Chapter 10. The profits from this and other PFI contracts in the health sector

The private capital which has been invested in the NNUH has consisted of senior debt capital, junior debt capital and equity capital. An example of the senior debt is a holding of about £3 million by Standard Life in its Long Life Corporate Bond Fund. This is invested in Octagon Healthcare, carrying an annual interest rate of 5.3% and maturing in 2035 (Standard Life website, accessed in September 2008). At the other end of the capital spectrum, the equity holdings are held by investors in Octagon Healthcare Holdings (Norwich) Limited. The shareholdings were held (as of December 31 2007) by four groups of investors - Innisfree, 3i, John Laing and Trillium (see section A1.11).

However the value of Octagon's equity shareholdings is small relative to the size of company's total liabilities, and the profits to Octagon's equity shareholders have been enormous. The value of the shareholders' funds at the year ending December 31, 1997 totalled just over £1mn (£1.325 mn. to be exact). Six years later in 2003, the gain to Octagon Healthcare from the refinancing was £95 mn. Of this, £11 mn. was paid as dividends to the shareholders in 2003, with most of the remainder appearing in the Octagon Healthcare balance sheet as intangible assets.

Octagon's £95 mn. profit on the refinancing in 2003 amounts to an annual rate of return of more than 120% on the share capital (see section A1.11). It is little wonder that Richard Jewson (chair of Octagon Healthcare at the time of the refinancing) was reported as saying that "We are pleased that the refinancing has been signed" and that the Chair of the Public Accounts Committee referred to it as "the unacceptable face of capitalism". Within six years of investing £1.325 mn, the shareholders had been paid £11 mn. in dividends, so that they had already recouped their investment more than seven times - and there was still more than 30 years to go before the first break in the contract.

An even more spectacular example of a high rate of profit from PFI projects is provided by Innisfree Limited. At the end of 2007, Innisfree Nominees held 26.3% of the equity shares in Octagon Healthcare. As of January 2009, Innisfree Nominees was part of the Innisfree Group. The latter is described in FAME company reports as a manager of private equity funds investing in UK and European PFI projects. In the annual report for the year ending 31 March 2008, the company's shareholdings were as follows;

A major subsidiary of this Group was Innisfree Limited. The sales, directors' remuneration, profits and equity capital of this company (Innisfree Limited) is shown in table 10.1 below

Table 10.1 shows that the real annual rate of return between 1998 and 2008 and on a discounted basis has been more than 200%. This rate of return is calculated by including the directors' remuneration in the cash flow to shareholders, since at the end of March 2008, there were only seven directors (N J Crowther, T J Kashem, G M Beazley Long, D A Metter, T R Pearson, J W Ward and M J Webber) and their remuneration was so large ossibly for tax reasons.

The real annual rate of profit of more than 200% is a very high rate of return indeed - many, many times the annual average of less than 15% for UK companies (private non-financial corporations) over the same period33.

Incorporated in 1995, Innisfree Limited was reported as having invested more than £200 mn of other people's money by 2003, buying into dozens of public infrastructure projects and in 2003, it claimed "to control more than £4 bn. worth of assets through its holdings" (Guardian February 22, 2003). The Chief Executive of Innisfree Group Limited is David Metter who has been described as "also the driving force behind the private sector's PPP forum" (Guardian, February 22 2003).

There are other reports of very high rates of return by investors in Octagon Healthcare. The annual return on shareholders' funds of Serco Investments Limited (which in 2005 had a 5% share in Octagon Healthcare) over the ten years between 1998 and 2007 was 39%. These profits included a capital distribution of £4.1 mn arising from the refinancing of the NNUH in 2003. In 2003, Serco stated in a news release dated 12 December that "The capital distribution will result in an exceptional and incremental profit before tax and a cash inflow of £4.1 mn in 2003".

It is clear that the rates of return obtained from PFI investments in the health sector have been very high. Thus the 2005 NAO report on the Darent Valley Hospital; the PFI Contract in Action estimated that the annual rate of return to the shareholders of THC (Dartford) Limited (the private company involved) was 56% pa. After investing £13 mn in that project, the shareholders³⁴ had already received £37 mn. within three years of the hospital coming into use (NAO 2005, 4).

The study by P Edwards et al 2004 also revealed a very high rate of profit to the shareholders of the 13 companies involved in PFI projects in the NHS. The figures are summarised in table 10.2 below. Over the five years from 1998 to 2002 inclusive, the average annual profit after tax was just under £12 mn., almost double the shareholders' funds which averaged £6.2 mn.

In a recent study of twelve large PFI hospital developments (including the NNUH) the return on shareholders' funds was 58% in 2005 and 1100% in 2004! (Shaoul, Stafford and Stapleton 2007, table 5).

It is perhaps not surprising that special funds have been set up with the specific purpose of buying into PFI contracts. In 2004, the largest was reported to be SMIF (the Secondary Market Infrastructure Fund) based in London which claimed a total shareholding of more than £200 million (BBC Tuesday July 6 2004, page 16 transcript). Similarly Richard Jewson (who was the chair of Octagon for eight years until August 2006) was involved in setting up a company (PFI Infrastructure Company Limited - also known as 'PFICo') in 2004 to deal in PFI projects. 'PFICo' was set up in the Isle of Man. Richard Jewson was non-executive chairman of 'PFICo' in May 2007 when the 'PFICo' directors recommended that a takeover bid from I2 BidCo ("I two Bid company") be accepted by the shareholders. The offer from the I2 BidCo valued the share capital of 'PFICo' at £156 mn. The offer per share was 308 pence, a rise of 120% on a 140 pence per share placing in July 2004 and a rise of 76% on a 175 pence per share placing in March 2006. These represent annual profits of, for the first placing, more than 40% and for the second placing, of more than 60%.

It is clear that the profits made from PFI dealings in the health sector have been exceptionally and absurdly high.

33. Figures for UK corporate profitability were obtained from the website of the Office of National Statistics.

34 One of the main shareholders is Carillion which announced in March 2005 that its £29 mn of investment in 18 PFI schemes - including the Darent Valley Hospital - was now worth around £83 mn - just under three times as much (Guardian March 10 2005)