Evidence that undermines company claims of high risk in investment PRIVATE INVESTORS accepted last week that profits for initial projects may have been high, but insisted they were lower now.
"There were good profits to be made," said Jo Elliot, the deputy chief executive of the Edinburgh investment bank, Quayle Munro. "These deals were put together with complete integrity when the world was very different. The returns reflected the risk that we and others assessed."
On-Yee Tai, a spokeswoman for the Public Private Partnership Forum representing over 100 companies, said: "Whilst the industry would accept that there have been a handful of projects where significant profits have been made, the genuine risks inherent in these early schemes cannot be underestimated."
Other evidence uncovered by Jim and Margaret Cuthbert, however, undermines companies' claims they they were taking a substantial risk. In 1998, Donald Dewar, then the secretary of state for Scotland, gave a written guarantee that if any health trust defaulted on payments, the government would step in to make sure that liabilities were met "on time and in full".
Serious flaws in the PFI business case for the Edinburgh Royal Infirmary were also discovered in a 1998 report by Moores Rowland Health Consulting for the Dutch bank Rabobank. There was some "double counting" of risks by Edinburgh NHS Trust, the report said.
A crucial £42 million interest-rate risk transferred to the private sector had been wrongly included, the report pointed out. Overall, the analysis was "incomplete" and "poor", it said.
The case for embarking on a PFI project had not been made by the health trust, the report contended. "It is impossible to rely on the trust's analysis of risk," it concluded. "Evidence of substantial risk transfer is weak."
The implication was that the financial risk taken on by investors was significantly less than the trust realised. "There have been major failings in the value for money, risk transfer, and affordability tests for PFI schemes," said Margaret Cuthbert.
"In the case of the new Royal Infirmary in Edinburgh, we now know that many of the problems were actually identified by the consultants acting for the lenders to the PFI scheme. Why was the public sector, which was acting on our behalf, not able to identify and act on these problems at the time?"
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Posted by: nostress, grangemouth on 11:56pm Sat 17 May 08
"the genuine risks inherent in these early schemes cannot be underestimated." What risks for God's sake! The Labour mob were never going to let this policy fail....the only risks for business were whether their profits would be obscenely fat or merely obscene...they couldn't believe their luck!
"the genuine risks inherent in these early schemes cannot be underestimated." What risks for God's sake! The Labour mob were never going to let this policy fail....the only risks for business were whether their profits would be obscenely fat or merely obscene...they couldn't believe their luck!
Posted by: Snarler Barr, Tollcross, Edinburgh on 1:34am Sun 18 May 08
A sensible consideration of the risks of building a major infrastructure project leads me to take exception to your claim that there was no risk to the funders of these projects.
- The guarantees made by Donald Dewar only relate to the revenues to be achieved by the PFI projects; there was significant risk of cost overruns in the construction phase, and the investors were not going to compensated for any additional costs.
- Investors require compensation for incurring risks upfront, before the outcome of the risk is known. Just because PFI companies did not suffer losses from their risk exposure does not mean that there was no risk; however, in this example, the uncertainty did not result in a loss for the investors.
The benefit of these structures is that the pricing of the risk was set at the lowest point which the market would support; and evidently the investors, such as QM, were unwilling to take those risks for a lower price.
If the Sunday Herald, and the Cuthberts, are seriously alleging that these profits were greater than the market price for the risks which investors incurred, then it should be possible to show that there was collusion between the market participants, or that there were barriers to entry which prevented other investors from competing down the excess profits earned by PFI investors.
A sensible consideration of the risks of building a major infrastructure project leads me to take exception to your claim that there was no risk to the funders of these projects.
- The guarantees made by Donald Dewar only relate to the revenues to be achieved by the PFI projects; there was significant risk of cost overruns in the construction phase, and the investors were not going to compensated for any additional costs.
- Investors require compensation for incurring risks upfront, before the outcome of the risk is known. Just because PFI companies did not suffer losses from their risk exposure does not mean that there was no risk; however, in this example, the uncertainty did not result in a loss for the investors.
The benefit of these structures is that the pricing of the risk was set at the lowest point which the market would support; and evidently the investors, such as QM, were unwilling to take those risks for a lower price.
If the Sunday Herald, and the Cuthberts, are seriously alleging that these profits were greater than the market price for the risks which investors incurred, then it should be possible to show that there was collusion between the market participants, or that there were barriers to entry which prevented other investors from competing down the excess profits earned by PFI investors.
Posted by: nostress, grangemouth on 2:04am Sun 18 May 08
Snarler Barr - again I ask what risks were these investors taking? We're talking about public projects here - hospitals and schools - which were always going to have to be paid for out of the public purse - not investors taking genuine risks on say, the launch of a new product which people may or may not buy or the building of some new business park which may or may not be used by business! We have no choice but to use the hospitals and schools and to pay for them. The question about PFI was always about whether it was the most cost-effective and efficient method of paying for public projects from the purchasers' (i.e. us the public) point of view. Evidence so far, would indicate that it was not, given the shoddy workmanship and useful length of life of many of the buildings and the fact that at the end of many, many years of paying for these projects, they will not end up in public ownership.
Snarler Barr - again I ask what risks were these investors taking? We're talking about public projects here - hospitals and schools - which were always going to have to be paid for out of the public purse - not investors taking genuine risks on say, the launch of a new product which people may or may not buy or the building of some new business park which may or may not be used by business! We have no choice but to use the hospitals and schools and to pay for them. The question about PFI was always about whether it was the most cost-effective and efficient method of paying for public projects from the purchasers' (i.e. us the public) point of view. Evidence so far, would indicate that it was not, given the shoddy workmanship and useful length of life of many of the buildings and the fact that at the end of many, many years of paying for these projects, they will not end up in public ownership.
Posted by: doonhamer on 2:27am Sun 18 May 08
[quote][bold]Snarler Barr[/bold] wrote:
A sensible consideration of the risks of building a major infrastructure project leads me to take exception to your claim that there was no risk to the funders of these projects. - The guarantees made by Donald Dewar only relate to the revenues to be achieved by the PFI projects; there was significant risk of cost overruns in the construction phase, and the investors were not going to compensated for any additional costs. - Investors require compensation for incurring risks upfront, before the outcome of the risk is known. Just because PFI companies did not suffer losses from their risk exposure does not mean that there was no risk; however, in this example, the uncertainty did not result in a loss for the investors. The benefit of these structures is that the pricing of the risk was set at the lowest point which the market would support; and evidently the investors, such as QM, were unwilling to take those risks for a lower price. If the Sunday Herald, and the Cuthberts, are seriously alleging that these profits were greater than the market price for the risks which investors incurred, then it should be possible to show that there was collusion between the market participants, or that there were barriers to entry which prevented other investors from competing down the excess profits earned by PFI investors.[/quote] Sunny Jim, you belong in the Tollbooth, not in Tollcross.
Snarler Barr wrote:
A sensible consideration of the risks of building a major infrastructure project leads me to take exception to your claim that there was no risk to the funders of these projects. - The guarantees made by Donald Dewar only relate to the revenues to be achieved by the PFI projects; there was significant risk of cost overruns in the construction phase, and the investors were not going to compensated for any additional costs. - Investors require compensation for incurring risks upfront, before the outcome of the risk is known. Just because PFI companies did not suffer losses from their risk exposure does not mean that there was no risk; however, in this example, the uncertainty did not result in a loss for the investors. The benefit of these structures is that the pricing of the risk was set at the lowest point which the market would support; and evidently the investors, such as QM, were unwilling to take those risks for a lower price. If the Sunday Herald, and the Cuthberts, are seriously alleging that these profits were greater than the market price for the risks which investors incurred, then it should be possible to show that there was collusion between the market participants, or that there were barriers to entry which prevented other investors from competing down the excess profits earned by PFI investors.
Sunny Jim, you belong in the Tollbooth, not in Tollcross.
Posted by: McSomeone, Scotland on 8:49am Sun 18 May 08
[quote]"These deals were put together with complete integrity when the world was very different. The returns reflected the risk that we and others assessed."[/quote]
Absolute rubbish, the banks and financiers walked right over the treasury, who haven't the faintest idea on financial dealings in the real world. Rather like the All Blacks playing an all girls first year rugby team. They don't know what's going to hit them.
Anyone who's ever negotiated with local authorities will know just how little their managers know, let alone understand of how business works. Whitehall and government are even worse, in fact most businessmen regard them as being downright pathetic and stupid as they appear to negotiate on what will make them look good in the press rather than what is best for the country.
"These deals were put together with complete integrity when the world was very different. The returns reflected the risk that we and others assessed."
Absolute rubbish, the banks and financiers walked right over the treasury, who haven't the faintest idea on financial dealings in the real world. Rather like the All Blacks playing an all girls first year rugby team. They don't know what's going to hit them.
Anyone who's ever negotiated with local authorities will know just how little their managers know, let alone understand of how business works. Whitehall and government are even worse, in fact most businessmen regard them as being downright pathetic and stupid as they appear to negotiate on what will make them look good in the press rather than what is best for the country.
Posted by: McSomeone, Scotland on 9:02am Sun 18 May 08
[quote][bold]Snarler Barr[/bold] wrote:
A sensible consideration of the risks of building a major infrastructure project leads me to take exception to your claim that there was no risk to the funders of these projects. - The guarantees made by Donald Dewar only relate to the revenues to be achieved by the PFI projects; there was significant risk of cost overruns in the construction phase, and the investors were not going to compensated for any additional costs. - Investors require compensation for incurring risks upfront, before the outcome of the risk is known. Just because PFI companies did not suffer losses from their risk exposure does not mean that there was no risk; however, in this example, the uncertainty did not result in a loss for the investors. The benefit of these structures is that the pricing of the risk was set at the lowest point which the market would support; and evidently the investors, such as QM, were unwilling to take those risks for a lower price. If the Sunday Herald, and the Cuthberts, are seriously alleging that these profits were greater than the market price for the risks which investors incurred, then it should be possible to show that there was collusion between the market participants, or that there were barriers to entry which prevented other investors from competing down the excess profits earned by PFI investors.[/quote] Tell me Snarler Barr, just how much have you dealt in stocks and shares? I started in the early sixties and continued until 2001 and never ever have I ever seen or heard of returns of this nature, for such negligible risk on the part of the investor. Even if the projects fail, schools or hospitals closes or fails to live up to expectations they still collect their profit. There is absolutely no risk for the investors and the money is guarranteed under the terms and conditions negotiated.
Any Chairman or Company director who negotiated such terms and conditions in business would be out on his ear in seconds, sued for incompetence and would never ever find work again. (Well maybe as a manager for a local authority, who appear to prize such incompetence very highly)
Snarler Barr wrote:
A sensible consideration of the risks of building a major infrastructure project leads me to take exception to your claim that there was no risk to the funders of these projects. - The guarantees made by Donald Dewar only relate to the revenues to be achieved by the PFI projects; there was significant risk of cost overruns in the construction phase, and the investors were not going to compensated for any additional costs. - Investors require compensation for incurring risks upfront, before the outcome of the risk is known. Just because PFI companies did not suffer losses from their risk exposure does not mean that there was no risk; however, in this example, the uncertainty did not result in a loss for the investors. The benefit of these structures is that the pricing of the risk was set at the lowest point which the market would support; and evidently the investors, such as QM, were unwilling to take those risks for a lower price. If the Sunday Herald, and the Cuthberts, are seriously alleging that these profits were greater than the market price for the risks which investors incurred, then it should be possible to show that there was collusion between the market participants, or that there were barriers to entry which prevented other investors from competing down the excess profits earned by PFI investors.
Tell me Snarler Barr, just how much have you dealt in stocks and shares? I started in the early sixties and continued until 2001 and never ever have I ever seen or heard of returns of this nature, for such negligible risk on the part of the investor. Even if the projects fail, schools or hospitals closes or fails to live up to expectations they still collect their profit. There is absolutely no risk for the investors and the money is guarranteed under the terms and conditions negotiated.
Any Chairman or Company director who negotiated such terms and conditions in business would be out on his ear in seconds, sued for incompetence and would never ever find work again. (Well maybe as a manager for a local authority, who appear to prize such incompetence very highly)
Posted by: Euan on 10:10am Sun 18 May 08
Just a thought: Right to buy by the tanant, does it apply? Would it work?
Euan
Just a thought: Right to buy by the tanant, does it apply? Would it work?
Euan
Posted by: Snarler Barr, Tollcross, Edinburgh on 11:46am Sun 18 May 08
McSomeone,
I agree that the 17% IRR would be very high for a project with "negligible risk", although I'm sure you would appreciate that there is still a liquidity premium required for tying up your money for 30 years in an investment with dubious resale potential.
My point was also that there is uncertainty in quantifying the business's costs, while revenues are fixed. Therefore, there is still a risk to the investor.
However, the evidence appears to suggest that these financing terms were the best available to the government at the time. Evidently, other potential investors considered that the project was riskier than you do.
Finally, I agree with your comments on the competency of local government managers; though doesn't this mean that the best solution is one in which they are involved as little as possible in the ongoing business?
McSomeone,
I agree that the 17% IRR would be very high for a project with "negligible risk", although I'm sure you would appreciate that there is still a liquidity premium required for tying up your money for 30 years in an investment with dubious resale potential.
My point was also that there is uncertainty in quantifying the business's costs, while revenues are fixed. Therefore, there is still a risk to the investor.
However, the evidence appears to suggest that these financing terms were the best available to the government at the time. Evidently, other potential investors considered that the project was riskier than you do.
Finally, I agree with your comments on the competency of local government managers; though doesn't this mean that the best solution is one in which they are involved as little as possible in the ongoing business?
Posted by: Neil, Aberdeenshire on 12:56pm Sun 18 May 08
Just a thought; who owns the land these PFI projects are built on?
If the PFI companies now own the land, what's to stop them from knocking the hospitals and schools down at the end of the contract and building executive houses?
Just a thought; who owns the land these PFI projects are built on?
If the PFI companies now own the land, what's to stop them from knocking the hospitals and schools down at the end of the contract and building executive houses?
Posted by: jim mitchell, sauchie, clack's on 12:58pm Sun 18 May 08
Who came up with this brilliant plan in the first place? Did the businessmen approach the politicians or did the politicians approach the businessmen?
Or did it come from those who have a foot in both camps?
Who came up with this brilliant plan in the first place? Did the businessmen approach the politicians or did the politicians approach the businessmen?
Or did it come from those who have a foot in both camps?
Posted by: McSomeone, Scotland on 2:56pm Sun 18 May 08
[quote]I agree that the 17% IRR would be very high for a project with "negligible risk", although I'm sure you would appreciate that there is still a liquidity premium required for tying up your money for 30 years in an investment with dubious resale potential.[/quote]
They don't have to resell the properties as their returns are guarranteed, whether it's used or not. It also depends on whether or not the own the land as well, if they do then they can resell or rebuild something else on that, whatever their profits from the original contract are still guarranteed They completely tied up the wonks in the treasury.
[quote]My point was also that there is uncertainty in quantifying the business's costs, while revenues are fixed. Therefore, there is still a risk to the investor.[/quote]
What part of there are none do you not understand. The government gave the the banks and big business and open cheque. [bold]WE,[/bold] the taxpayer pick up the risk and any losses incurred. It's a win win situation for those holding the PFI/PPP contracts. Why do you think PFI/PPP agreements are so valuable to investors if they ever come up for remortgage. Look what happened when that hospital contract went up for remortgage in Norwich, everyone from banks to hedge funds were fighting each other to get it while the original investors laughed all the way to the bank. They got their profits today instead of tomorrow. It is going to be the national and local taxpayer who is going to be lumbered with any future maintenance as the PFI/PPP share will be in the hands of hedge funds, banks and pension funds and they aren't interested in building contracts, just profits.
[quote]Finally, I agree with your comments on the competency of local government managers; though doesn't this mean that the best solution is one in which they are involved as little as possible in the ongoing business?[/quote]
How? Better still do managerial exchanges with local business so local authorities learn how business works,and business learns how Local authorities work. The most useless prat I've ever worked with came to us froma local authority and I think all of us who worked with him were frankly amazed at just how little he knew and understood about management, dealing with people or with technology. Basically he'd just been a (glorified) clerk, manager was a courtesy title, a sop for his ego.
I agree that the 17% IRR would be very high for a project with "negligible risk", although I'm sure you would appreciate that there is still a liquidity premium required for tying up your money for 30 years in an investment with dubious resale potential.
They don't have to resell the properties as their returns are guarranteed, whether it's used or not. It also depends on whether or not the own the land as well, if they do then they can resell or rebuild something else on that, whatever their profits from the original contract are still guarranteed They completely tied up the wonks in the treasury.
My point was also that there is uncertainty in quantifying the business's costs, while revenues are fixed. Therefore, there is still a risk to the investor.
What part of there are none do you not understand. The government gave the the banks and big business and open cheque.
WE, the taxpayer pick up the risk and any losses incurred. It's a win win situation for those holding the PFI/PPP contracts. Why do you think PFI/PPP agreements are so valuable to investors if they ever come up for remortgage. Look what happened when that hospital contract went up for remortgage in Norwich, everyone from banks to hedge funds were fighting each other to get it while the original investors laughed all the way to the bank. They got their profits today instead of tomorrow. It is going to be the national and local taxpayer who is going to be lumbered with any future maintenance as the PFI/PPP share will be in the hands of hedge funds, banks and pension funds and they aren't interested in building contracts, just profits.
Finally, I agree with your comments on the competency of local government managers; though doesn't this mean that the best solution is one in which they are involved as little as possible in the ongoing business?
How? Better still do managerial exchanges with local business so local authorities learn how business works,and business learns how Local authorities work. The most useless prat I've ever worked with came to us froma local authority and I think all of us who worked with him were frankly amazed at just how little he knew and understood about management, dealing with people or with technology. Basically he'd just been a (glorified) clerk, manager was a courtesy title, a sop for his ego.
Posted by: Wattie, Renfrew on 5:21pm Sun 18 May 08
I was a salesman in my working life, and I can fully subscribe to the view that Local Authority Managers are generally incapable of understanding even straight forward contracts.
I was a salesman in my working life, and I can fully subscribe to the view that Local Authority Managers are generally incapable of understanding even straight forward contracts.
Posted by: scotties on 5:01pm Mon 19 May 08
You only need to look at the Scottish Parliament building to realise that there still remains genuine risk in public procurement. A 10 fold increase in price (£40 million project costing £400 by the end) is astonishing. This overrun is paid for by Scottish taxpayers. Let's hope that the £800 million Glasgow hospital doesn't go that way as it's tax payers that suffer the consequences, not the private sector as in a PFI.
You only need to look at the Scottish Parliament building to realise that there still remains genuine risk in public procurement. A 10 fold increase in price (£40 million project costing £400 by the end) is astonishing. This overrun is paid for by Scottish taxpayers. Let's hope that the £800 million Glasgow hospital doesn't go that way as it's tax payers that suffer the consequences, not the private sector as in a PFI.
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