. For unlisted sponsors, we derive the betas by resorting to comparable listed firms. Comparables have been selected according to the following steps: (1) we apply the Bloomberg function and a criteria incorporating: nature of core business, reference market and geographical presence using official information released by each company websites and Hoover’s Online; (2) we calculate levered Beta for the derived comparables, using Bloomberg and then we de-leverage these to calculate an average beta to be applied to the group of unlisted sponsors; (3) we calculate the re-leveraged betas using the sponsor’s capital structure at the financial close of the PFI projects under assessment. Sponsor

Project

Contract date

rf

b

rm − rf

Ke

3i Group ABN AMRO

Norfolk & Norwich University Hospital Maternity and acute development – Hull Royal Infirmary Crosshouse Maternity Hospital Cumberland Infirmary Redevelopment New Royal Infirmary of Edinburgh & University of Edinburgh Medical School Neath Port Talbot Hospital

09/01/98 04/05/01

5.10% 4.60%

1.29 1.48

5.10% 5.10%

11.68% 12.15%

07/10/08 01/11/97 21/08/98

4.36% 5.29% 5.10%

1.02 1.28 0.81

5.10% 5.10% 5.10%

9.56% 11.84% 9.23%

13/05/04

4.90%

0.86

5.10%

9.29%

Redevelopment of Bishop Auckland General Hospital New Royal Infirmary of Edinburgh & University of Edinburgh Medical School Royal Blackburn Hospital – Delivering a Single Site Acute Hospital Redevelopment of Pinderfields General Hospital & Pontefract General Infirmary

10/03/98 21/08/98

5.10% 5.10%

0.94 1.01

5.10% 5.10%

9.87% 10.25%

10/07/07

4.90%

0.94

5.10%

9.67%

29/06/11

4.15%

0.98

5.10%

9.12%

Wishaw General Hospital Queens Medical Centre Nottingham University NHS Trust ENT and Opthalmology Craig Phadrig Psychiatric Unit (New Craigs)

01/07/98 25/05/99

5.10% 4.58%

2.09 2.56

5.10% 5.10%

15.77% 17.62%

01/04/03

4.60%

1.28

5.10%

11.15%

Norfolk & Norwich University Hospital Hertfordshire County Council – Young Herts Childrens, Schools & Families PFI Project Nuffield Orthapaedic NHS Trust Carseview Psychiatric Unit at Ninewells University Hospital Lewisham – Redevelopment Churchill Hospital PFI Project Gartnavel Royal Hospital

09/01/98 21/07/00

5.10% 4.48%

1.14 1.54

5.10% 5.10%

10.90% 12.31%

21/04/06 31/03/07 09/07/08 02/12/09 24/08/10

4.25% 4.43% 4.60% 4.12% 4.02%

1.37 1.36 1.33 1.53 1.54

5.10% 5.10% 5.10% 5.10% 5.10%

11.25% 11.37% 11.38% 11.94% 11.85%

Avon & Western Wiltshire: Modernising Mental Health expanding regional Secure Services Royal Alexandra Hospital for Sick Children

02/03/08

4.39%

0.92

5.10%

9.06%

11/06/08

4.62%

0.89

5.10%

9.17%

BIIF Bidco Ltd

Cardiothoracic & Neurosciences Development Tiverton & District Community Hospital

13/03/04 01/04/06

4.54% 4.10%

1.07 1.14

5.10% 5.10%

10.01% 9.92%

Bouygues UK Ltd

New Hospital Development

03/08/11

4.02%

1.31

5.10%

10.69%

Bovis Lend Lease Holdings Ltd

Queen Mary’s Hospital Roehampton – Redevelopment Project Wharfedale General Hospital Development

07/05/08

4.55%

0.97

5.10%

9.51%

16/10/08

4.50%

1.02

5.10%

9.68%

Canmore Partnership

Larkfield Geriatric Assessment Facility Mid Argyll Community Hospital Greater Glasgow Health Board – Stobhill Psychiatric Unit

01/06/03 05/02/08 15/07/09

4.27% 4.34% 4.37%

0.63 0.77 0.80

5.10% 5.10% 5.10%

7.48% 8.25% 8.45%

Carillion Plc

Southern General Hospital Geriatric Medicine & Assessment Facility Queen Alexandra Hospital Redevelopment Three Shires Hospitals PFI Project – Spalding Community Hospital Project

01/08/03

4.66%

0.91

5.10%

9.29%

02/12/09 02/05/11

4.12% 4.18%

0.92 1.02

5.10% 5.10%

8.82% 9.39%

19/03/03

4.32%

1.10

5.10%

9.94%

Allied Irish Banks Plc Amec Anglian Water Baglan Moor Healthcare Balfour Beatty

Bank of Scotland

Barclays

BDP Holdings Ltd

Catalyst Investment Holdings Ltd

Worcester Acute Hospitals NHS Trust New District General Hospital Burnley Hospital Phase V

14/10/07

4.62%

1.11

5.10%

10.29%

Chiltern Securities Ltd Clugstons

North Kirklees Primary Care Centres Queens Medical Centre Nottingham University NHS Trust ENT and Opthalmology

22/04/08 25/05/99

4.60% 4.58%

0.63 1.07

5.10% 5.10%

7.82% 10.04%

Commonwealth Bank of Australia

Redevelopment of the Royal Hospital of St Bartholomew and the Royal London Hospital

28/04/10

4.61%

0.94

5.10%

9.38%

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Table 3 (Continued) Pembury Hospital Redevelopment Clackmannanshire Community Health Services Project

27/03/11 17/05/11

4.35% 4.19%

0.98 0.99

5.10% 5.10%

9.36% 9.24%

Costain Group Plc

Redevelopment of Kingston Hospital Three Shires Hospitals PFI Project – Spalding Community Hospital Project

24/11/08 02/05/11

4.21% 4.18%

0.77 0.81

5.10% 5.10%

8.11% 8.31%

Dawn Construction Dutch Infrastucture Fund PPP UK Ltd FES Ltd G4S Galliford Try Plc Grosvenor House Group Plc Guildhouse Holdings

Crosshouse Maternity Hospital St Andrews Community Hospital & Health Centre PFI

07/10/08 22/11/11

4.36% 3.19%

0.94 1.25

5.10% 5.10%

9.13% 9.56%

Crosshouse Maternity Hospital Churchill Hospital PFI Project St Andrews Community Hospital & Health Centre PFI Lanchester Road Hospital & Stanley Primary Care PPP Willesden Community Hospital – Mental Health Facility

07/10/08 02/12/09 22/11/11 02/05/11 06/12/06

4.36% 4.12% 3.19% 4.18% 4.02%

0.94 0.81 0.71 1.03 0.95

5.10% 5.10% 5.10% 5.10% 5.10%

9.13% 8.26% 6.81% 9.44% 8.89%

Birmingham Ambulatory Care Centre West Middlesex University Hospital DBFO Royal Blackburn Hospital – Delivering a Single Site Acute Hospital Central Middlesex Hospital Modernisation Stoke Mandeville Hospital – Redevelopment Project Garrett Anderson Treatment and Critical Care Centre North Middlesex University Hospital NHS Trust – New Hospital Development Broomfield Hospital

19/12/02 31/01/05 10/07/07

4.68% 4.49% 4.90%

0.97 1.50 1.40

5.10% 5.10% 5.10%

9.65% 12.12% 12.05%

07/11/07 22/05/08 28/03/10 03/08/11

4.48% 4.48% 4.62% 4.02%

1.32 1.30 1.09 0.99

5.10% 5.10% 5.10% 5.10%

11.21% 11.10% 10.20% 9.07%

07/12/11

3.27%

1.00

5.10%

8.35%

i2 Group Ltd Ideal Cleaning Services

Provision of Day Care and Maternity Services Queens Medical Centre Nottingham University NHS Trust ENT and Opthalmology

01/06/03 25/05/99

4.27% 4.58%

1.03 1.08

5.10% 5.10%

9.51% 10.10%

Impregilo SpA

St David’s Community Hospital Royal Wolverhampton Hospitals NHS Trust Radiology unit Churchill Hospital PFI Project

01/04/04 21/03/06

4.64% 4.08%

1.28 1.27

5.10% 5.10%

11.15% 10.54%

02/12/09

4.12%

1.48

5.10%

11.67%

Infrastructure Investments General Partner Ltd

Specialist Services Reprovision at John Radcliffe Hospital

20/12/07

4.51%

1.20

5.10%

10.62%

Infrastructure Investors Ltd

Barnet General Hospital Modernisation Oldchurch Hospital Site Rationalisation – Queens Hospital Redevelopment of Kingston Hospital

02/02/03 16/01/08

4.40% 4.35%

1.07 1.14

5.10% 5.10%

9.86% 10.14%

24/11/08

4.21%

1.18

5.10%

10.24%

Innisfree

Norfolk & Norwich University Hospital Hairmyres Hospital Darent Valley Hospital South Buckinghamshire NHST Site Rationalisation Queen Elizabeth Hospital Princess Royal University Hospital Coventry New Hospitals Project Redevelopment of the Royal Hospital of St Bartholomew and the Royal London Hospital St Helens and Whiston Hospitals Strategic Redevelopment Project Walsall Hospitals NHS Trust – Redevelopment Project

09/01/98 20/03/98 31/07/01 15/12/01 02/07/02 20/11/02 28/11/06 28/04/10

5.10% 5.10% 4.60% 4.60% 4.68% 4.68% 4.05% 4.61%

0.72 0.72 0.93 0.99 1.02 1.06 1.14 1.34

5.10% 5.10% 5.10% 5.10% 5.10% 5.10% 5.10% 5.10%

8.80% 8.80% 9.34% 9.63% 9.86% 10.08% 9.87% 11.45%

02/06/10

4.28%

1.29

5.10%

10.83%

21/11/11

3.19%

1.25

5.10%

9.56%

Integral UK Ltd

South West Essex Primary Care Trust – Brentwood Community Hospital

30/06/10

4.23%

0.98

5.10%

9.25%

Interserve

Cumberland Infirmary Redevelopment Pembury Hospital Redevelopment

01/11/97 27/03/11

5.29% 4.35%

0.84 1.18

5.10% 5.10%

9.55% 10.34%

James Walker (Leith) Ltd Jarvis

Elderly & Mental Health Units Birmingham Ambulatory Care Centre

24/12/08 19/12/02

3.83% 4.68%

0.96 0.91

5.10% 5.10%

8.74% 9.34%

JEIB Ltd

Avon & Western Wiltshire: Modernising Mental Health and expanding regional Secure Services Royal Alexandra Hospital for Sick Children

02/03/08

4.39%

1.12

5.10%

10.10%

11/06/08

4.62%

1.11

5.10%

10.27%

John Laing

Norfolk & Norwich University Hospital Queen Elizabeth Hospital Acute Services Reprovision at Newham General Hospital

09/01/98 02/07/02 28/01/08

5.10% 4.68% 4.39%

1.26 0.86 0.82

5.10% 5.10% 5.10%

11.55% 9.08% 8.60%

HSBC

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Table 3 (Continued) Sponsor

Project

Contract date

rf

b

rm − rf

Pembury Hospital Redevelopment Redcar and Cleveland Primary Care Trust New Hospital Clackmannanshire Community Health Services Project North Staffordshire Acute Psychiatric Unit

27/03/11 02/04/11 17/05/11 02/06/11

4.35% 4.35% 4.19% 4.12%

0.98 0.99 0.99 0.98

5.10% 5.10% 5.10% 5.10%

9.36% 9.38% 9.24% 9.14%

Ke

Johnson Service Plc

Whitehills Health and Community Care Centre

01/08/03

4.66%

0.71

5.10%

8.26%

Kajima

Royal Alexandra Hospital for Sick Children South West Essex Primary Care Trust – Brentwood Community Hospital

11/06/08 30/06/10

4.62% 4.23%

0.94 1.06

5.10% 5.10%

9.40% 9.64%

Kier

Hairmyres Hospital Garrett Anderson Treatment and Critical Care Centre

20/03/98 28/03/10

5.10% 4.62%

0.67 1.08

5.10% 5.10%

8.52% 10.11%

Kintra Ltd Land Securities Group Plc Lloyds Banking Group Macob Newham Investment Company Ltd NIHG South West Health Nisbet LLP

Neville Hall Hospital Energy Management Project Hereford County Hospital Whittington Hospital St David’s Community Hospital Acute Services Reprovision at Newham General Hospital Acute Hospital For The South West (Enniskillen) South West Essex Primary Care Trust – Brentwood Community Hospital

14/02/02 01/04/03 09/10/06 01/04/04 28/01/08

4.68% 4.60% 4.08% 4.64% 4.39%

0.77 0.77 1.35 0.78 1.11

5.10% 5.10% 5.10% 5.10% 5.10%

8.59% 8.54% 10.94% 8.60% 10.06%

21/05/11 30/06/10

4.17% 4.23%

1.04 0.84

5.10% 5.10%

9.46% 8.54%

Quayle Munro Holding Plc

Larkfield Geriatric Assessment Facility Mid Argyll Community Hospital Greater Glasgow Health Board – Stobhill Psychiatric Unit

01/06/03 05/02/08 15/07/09

4.27% 4.34% 4.37%

0.44 0.40 0.82

5.10% 5.10% 5.10%

6.50% 6.38% 8.54%

Robert McAlpine

Wishaw General Hospital

01/07/98

5.10%

0.69

5.10%

8.62%

Robertson Group

Gartnavel Royal Hospital New Acute Hospital for Forth Valley

01/12/09 11/07/11

4.12% 4.15%

0.92 1.05

5.10% 5.10%

8.82% 9.52%

Royal BAM Group

St James University Hospital & Leeds General Infirmary Redevelopment

21/09/06

4.14%

0.73

5.10%

7.88%

Royal Bank of Scotland

Redevelopment of Bishop Auckland General Hospital New Royal Infirmary of Edinburgh & University of Edinburgh Medical School Specialist Services Reprovision at John Radcliffe Hospital Redevelopment of Pinderfields General Hospital & Pontefract General Infirmary

10/03/98 21/08/98

5.10% 5.10%

1.34 1.33

5.10% 5.10%

11.95% 11.90%

20/12/07

4.51%

1.07

5.10%

9.97%

29/06/11

4.15%

1.54

5.10%

11.98%

Ryhurst

Hertfordshire County Council – Young Herts Childrens, Schools & Families PFI Project Redcar and Cleveland Primary Care Trust New Hospital

21/07/00

4.48%

1.00

5.10%

9.59%

02/04/11

4.35%

1.08

5.10%

9.86%

Semperian PPP Investment Partners

Darent Valley Hospital Princess Royal University Hospital Hereford County Hospital Royal Wolverhampton Hospitals NHS Trust Radiology unit Nuffield Orthapaedic NHS Trust Avon & Western Wiltshire: Modernising Mental Health and expanding regional Secure Services Lymington New Forest Hospital Daventry and South Northants Primary Care Trust Community Hospital Walsall Hospitals NHS Trust – Redevelopment Project

31/07/01 20/11/02 01/04/03 21/03/06

4.60% 4.68% 4.60% 4.08%

0.93 1.06 1.06 1.13

5.10% 5.10% 5.10% 5.10%

9.32% 10.08% 10.02% 9.86%

21/04/06 02/03/08

4.25% 4.39%

1.14 1.10

5.10% 5.10%

10.07% 10.00%

19/11/08 04/03/09

4.44% 4.34%

1.17 1.20

5.10% 5.10%

10.42% 10.48%

21/11/11

3.19%

1.25

5.10%

9.56%

Serco Group Shepherd Construction

Norfolk & Norwich University Hospital Maternity and acute development – Hull Royal Infirmary

09/01/98 04/05/01

5.10% 4.60%

0.86 0.95

5.10% 5.10%

9.48% 9.43%

Skanska AB

Coventry New Hospitals Project Redevelopment of the Royal Hospital of St Bartholomew and the Royal London Hospital

28/11/06 28/04/10

4.05% 4.61%

1.12 1.19

5.10% 5.10%

9.74% 10.68%

Sodexo

Oldchurch Hospital Site Rationalisation – Queens Hospital Stoke Mandeville Hospital – Redevelopment Project North Staffordshire Acute Psychiatric Unit

16/01/08

4.35%

1.24

5.10%

10.68%

22/05/08 02/06/11

4.48% 4.12%

1.20 1.03

5.10% 5.10%

10.62% 9.35%

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Table 3 (Continued) Avon & Western Wiltshire: Modernising Mental Health and expanding regional Secure Services Royal Alexandra Hospital for Sick Children

02/03/08

4.39%

0.94

5.10%

9.16%

11/06/08

4.62%

0.91

5.10%

9.28%

Taylor Woodrow Construction Ltd Uberior Infrastructure Investors Ltd

St Helens and Whiston Hospitals Strategic Redevelopment Project Oldchurch Hospital Site Rationalisation – Queens Hospital

02/06/10

4.28%

0.85

5.10%

8.63%

16/01/08

4.35%

1.14

5.10%

10.14%

UME Group

Larkfield Geriatric Assessment Facility Southern General Hospital Geriatric Medicine & Assessment Facility North Staffordshire Acute Psychiatric Unit Mid Argyll Community Hospital Greater Glasgow Health Board – Stobhill Psychiatric Unit Greater Glasgow NHS Board – Phase 1: Stobhill and Victoria Ambulatory Care and Diagnostic Hospitals

01/06/03 01/08/03

4.27% 4.66%

0.84 0.84

5.10% 5.10%

8.54% 8.95%

09/12/03 05/02/08 15/07/09

4.78% 4.34% 4.37%

0.85 0.95 0.96

5.10% 5.10% 5.10%

9.09% 9.17% 9.26%

24/08/10

4.02%

0.99

5.10%

9.06%

South West Essex Primary Care Trust – Brentwood Community Hospital

30/06/10

4.23%

1.33

5.10%

11.00%

Staveley Industries

Westwind Capital Partners Ltd

now be significantly lower. This is an extremely important issue since the costs faced by NHS organisations with operational PFI schemes have been shown to be a major contributor to financial difficulties for the NHS organisations involved [1]. This has, in turn, often damaged the capacity of NHS organisations to meet population health care requirements, a fact which has been acknowledged by a former Secretary of State for Health, Andrew Lansley [47]. A second way to view excess returns is in terms of foregone opportunities for investment. To the extent that capital investment is likely to increase the efficiency of the health system (and given the inappropriate profile of the current NHS estate, this appears to be a reasonable assumption), then the lost opportunities for additional investment has a negative impact on financial sustainability. That said, the presence of excess returns is not in itself conclusive evidence of the relative cost efficiency of private finance versus public finance for capital investment. It is evident that where returns on investor capital are in excess of the level determined by the degree of risk involved, the PFI capital structure may deliver efficiencies in project development that are sufficient to offset the extra financial cost (including both the ‘legitimate’ risk premium, and the excess premium), such that the model offers good value for money overall. More independent research needs to be undertaken before a conclusive judgement on the ability of private finance models to achieve value for money can be determined. 7. Policy implications By virtue of their multi-dimensional and long-term nature, PFIs are complex procurements, so that a procurer’s requirements cannot be specified in a simple way. This leads to high transaction costs associated with searching for and negotiating with bidders, generating high barriers to entry and limited competitiveness [48]. Dudkin and Välilä [49] show that, on a sample of 55 PFI procurements in the UK (drawn from across the public sector), the combined pre-contractual transaction costs for the public sector and the winning bidder were on average

7% of the total capital value of the project (split roughly equally between the public sector and the winning bidder). Where a concentration in market share leads to a reduction in the competition for contracts, this may confer substantial advantages on market players when bargaining with purchasers. As has been noted by the National Audit Office [50], it is the final phase of bidding, incorporating an exclusive negotiation between a single bidder and single purchaser, when transaction costs escalate most rapidly. Due to the sunk costs involved (an issue of greater salience for public authorities than for bidders, for whom the costs of losing bids are part of doing business), investors are in an advantageous position vis-à-vis the authority, in knowing that they are virtually guaranteed to secure the contract. Setting the complexities and transaction costs of procurement against the broader context of growing demand for private finance in an internationalising market and the expansion of project financing models in sectors outside of social infrastructure (for instance, renewable energy, digital networks and high speed rail), it is clear there is no compelling reason to expect a general reduction in the returns being targeted by investors in the market for PFI contracts. This implies that a change in, or an expansion of, regulation may be required to drive investor returns down to the efficient level and thereby minimise the cost pressures generated by such contracts for public authorities. In sectors of the economy where competition is not plausible, not efficient (e.g. in network industries with significant economies of scale) or not achieved, government intervention in the form of economic regulation is widespread and the rationale for it in terms of correcting market failures accepted by economists and policy-makers alike. Under many versions of price regulation, for example, regulators set the price a utility can charge so as to enable investors in that utility to earn only a specified maximum rate of return. This “fair” rate of return is set according to the regulator’s assessment of the utility’s WACC (with the cost of equity derived through the Capital Asset Pricing Model along with consideration of the company’s effective cost of debt, taxation and gearing) [58]. It is evident

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Table 4 The rating and the cost of the debt (Kd ) of the PFI sample sponsors. This table reports the cost of debt for the sponsors of the projects in our sample. We calculate Kd as the average yields on corporate bonds maturing in five to seven years (a time horizon in line with the average duration of project loans) from the contract signature, issued by organisations with the same creditworthiness (rating) of the sponsors of our sample. For unrated sponsors, we estimate Kd through the two following steps: (1) we use a proxy creditworthiness merit class (according to the Standard & Poor’s convention) comprised between BBB+ and BBB−, in line with the intrinsic features of PPP–PFI projects, following Corielli et al. [32] and Moody’s [45]; (2) we calculate the cost of debt using the GBP Euro BFV Curve Bloomberg function, as an average on the five and seven year debt maturities. Sponsor

Rating

Moody’s

S&P

Project

rd 5 years

rd 7 years

Kd

3i Group ABN AMRO

yes yes

Baa1 Aa3

BBB+ A

7.12% 6.79%

7.11% 6.79%

7.12% 6.79%

Allied Irish Banks Plc Amec Anglian Water

yes no yes

BB – Baa1

Ba2 – BBB

Norfolk & Norwich University Hospital Maternity and acute development – Hull Royal Infirmary Crosshouse Maternity Hospital Cumberland Infirmary Redevelopment New Royal Infirmary of Edinburgh & University of Edinburgh Medical School Neath Port Talbot Hospital

6.41% 7.41% 6.87%

6.51% 7.55% 6.74%

6.46% 7.48% 6.81%

5.53%

5.68%

5.61%

Redevelopment of Bishop Auckland General Hospital New Royal Infirmary of Edinburgh & University of Edinburgh Medical School Royal Blackburn Hospital – Delivering a Single Site Acute Hospital Redevelopment of Pinderfields General Hospital & Pontefract General Infirmary

7.10%

7.08%

7.09%

6.87%

6.74%

6.81%

6.55%

6.65%

6.60%

4.11%

4.75%

4.43%

7.15% 5.95%

6.97% 6.07%

7.06% 6.01%

4.60%

5.03%

4.81%

Norfolk & Norwich University Hospital Hertfordshire County Council – Young Herts Childrens, Schools & Families PFI Project Nuffield Orthapaedic NHS Trust Carseview Psychiatric Unit at Ninewells University Hospital Lewisham – Redevelopment Churchill Hospital PFI Project Gartnavel Royal Hospital

6.79% 6.79%

6.79% 6.79%

6.79% 6.79%

5.16% 5.87%

5.34% 5.92%

5.25% 5.89%

6.46%

6.44%

6.45%

4.07% 2.93%

4.60% 3.46%

4.34% 3.19%

Avon & Western Wiltshire: Modernising Mental Health and expanding regional Secure Services Royal Alexandra Hospital for Sick Children

6.33%

6.47%

6.40%

7.21%

7.17%

7.19%

Cardiothoracic & Neurosciences Development Tiverton & District Community Hospital

5.46%

5.67%

5.57%

5.44%

5.57%

5.51%

Baglan Moor Healthcare

yes

Aa3

AA–

Balfour Beatty

no





Bank of Scotland

Barclays

BDP Holdings Ltd

BIIF Bidco Ltd

no

yes

no

no



A1







A+





Wishaw General Hospital Queens Medical Centre Nottingham University NHS Trust ENT and Opthalmology Craig Phadrig Psychiatric Unit (New Craigs)

Bouygues UK Ltd

yes

A3

A−

New Hospital Development

2.89%

3.45%

3.17%

Bovis Lend Lease Holdings Ltd

no





Queen Mary’s Hospital Roehampton – Redevelopment Project Wharfedale General Hospital Development

6.61%

6.67%

6.64%

7.08%

7.23%

7.16%

Canmore Partnership

no





Larkfield Geriatric Assessment Facility Mid Argyll Community Hospital Greater Glasgow Health Board – Stobhill Psychiatric Unit

5.09% 6.15% 5.70%

5.32% 6.27% 6.26%

5.21% 6.21% 5.98%

Carillion Plc

no





Southern General Hospital Geriatric Medicine & Assessment Facility Queen Alexandra Hospital Redevelopment Three Shires Hospitals PFI Project – Spalding Community Hospital Project

5.49%

5.66%

5.58%

4.72%

5.31%

5.02%

4.28%

4.88%

4.58%

Please cite this article in press as: Vecchi V, et al. Does the private sector receive an excessive return from investments in health care infrastructure projects? Evidence from the UK. Health Policy (2013), http://dx.doi.org/10.1016/j.healthpol.2012.12.010

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19

Table 4 (Continued) Catalyst Investment Holdings Ltd

no





Worcester Acute Hospitals NHS Trust New District General Hospital Burnley Hospital Phase V

5.39%

5.63%

5.51%

6.43%

6.48%

6.46%

Chiltern Securities Ltd Clugstons

no no

– –

– –

North Kirklees Primary Care Centres Queens Medical Centre Nottingham University NHS Trust ENT and Opthalmology

6.79% 6.35%

6.81% 6.49%

6.80% 6.42%

Commonwealth Bank of Australia

yes

Aa2

AA

Redevelopment of the Royal Hospital of St Bartholomew and the Royal London Hospital Pembury Hospital Redevelopment Clackmannanshire Community Health Services Project

3.77%

4.44%

4.11%

3.85% 3.47%

4.41% 4.05%

4.13% 3.76%

Costain Group Plc

no





Redevelopment of Kingston Hospital Three Shires Hospitals PFI Project – Spalding Community Hospital Project

6.88% 4.28%

7.38% 4.88%

7.13% 4.58%

Dawn Construction Dutch Infrastucture Fund PPP UK Ltd FES Ltd G4S Galliford Try Plc

no no

– –

– –

6.41% 3.55%

6.51% 4.11%

6.46% 3.83%

no yes no

– Baa2 –

– BBB –

6.41% 4.72% 3.55%

6.51% 5.31% 4.11%

6.46% 5.02% 3.83%

Grosvenor House Group Plc

no





4.28%

4.88%

4.58%

Guildhouse Holdings

no





Crosshouse Maternity Hospital St Andrews Community Hospital & Health Centre PFI Crosshouse Maternity Hospital Churchill Hospital PFI Project St Andrews Community Hospital & Health Centre PFI Lanchester Road Hospital & Stanley Primary Care PPP Willesden Community Hospital – Mental Health Facility

5.64%

5.67%

5.65%

HSBC

yes

Aa2

AA−

Birmingham Ambulatory Care Centre West Middlesex University Hospital DBFO Royal Blackburn Hospital – Delivering a Single Site Acute Hospital Central Middlesex Hospital Modernisation Stoke Mandeville Hospital – Redevelopment Project Garrett Anderson Treatment and Critical Care Centre North Middlesex University Hospital NHS Trust – New Hospital Development Broomfield Hospital

4.89% 4.97%

5.06% 5.02%

4.98% 4.99%

6.25%

6.21%

6.23%

5.84%

5.84%

5.84%

5.98%

6.01%

5.99%

3.66%

4.38%

4.02%

2.83%

3.39%

3.11%

3.49%

4.24%

3.87%

Provision of Day Care and Maternity Services Queens Medical Centre Nottingham University NHS Trust ENT and Opthalmology

5.09%

5.32%

5.21%

6.35%

6.49%

6.42%

i2 Group Ltd

no





Ideal Cleaning Services

no





Impregilo SpA

yes

Aaa

AAA

St David’s Community Hospital Royal Wolverhampton Hospitals NHS Trust Radiology unit Churchill Hospital PFI Project

5.00% 4.82%

5.14% 4.82%

5.07% 4.82%

3.37%

4.07%

3.72%

Infrastructure Investments General Partner Ltd

no





Specialist Services Reprovision at John Radcliffe Hospital

6.13%

6.24%

6.19%

Infrastructure Investors Ltd

no





Barnet General Hospital Modernisation Oldchurch Hospital Site Rationalisation – Queens Hospital Redevelopment of Kingston Hospital

5.11% 5.94%

5.33% 6.10%

5.22% 6.02%

6.88%

7.38%

7.13%

Norfolk & Norwich University Hospital Hairmyres Hospital Darent Valley Hospital South Buckinghamshire NHST Site Rationalisation Queen Elizabeth Hospital Princess Royal University Hospital

7.12% 7.05% 6.63% 6.19%

7.11% 7.05% 6.67% 6.36%

7.12% 7.05% 6.65% 6.28%

6.12% 5.49%

6.18% 5.74%

6.15% 5.62%

Innisfree

no





Please cite this article in press as: Vecchi V, et al. Does the private sector receive an excessive return from investments in health care infrastructure projects? Evidence from the UK. Health Policy (2013), http://dx.doi.org/10.1016/j.healthpol.2012.12.010

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20

V. Vecchi et al. / Health Policy xxx (2013) xxx–xxx

Table 4 (Continued) Sponsor

Rating

Moody’s

S&P

Project

rd 5 years

rd 7 years

Kd

Coventry New Hospitals Project Redevelopment of the Royal Hospital of St Bartholomew and the Royal London Hospital St Helens and Whiston Hospitals Strategic Redevelopment Project Walsall Hospitals NHS Trust – Redevelopment Project

5.70% 4.40%

5.71% 5.02%

5.71% 4.71%

4.22%

4.83%

4.52%

3.56%

4.12%

3.84%

Integral UK Ltd

no





South West Essex Primary Care Trust – Brentwood Community Hospital

4.08%

4.66%

4.37%

Interserve

no





Cumberland Infirmary Redevelopment Pembury Hospital Redevelopment

7.41% 4.45%

7.55% 5.03%

7.48% 4.74%

James Walker (Leith) Ltd Jarvis JEIB Ltd

no no no

– – –

– – –

Elderly & Mental Health Units Birmingham Ambulatory Care Centre Avon & Western Wiltshire: Modernising Mental Health in Avon and Expanding regional Secure Services Royal Alexandra Hospital for Sick Children

6.55% 5.34% 6.33%

6.82% 5.54% 6.47%

6.69% 5.44% 6.40%

7.21%

7.17%

7.19%

Norfolk & Norwich University Hospital Queen Elizabeth Hospital Acute Services Reprovision at Newham General Hospital Pembury Hospital Redevelopment Redcar and Cleveland Primary Care Trust New Hospital Clackmannanshire Community Health Services Project North Staffordshire Acute Psychiatric Unit

7.12% 6.12% 6.22%

7.11% 6.18% 6.30%

7.12% 6.15% 6.26%

4.45% 4.48%

5.03% 5.08%

4.74% 4.78%

4.09%

4.69%

4.39%

4.01%

4.66%

4.33%

Whitehills Health and Community Care Centre Royal Alexandra Hospital for Sick Children South West Essex Primary Care Trust – Brentwood Community Hospital

5.49%

5.66%

5.58%

7.21%

7.17%

7.19%

4.08%

4.66%

4.37%

John Laing

no





Johnson Service Plc

no





Kajima

no





Kier

no





Hairmyres Hospital Garrett Anderson Treatment and Critical Care Centre

7.05% 4.42%

7.05% 5.08%

7.05% 4.75%

Kintra Ltd

no





6.22%

6.29%

6.26%

Land Securities Group Plc Lloyds Banking Group Macob Newham Investment Company Ltd NIHG South West Health

no si no no

– A2 – –

– A – –

5.15% 5.38% 5.62% 6.22%

5.38% 5.34% 5.83% 6.30%

5.26% 5.36% 5.72% 6.26%

no





4.09%

4.69%

4.39%

Nisbet LLP

no





Neville Hall Hospital Energy Management Project Hereford County Hospital Whittington Hospital St David’s Community Hospital Acute Services Reprovision at Newham General Hospital Acute Hospital For The South West (Enniskillen) South West Essex Primary Care Trust – Brentwood Community Hospital

4.08%

4.66%

4.37%

Quayle Munro Holding Plc

no





Larkfield Geriatric Assessment Facility Mid Argyll Community Hospital Greater Glasgow Health Board – Stobhill Psychiatric Unit

5.09% 6.15% 5.70%

5.32% 6.27% 6.26%

5.21% 6.21% 5.98%

Robert McAlpine

no





Wishaw General Hospital

7.27%

7.11%

7.19%

Robertson Group

no





Gartnavel Royal Hospital New Acute Hospital for Forth Valley

4.72% 3.89%

5.29% 4.47%

5.00% 4.18%

Royal BAM Group

no





St James University Hospital & Leeds General Infirmary Redevelopment

5.74%

5.78%

5.76%

Please cite this article in press as: Vecchi V, et al. Does the private sector receive an excessive return from investments in health care infrastructure projects? Evidence from the UK. Health Policy (2013), http://dx.doi.org/10.1016/j.healthpol.2012.12.010

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21

Table 4 (Continued) Royal Bank of Scotland

Ryhurst

Semperian PPP Investment Partners

yes

no

no

A3





A





6.79%

6.79%

6.79%

6.79%

6.79%

6.79%

5.78%

5.88%

5.83%

3.54%

4.11%

3.82%

7.33%

7.28%

7.31%

4.48%

5.08%

4.78%

Darent Valley Hospital Princess Royal University Hospital Hereford County Hospital Royal Wolverhampton Hospitals NHS Trust Radiology unit Nuffield Orthapaedic NHS Trust Avon & Western Wiltshire: Modernising Mental Health and expanding regional Secure Services Lymington New Forest Hospital Daventry and South Northants Primary Care Trust Community Hospital Walsall Hospitals NHS Trust – Redevelopment Project

6.63% 5.49% 5.15% 5.41%

6.67% 5.74% 5.38% 5.53%

6.65% 5.62% 5.26% 5.47%

5.49% 6.33%

5.65% 6.47%

5.57% 6.40%

6.90% 5.70%

7.44% 6.37%

7.17% 6.04%

3.56%

4.12%

3.84%

Redevelopment of Bishop Auckland General Hospital New Royal Infirmary of Edinburgh & University of Edinburgh Medical School Specialist Services Reprovision at John Radcliffe Hospital Redevelopment of Pinderfields General Hospital & Pontefract General Infirmary Hertfordshire County Council – Young Herts Childrens, Schools & Families PFI Project Redcar and Cleveland Primary Care Trust New Hospital

Serco Group Shepherd Construction

yes no

A3 –

A– –

Norfolk & Norwich University Hospital Maternity and acute development – Hull Royal Infirmary

6.79% 6.50%

6.79% 6.63%

6.79% 6.57%

Skanska AB

no





Coventry New Hospitals Project Redevelopment of the Royal Hospital of St Bartholomew and the Royal London Hospital

5.70% 4.40%

5.71% 5.02%

5.71% 4.71%

Sodexo

yes

Baa1

BBB+

Oldchurch Hospital Site Rationalisation – Queens Hospital Stoke Mandeville Hospital – Redevelopment Project North Staffordshire Acute Psychiatric Unit

5.94%

6.07%

6.01%

6.86%

6.85%

6.86%

4.01%

4.66%

4.33%

6.33%

6.47%

6.40%

7.21%

7.17%

7.19%

St Helens and Whiston Hospitals Strategic Redevelopment Project Oldchurch Hospital Site Rationalisation – Queens Hospital

4.22%

4.83%

4.52%

5.94%

6.10%

6.02%

Larkfield Geriatric Assessment Facility Southern General Hospital Geriatric Medicine & Assessment Facility North Staffordshire Acute Psychiatric Unit Mid Argyll Community Hospital Greater Glasgow Health Board – Stobhill Psychiatric Unit Greater Glasgow NHS Board – Phase 1: Stobhill and Victoria Ambulatory Care and Diagnostic Hospitals

5.09% 5.49%

5.32% 5.66%

5.21% 5.58%

5.96%

5.89%

5.92%

6.15% 5.70%

6.27% 6.26%

6.21% 5.98%

3.56%

4.12%

3.84%

South West Essex Primary Care Trust – Brentwood Community Hospital

4.08%

4.66%

4.37%

Staveley Industries

no





Taylor Woodrow Construction Ltd Uberior Infrastructure Investors Ltd

no





no





UME Group

no





Westwind Capital Partners Ltd

no





Avon & Western Wiltshire: Modernising Mental Health and expanding regional Secure Services Royal Alexandra Hospital for Sick Children

Please cite this article in press as: Vecchi V, et al. Does the private sector receive an excessive return from investments in health care infrastructure projects? Evidence from the UK. Health Policy (2013), http://dx.doi.org/10.1016/j.healthpol.2012.12.010

G Model HEAP-2953; No. of Pages 28 22

ARTICLE IN PRESS V. Vecchi et al. / Health Policy xxx (2013) xxx–xxx

Table 5 Comparison of the WACC of the sponsors and their blended equity IRR. This table shows the value of WACC of the sponsors compared with the blended equity IRR of each NHS project. For listed companies, the data are directly retrieved from Bloomberg. For unlisted sponsors, we apply an average value of comparable companies’ capital structure ratios as a reasonable proxy of the typical debt/equity ratio in the industry. The average difference between the WACC and the blended equity IRR is 9.27%, with a minimum of 4.47% for Impregilo in the Royal Wolverhampton Hospitals NHS Trust Radiology unit project and a maximum of 17.43% for Semperian PPP Investment Partners and Innisfree in the Princess Royal University Hospital project. Tax rate expresses the UK corporate tax at the year of contract signature. Sponsor

Project

Contract date

Ke

Kd

Tax rate

(1 − T)

D/D + E

WACC

Blended equity IRR

3i Group

Norfolk & Norwich University Hospital Maternity and acute development – Hull Royal Infirmary Crosshouse Maternity Hospital Cumberland Infirmary Redevelopment New Royal Infirmary of Edinburgh & University of Edinburgh Medical School Neath Port Talbot Hospital

01/09/98

11.68%

7.12%

31.00%

69.00%

37.40%

9.15%

19.00%

9.85%

05/04/01

12.15%

6.79%

30.00%

70.00%

83.24%

5.99%

13.00%

7.01%

10/07/08 11/01/97

9.56% 11.84%

6.46% 7.48%

28.00% 31.00%

72.00% 69.00%

88.91% 32.48%

5.19% 9.67%

16.00% 16.59%

10.81% 6.92%

08/21/98

9.23%

6.81%

31.00%

69.00%

42.27%

7.32%

19.71%

12.39%

05/13/04

9.29%

5.61%

30.00%

70.00%

49.81%

6.62%

14.88%

8.26%

03/10/98

9.87%

7.09%

31.00%

69.00%

43.77%

7.69%

18.11%

10.42%

08/21/98

10.25%

6.81%

31.00%

69.00%

43.77%

7.82%

19.71%

11.89%

07/10/07

9.67%

6.60%

30.00%

70.00%

22.54%

8.53%

14.00%

5.47%

06/29/11

9.12%

4.43%

26.00%

74.00%

42.90%

6.62%

15.31%

8.69%

Wishaw General Hospital Queens Medical Centre Nottingham University NHS Trust ENT and Opthalmology Craig Phadrig Psychiatric Unit (New Craigs)

07/01/98 05/25/99

15.77% 17.62%

7.06% 6.01%

31.00% 30.00%

69.00% 70.00%

90.35% 90.72%

5.92% 5.45%

15.00% 15.00%

9.08% 9.55%

04/01/03

11.15%

4.81%

30.00%

70.00%

83.54%

4.65%

16.02%

11.37%

Norfolk & Norwich University Hospital Hertfordshire County Council – Young Herts Childrens, Schools & Families PFI Project Nuffield Orthapaedic NHS Trust Carseview Psychiatric Unitat Ninewells University Hospital Lewisham – Redevelopment Churchill Hospital PFI Project Gartnavel Royal Hospital

01/09/98

10.90%

6.79%

31.00%

69.00%

89.90%

5.31%

19.00%

13.69%

07/21/00

12.31%

6.79%

30.00%

70.00%

90.20%

5.49%

15.00%

9.51%

04/21/06 03/31/07

11.25% 11.37%

5.25% 5.89%

30.00% 30.00%

70.00% 70.00%

91.18% 90.77%

4.34% 4.79%

13.42% 15.00%

9.08% 10.21%

07/09/08

11.38%

6.45%

28.00%

72.00%

88.94%

5.39%

13.50%

8.11%

12/02/09 08/24/10

11.94% 11.85%

4.34% 3.19%

28.00% 28.00%

72.00% 72.00%

83.44% 83.80%

4.58% 3.85%

14.00% 15.10%

9.42% 11.25%

Avon & Wiltshire Mental Health Partnership NHS Trust Royal Alexandra Hospital for Sick Children

03/02/08

9.06%

6.40%

28.00%

72.00%

40.78%

7.24%

14.69%

7.45%

06/11/08

9.17%

7.19%

28.00%

72.00%

40.78%

7.54%

13.00%

5.46%

Cardiothoracic & Neurosciences Development Tiverton & District Community Hospital

03/13/04

10.01%

5.57%

30.00%

70.00%

71.97%

5.61%

18.00%

12.39%

04/01/06

9.92%

5.51%

30.00%

70.00%

77.11%

5.24%

14.14%

8.90%

ABN AMRO

Allied Irish Banks Plc Amec Anglian Water

Baglan Moor Healthcare Balfour Beatty

Bank of Scotland

Barclays

BDP Holdings Ltd

BIIF Bidco Ltd

Redevelopment of Bishop Auckland General Hospital New Royal Infirmary of Edinburgh & University of Edinburgh Medical School Royal Blackburn Hospital – Delivering a Single Site Acute Hospital Redevelopment of Pinderfields General Hospital & Pontefract General Infirmary

Extra return

Bouygues UK Ltd

New Hospital Development

08/03/11

10.69%

3.17%

26.00%

74.00%

37.51%

7.56%

14.75%

7.19%

Bovis Lend Lease Holdings Ltd

Queen Mary’s Hospital Roehampton – Redevelopment Project Wharfedale General Hospital Development

05/07/08

9.51%

6.64%

28.00%

72.00%

38.48%

7.69%

13.27%

5.58%

10/16/08

9.68%

7.16%

28.00%

72.00%

38.48%

7.94%

13.00%

5.06%

Please cite this article in press as: Vecchi V, et al. Does the private sector receive an excessive return from investments in health care infrastructure projects? Evidence from the UK. Health Policy (2013), http://dx.doi.org/10.1016/j.healthpol.2012.12.010

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23

Table 5 (Continued) Canmore Partnership

Carillion Plc

Larkfield Geriatric Assessment Facility Mid Argyll Community Hospital Greater Glasgow Health Board – Stobhill Psychiatric Unit Southern General Hospital Geriatric Medicine & Assessment Facility Queen Alexandra Hospital Redevelopment Three Shires Hospitals PFI Project – Spalding Community Hospital Project

06/01/03

7.48%

5.21%

30.00%

70.00%

32.33%

6.24%

16.00%

9.76%

02/05/08

8.25%

6.21%

28.00%

72.00%

35.29%

6.92%

15.00%

8.08%

07/15/09

8.45%

5.98%

28.00%

72.00%

39.13%

6.83%

15.00%

8.17%

08/01/03

9.29%

5.58%

30.00%

70.00%

39.79%

7.15%

16.00%

8.85%

12/02/09

8.82%

5.02%

28.00%

72.00%

52.94%

6.06%

14.90%

8.84%

05/02/11

9.39%

4.58%

26.00%

74.00%

30.35%

7.57%

14.25%

6.68%

03/19/03

9.94%

5.51%

30.00%

70.00%

53.99%

6.66%

16.00%

9.34%

Catalyst Investment Holdings Ltd

Worcester Acute Hospitals NHS Trust New District General Hospital Burnley Hospital Phase V

10/14/07

10.29%

6.46%

30.00%

70.00%

51.95%

7.29%

14.89%

7.60%

Chiltern Securities Ltd Clugstons

North Kirklees Primary Care Centres Queens Medical Centre Nottingham University NHS Trust ENT and Opthalmology

04/22/08

7.82%

6.80%

28.00%

72.00%

45.79%

6.48%

15.00%

8.52%

05/25/99

10.04%

6.42%

30.00%

70.00%

22.54%

8.79%

15.00%

6.21%

Commonwealth Bank of Australia

Redevelopment of the Royal Hospital of St Bartholomew and the Royal London Hospital Pembury Hospital Redevelopment Clackmannanshire Community Health Services Project

04/28/10

9.38%

4.11%

28.00%

72.00%

83.51%

4.02%

17.00%

12.98%

03/27/11

9.36%

4.13%

26.00%

74.00%

81.38%

4.23%

14.00%

9.77%

05/17/11

9.24%

3.76%

26.00%

74.00%

81.38%

3.98%

15.60%

11.62%

11/24/08

8.11%

7.13%

28.00%

72.00%

47.09%

6.71%

15.02%

8.31%

05/02/11

8.31%

4.58%

26.00%

74.00%

41.89%

6.25%

14.25%

8.00%

Crosshouse Maternity Hospital St Andrews Community Hospital & Health Centre PFI Crosshouse Maternity Hospital Churchill Hospital PFI Project St Andrews Community Hospital & Health Centre PFI Lanchester Road Hospital & Stanley Primary Care PPP Willesden Community Hospital – Mental Health Facility

10/07/08 11/22/11

9.13% 9.56%

6.46% 3.83%

28.00% 26.00%

72.00% 74.00%

41.50% 64.70%

7.27% 5.21%

16.00% 16.00%

8.73% 10.79%

10/07/08 12/02/09 11/22/11

9.13% 8.26% 6.81%

6.46% 5.02% 3.83%

28.00% 28.00% 26.00%

72.00% 72.00% 74.00%

41.50% 57.49% 33.24%

7.27% 5.59% 5.49%

16.00% 14.00% 16.00%

8.73% 8.41% 10.51%

05/02/11

9.44%

4.58%

26.00%

74.00%

51.81%

6.30%

14.00%

7.70%

12/06/06

8.89%

5.65%

30.00%

70.00%

60.62%

5.90%

14.89%

8.99%

Birmingham Ambulatory Care Centre West Middlesex University Hospital DBFO Royal Blackburn Hospital – Delivering a Single Site Acute Hospital Central Middlesex Hospital Modernisation Stoke Mandeville Hospital – Redevelopment Project Garrett Anderson Treatment and Critical Care Centre North Middlesex University Hospital NHS Trust – New Hospital Development Broomfield Hospital

12/19/02

9.65%

4.98%

30.00%

70.00%

71.01%

5.27%

14.00%

8.73%

01/31/05

12.12%

4.99%

30.00%

70.00%

84.65%

4.82%

15.30%

10.48%

07/10/07

12.05%

6.23%

30.00%

70.00%

86.79%

5.37%

14.00%

8.63%

11/07/07

11.21%

5.84%

30.00%

70.00%

86.79%

5.03%

15.00%

9.97%

05/22/08

11.10%

5.99%

28.00%

72.00%

78.31%

5.79%

15.00%

9.21%

03/28/10

10.20%

4.02%

28.00%

72.00%

82.04%

4.21%

14.50%

10.29%

08/03/11

9.07%

3.11%

26.00%

74.00%

82.04%

3.52%

14.75%

11.23%

12/07/11

8.35%

3.87%

26.00%

74.00%

82.04%

3.85%

12.65%

8.80%

Provision of Day Care and Maternity Services

06/01/03

9.51%

5.21%

30.00%

70.00%

38.17%

7.27%

16.02%

8.75%

Costain Group Plc

Dawn Construction Dutch Infrastucture Fund PPP UK Ltd FES Ltd G4S Galliford Try Plc Grosvenor House Group Plc Guildhouse Holdings HSBC

i2 Group Ltd

Redevelopment of Kingston Hospital Three Shires Hospitals PFI Project – Spalding Community Hospital Project

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V. Vecchi et al. / Health Policy xxx (2013) xxx–xxx

Table 5 (Continued) Sponsor

Project

Contract date

Ke

Kd

Tax rate

(1 − T)

D/D + E

WACC

Blended equity IRR

Ideal Cleaning Services

Queens Medical Centre Nottingham University NHS Trust ENT and Opthalmology

05/25/99

10.10%

6.42%

30.00%

70.00%

27.41%

8.56%

15.00%

6.44%

Impregilo SpA

St David’s Community Hospital Royal Wolverhampton Hospitals NHS Trust Radiology unit Churchill Hospital PFI Project

04/01/04 03/21/06

11.15% 10.54%

5.07% 4.82%

30.00% 30.00%

70.00% 70.00%

73.43% 60.75%

5.57% 6.19%

17.00% 10.66%

11.43% 4.47%

12/02/09

11.67%

3.72%

28.00%

72.00%

60.18%

6.26%

14.00%

7.74%

Infrastructure Investments General Partner Ltd

Specialist Services Reprovision at John Radcliffe Hospital

12/20/07

10.62%

6.19%

30.00%

70.00%

76.05%

5.84%

15.30%

9.46%

02/02/03

9.86%

5.22%

30.00%

70.00%

72.72%

5.35%

18.00%

12.65%

01/16/08

10.14%

6.02%

28.00%

72.00%

72.29%

5.94%

15.16%

9.22%

11/24/08

10.24%

7.13%

28.00%

72.00%

72.29%

6.55%

15.02%

8.47%

01/09/98

8.80%

7.12%

31.00%

69.00%

59.62%

6.48%

19.00%

12.52%

03/20/98 07/31/01 12/15/01

8.80% 9.34% 9.63%

7.05% 6.65% 6.28%

31.00% 30.00% 30.00%

69.00% 70.00% 70.00%

59.62% 73.84% 73.84%

6.45% 5.88% 5.76%

23.00% 13.98% 20.70%

16.55% 8.10% 14.94%

07/02/02 11/20/02

9.86% 10.08%

6.15% 5.62%

30.00% 30.00%

70.00% 70.00%

73.29% 73.29%

5.79% 5.57%

20.00% 23.00%

14.21% 17.43%

11/28/06

9.87%

5.71%

30.00%

70.00%

77.11%

5.34%

15.00%

9.66%

04/28/10

11.45%

4.71%

28.00%

72.00%

73.94%

5.49%

17.00%

11.51%

06/02/10

10.83%

4.52%

28.00%

72.00%

73.94%

5.23%

14.75%

9.52%

11/21/11

9.56%

3.84%

26.00%

74.00%

64.70%

5.21%

15.00%

9.79%

Infrastructure Investors Barnet General Hospital Modernisation Ltd Oldchurch Hospital Site Rationalisation – Queens Hospital Redevelopment of Kingston Hospital Innisfree

Norfolk & Norwich University Hospital Hairmyres Hospital Darent Valley Hospital South Buckinghamshire NHST Site Rationalisation Queen Elizabeth Hospital Princess Royal University Hospital Coventry New Hospitals Project Redevelopment of the Royal Hospital of St Bartholomew and the Royal London Hospital St Helens and Whiston Hospitals Strategic Redevelopment Project Walsall Hospitals NHS Trust – Redevelopment Project

Extra return

Integral UK Ltd

South West Essex Primary Care Trust – Brentwood Community Hospital

06/30/10

9.25%

4.37%

28.00%

72.00%

59.43%

5.62%

16.00%

10.38%

Interserve

Cumberland Infirmary Redevelopment Pembury Hospital Redevelopment

11/01/97

9.55%

7.48%

31.00%

69.00%

23.62%

8.51%

16.59%

8.08%

03/27/11

10.34%

4.74%

26.00%

74.00%

49.21%

6.98%

14.00%

7.02%

Elderly & Mental Health Units

12/24/08

8.74%

6.69%

28.00%

72.00%

41.50%

7.11%

16.02%

8.91%

Birmingham Ambulatory Care Centre

12/19/02

9.34%

5.44%

30.00%

70.00%

38.89%

7.19%

14.00%

6.81%

Avon & Western Wiltshire: Modernising Mental Health and expanding regional Secure Services. Royal Alexandra Hospital for Sick Children

03/02/08

10.10%

6.40%

28.00%

72.00%

69.73%

6.27%

14.69%

8.42%

06/11/08

10.27%

7.19%

28.00%

72.00%

69.73%

6.72%

13.00%

6.28%

Norfolk & Norwich University Hospital Queen Elizabeth Hospital Acute Services Reprovision at Newham General Hospital Pembury Hospital Redevelopment Redcar and Cleveland Primary Care Trust New Hospital Clackmannanshire Community Health Services Project

01/09/98

11.55%

7.12%

31.00%

69.00%

29.83%

9.57%

19.00%

9.43%

07/02/02 01/28/08

9.08% 8.60%

6.15% 6.26%

30.00% 28.00%

70.00% 72.00%

42.48% 43.94%

7.05% 6.80%

20.00% 14.97%

12.95% 8.17%

03/27/11

9.36%

4.74%

26.00%

74.00%

36.10%

7.25%

14.00%

6.75%

04/02/11

9.38%

4.78%

26.00%

74.00%

36.10%

7.27%

13.65%

6.38%

05/17/11

9.24%

4.39%

26.00%

74.00%

36.10%

7.08%

15.60%

8.52%

James Walker (Leith) Ltd Jarvis

JEIB Ltd

John Laing

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25

Table 5 (Continued) North Staffordshire Acute Psychiatric Unit

06/02/11

9.14%

4.33%

26.00%

74.00%

36.10%

7.00%

15.00%

8.00%

Johnson Service Plc

Whitehills Health and Community Care Centre

08/01/03

8.26%

5.58%

30.00%

70.00%

30.16%

6.95%

15.00%

8.05%

Kajima

Royal Alexandra Hospital for Sick Children South West Essex Primary Care Trust – Brentwood Community Hospital

06/11/08

9.40%

7.19%

28.00%

72.00%

56.60%

7.01%

13.00%

5.99%

06/30/10

9.64%

4.37%

28.00%

72.00%

72.01%

4.96%

16.00%

11.04%

Kier

Hairmyres Hospital Garrett Anderson Treatment and Critical Care Centre

03/20/98 03/28/10

8.52% 10.11%

7.05% 4.75%

31.00% 28.00%

69.00% 72.00%

27.53% 43.76%

7.52% 7.18%

23.00% 14.50%

15.48% 7.32%

Kintra Ltd

Neville Hall Hospital Energy Management Project Hereford County Hospital

02/14/02

8.59%

6.26%

30.00%

70.00%

35.88%

7.08%

15.99%

8.91%

04/01/03

8.54%

5.26%

30.00%

70.00%

32.94%

6.94%

18.10%

11.16%

Whittington Hospital

10/09/06

10.94%

5.36%

30.00%

70.00%

90.19%

4.46%

14.38%

9.92%

St David’s Community Hospital Acute Services Reprovision at Newham General Hospital Acute Hospital For The South West (Enniskillen) South West Essex Primary Care Trust – Brentwood Community Hospital

04/01/04 01/28/08

8.60% 10.06%

5.72% 6.26%

30.00% 28.00%

70.00% 72.00%

40.23% 72.29%

6.75% 6.05%

17.00% 14.97%

10.25% 8.92%

05/21/11

9.46%

4.39%

26.00%

74.00%

39.17%

7.03%

14.00%

6.97%

06/30/10

8.54%

4.37%

28.00%

72.00%

47.60%

5.97%

16.00%

10.03%

06/01/03

6.50%

5.21%

30.00%

70.00%

29.68%

5.65%

16.00%

10.35%

02/05/08

6.38%

6.21%

28.00%

72.00%

33.15%

5.75%

15.00%

9.25%

07/15/09

8.54%

5.98%

28.00%

72.00%

29.82%

7.28%

15.00%

7.72%

Land Securities Group Plc Lloyds Banking Group Macob Newham Investment Company Ltd NIHG South West Health Nisbet LLP

Quayle Munro Holding Larkfield Geriatric Assessment Facility Plc Mid Argyll Community Hospital Greater Glasgow Health Board – Stobhill Psychiatric Unit Robert McAlpine

Wishaw General Hospital

07/01/98

8.62%

7.19%

31.00%

69.00%

25.81%

7.67%

15.00%

7.33%

Robertson Group

Gartnavel Royal Hospital New Acute Hospital for Forth Valley

12/01/09 07/11/11

8.82% 9.52%

5.00% 4.18%

28.00% 26.00%

72.00% 74.00%

43.43% 37.51%

6.55% 7.11%

15.10% 15.00%

8.55% 7.89%

Royal BAM Group

St James University Hospital & Leeds General Infirmary Redevelopment

09/21/06

7.88%

5.76%

30.00%

70.00%

73.25%

5.06%

15.02%

9.96%

Royal Bank of Scotland

Redevelopment of Bishop Auckland General Hospital New Royal Infirmary of Edinburgh & University of Edinburgh Medical School Specialist Services Reprovision at John Radcliffe Hospital Redevelopment of Pinderfields General Hospital & Pontefract General Infirmary

03/10/98

11.95%

6.79%

31.00%

69.00%

88.57%

5.52%

18.11%

12.59%

08/21/98

11.90%

6.79%

31.00%

69.00%

88.57%

5.51%

19.71%

14.20%

12/20/07

9.97%

5.83%

30.00%

70.00%

90.22%

4.66%

15.30%

10.64%

06/29/11

11.98%

3.82%

26.00%

74.00%

88.75%

3.86%

15.31%

11.45%

07/21/00

9.59%

7.31%

30.00%

70.00%

28.04%

8.34%

15.00%

6.66%

04/02/11

9.86%

4.78%

26.00%

74.00%

39.17%

7.39%

13.65%

6.26%

07/31/01 11/20/02

9.32% 10.08%

6.65% 5.62%

30.00% 30.00%

70.00% 70.00%

73.84% 73.29%

5.88% 5.57%

13.98% 23.00%

8.10% 17.43%

04/01/03 03/21/06

10.02% 9.86%

5.26% 5.47%

30.00% 30.00%

70.00% 70.00%

72.72% 77.11%

5.41% 5.21%

18.10% 10.66%

12.69% 5.45%

04/21/06

10.07%

5.57%

30.00%

70.00%

77.11%

5.31%

13.42%

8.11%

Ryhurst

Semperian PPP Investment Partners

Hertfordshire County Council – Young Herts Childrens, Schools & Families PFI Project Redcar and Cleveland Primary Care Trust New Hospital Darent Valley Hospital Princess Royal University Hospital Hereford County Hospital Royal Wolverhampton Hospitals NHS Trust Radiology unit Nuffield Orthapaedic NHS Trust

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V. Vecchi et al. / Health Policy xxx (2013) xxx–xxx

Table 5 (Continued) Sponsor

Serco Group Shepherd Construction

Skanska AB

Sodexo

Staveley Industries

Taylor Woodrow Construction Ltd Uberior Infrastructure Investors Ltd UME Group

Westwind Capital Partners Ltd

Project

Contract date

Ke

Kd

Tax rate

(1 − T)

D/D + E

WACC

Blended equity IRR

Avon & Western Wiltshire: Modernising Mental Health and expanding regional Secure Services. Lymington New Forest Hospital Daventry and South Northants Primary Care Trust Community Hospital Walsall Hospitals NHS Trust – Redevelopment Project

03/02/08

10.00%

6.40%

28.00%

72.00%

73.17%

6.05%

14.69%

8.64%

11/19/08 03/04/09

10.42% 10.48%

7.17% 6.04%

28.00% 28.00%

72.00% 72.00%

73.17% 74.60%

6.57% 5.90%

14.73% 13.17%

8.16% 7.27%

11/21/11

9.56%

3.84%

26.00%

74.00%

64.70%

5.21%

15.00%

9.79%

Norfolk & Norwich University Hospital Maternity and acute development – Hull Royal Infirmary

01/09/98

9.48%

6.79%

31.00%

69.00%

45.84%

7.28%

19.00%

11.72%

05/04/01

9.43%

6.57%

30.00%

70.00%

32.97%

7.83%

13.00%

5.17%

Coventry New Hospitals Project Redevelopment of the Royal Hospital of St Bartholomew and the Royal London Hospital

11/28/06

9.74%

5.71%

30.00%

70.00%

67.55%

5.86%

15.00%

9.14%

04/28/10

10.68%

4.71%

28.00%

72.00%

66.30%

5.85%

17.00%

11.15%

Oldchurch Hospital Site Rationalisation – Queens Hospital Stoke Mandeville Hospital – Redevelopment Project North Staffordshire Acute Psychiatric Unit

01/16/08

10.68%

6.01%

28.00%

72.00%

54.28%

7.23%

15.16%

7.93%

05/22/08

10.62%

6.86%

28.00%

72.00%

54.28%

7.53%

15.00%

7.47%

06/02/11

9.35%

4.33%

26.00%

74.00%

50.33%

6.26%

15.00%

8.74%

Avon & Western Wiltshire: Modernising Mental Health and expanding regional Secure Services. Royal Alexandra Hospital for Sick Children

03/02/08

9.16%

6.40%

28.00%

72.00%

41.25%

7.28%

14.69%

7.41%

06/11/08

9.28%

7.19%

28.00%

72.00%

41.25%

7.59%

13.00%

5.41%

St Helens and Whiston Hospitals Strategic Redevelopment Project Oldchurch Hospital Site Rationalisation – Queens Hospital

06/02/10

8.63%

4.52%

28.00%

72.00%

42.73%

6.33%

14.75%

8.42%

01/16/08

10.14%

6.02%

28.00%

72.00%

72.29%

5.94%

15.16%

9.22%

Larkfield Geriatric Assessment Facility Southern General Hospital Geriatric Medicine & Assessment Facility North Staffordshire Acute Psychiatric Unit Mid Argyll Community Hospital Greater Glasgow Health Board – Stobhill Psychiatric Unit Greater Glasgow NHS Board – Phase 1: Stobhill and Victoria Ambulatory Care and Diagnostic Hospitals

06/01/03

8.54%

5.21%

30.00%

70.00%

52.94%

5.95%

16.00%

10.05%

08/01/03

8.95%

5.58%

30.00%

70.00%

52.94%

6.28%

16.00%

9.72%

12/09/03

9.09%

5.92%

30.00%

70.00%

52.94%

6.47%

15.00%

8.53%

02/05/08

9.17%

6.21%

28.00%

72.00%

45.15%

7.05%

15.00%

7.95%

07/15/09

9.26%

5.98%

28.00%

72.00%

51.14%

6.73%

15.00%

8.27%

08/24/10

9.06%

3.84%

28.00%

72.00%

52.13%

5.78%

15.10%

9.32%

06/30/10

11.00%

4.37%

28.00%

72.00%

73.94%

5.19%

16.00%

10.81%

South West Essex Primary Care Trust – Brentwood Community Hospital

Extra return

Tax rate expresses the UK corporate tax at the year of contract signature.

from earlier sections of this paper that a similar approach could be developed for SPVs undertaking PFIs. Specifically, the application of capital budgeting methods developed in this paper could be used to re-calibrate unitary charges on future projects so as to generate cash-flows sufficient to

provide a “fair”, rather than an excess, return to investors of equity capital. In addition, it is important to recognise that regulatory intervention may be required throughout the contract period, and not just at the point that contracts are signed

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and base case rates of return are agreed. As noted elsewhere [51], a private firm in charge of services over a 30-year contract will find opportunities to reduce operational costs within the period. Of the services included within a PFI contract, only support services such as catering and cleaning are routinely benchmarked or market tested during the contract period. Typically, there is no mechanism under which the gains from cost-reductions in operations such as maintenance or life-cycle management can be shared with authorities. As a consequence, any such gains accrue to equity-holders in their entirety and this may increase the return on equity substantially beyond that agreed at financial close. Indeed, a recent National Audit Office report [20] showed that expected blended equity IRRs are higher than those agreed at financial close in two-thirds of the 118 PFI contracts included in its survey. In a recent paper, Jensen and Blanc-Brude [51] suggest a national regulator, modelled broadly on the lines of independent utility regulators, and employing a form of RPI-X incentive regulation and well established techniques of comparative competition, would provide the best institutional structure for regulating PFIs. However, where institutional structures are well developed, the need for a new regulator is not clear. In particular, where standard contracts exist (such as the UK Treasury’s Standardisation of PFI Contracts) these may provide the most convenient, and possibly the most effective, means of regulating equity returns. One of the functions of standard contracts is to spell out the government’s favoured model of risk allocation. Currently, the standard contract specifies the transfer of construction and availability risk to the private sector counterparty, as well as the general risks of assets ownership [30]. For this standard model, an allowable range in the reasonable return could be specified. The standard contract could also, through relatively minor amendments to existing clauses, ensure that any free cash-flow in excess of that required to provide investors with the return projected at financial close is shared with the authority. Of course, it is one thing for central government to announce changes to standard contracts and a regulated return, it is quite another to persuade the private sector to accept this. Therefore, the consolidation of the public sector purchasing function is likely to be a pre-requisite for any regulatory action to succeed. Making full use of the government’s considerable market power in the construction, facilities management and project finance markets will be required. Examples of good practice in centralised procurement do exist. For example, there is a much greater degree of centralisation in the Republic of Ireland, where the National Development Finance Agency is responsible for delivering all aspects of DBFO programmes undertaken by government departments. Within the UK, the Scottish Futures Trust, which is taking forward a pipeline of PFI/PPPs worth £2.5 billion on behalf of the Scottish Government, has also sought to reduce the fragmentation of the public sector’s purchasing function, with the explicit aim of maximising the amount of investment secured for a fixed proportion of its revenue budget allocated to paying for DBFO contracts [52]. By consolidating the government purchasing function, standardising initial rates of return on an appropriate

27

CAPM basis, and ensuring that actual returns converge to the acceptable level throughout the contract, policymakers can eliminate the problem of excess returns on the (increasingly prominent) equity element of a project’s capital investment. This is likely to yield significant financial benefits for individual public authorities involved. Conversely, given that equity is set to play a much greater role in project financing under the PF2 system, in which gearing is to be lowered, the absence of such measures will lead to a major increase in the Weighted Average Cost of Capital for projects, and thus a much higher final cost for publicly funded hospitals and health care systems. In an era of tight fiscal constraints, such avoidable expenses should not be tolerated. References [1] Hellowell M. The private finance initiative: policy, performance and prospects. In: Hodge G, Greve C, Boardman A, editors. International handbook on public–private-partnerships. Edward Elgar; 2010. [2] Välilä. How expensive are cost savings? On the economics of public–private partnerships’. EIB Papers, 10 (1), Luxemburg: European Investment Bank; 2005. [3] HM Treasury. A new approach to public private partnerships. 2012. Available at: http://www.hm-treasury.gov.uk [accessed 05.12.12]. [4] HM Treasury. PFI projects signed list at April 2012. Available at: http://www.hm-treasury.gov.uk/ppp pfi stats.htm [accessed 06.12.11]. [5] HM Treasury. PFI projects in procurement list at April 2012. Available at http://www.hm-treasury.gov.uk/ppp pfi stats.htm [accessed 06.04.12]. [6] HM Treasury. Quantitative assessment user guidance. 2007. Available at: http://www.hm-treasury.gov.uk/ppp vfm index.htm [accessed 20.10.11]. [7] Croce RD. Pension funds investment in infrastructure: policy actions. OECD Working Papers on Finance, Insurance and Private Pensions, No. 13; 2011. Paris: OECD. [8] Kappeler A, Nemoz M. Public–private partnerships in Europe – before and during the recent financial crisis. European Investment Bank, Economic and Financial Report 2010/04, Luxembourg; 2010. [9] EPEC. Market update review of the European PPP market first semester of 2011. Available at: http://www.eib.org/ epec/resources/epec-market-update-h1-2011.pdf [accessed 20.04.12]. [10] Hellowell M, Vecchi V. The credit crunch in infrastructure finance: assessing the economic advantage of recent policy actions. In: Paper given at the PPPs for economic advantage conference. 2012. [11] Cuthbert J, Cuthbert M. The implications of evidence released through Freedom of Information on the projected returns from the New Royal Infirmary of Edinburgh and certain other PFI schemes. Working paper; 2008. Available at: www.cuthbert1.pwp.blue- yonder.co.uk [12] Shaoul J, Stafford A, Stapleton P. The cost of using private finance to build finance and operate hospitals. Public Money & Management 2008;28(3):101–8. [13] Vecchi V, Hellowell M, Longo F. Are Italian healthcare organizations paying too much for their public private partnerships? Public Money and Management 2010;30(2):125–32. [14] National Audit Office. The refinancing of the Norfolk and Norwich PFI hospital: how the deal can be viewed in the light of the refinancing. London: The Stationery Office; 2005. Available at: www.nao.org.uk/publications [accessed 01.04.11]. [15] National Audit Office. Update on PFI debt refinancing and the PFI equity market. London: The Stationery Office; 2006. Available at: www.nao.org.uk/publications [accessed 01.04.11]. [16] National Audit Office. Financing PFI projects in the credit crisis and the Treasury’s response. London: The Stationery Office; 2010. Available at: www.nao.org.uk/publications [accessed 01.04.11]. [17] Balfour Beatty, Annual report and accounts; 2010. Available at: http://www.balfourbeatty.com/files [18] Carillion. Annual report and accounts; 2010. Available at: annualreport2010.carillionplc.com [accessed 06.12.11]. [19] Probitas Partners. Infrastructure market review and institutional investor trends survey for 2011; 2010.

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Please cite this article in press as: Vecchi V, et al. Does the private sector receive an excessive return from investments in health care infrastructure projects? Evidence from the UK. Health Policy (2013), http://dx.doi.org/10.1016/j.healthpol.2012.12.010