113. Investors in PFPs can sell their stakes. Many argue that the secondary market is very beneficial and that freedom to sell stakes makes it easier to attract funds to private finance deals in the first place (NAO p 126, Mr Philip Turville, Royal Bank of Canada Capital Markets, Q 424, Mr Olsen QQ 445-448, Mr Metter Q 462).
114. Since the construction phase of a project is the most risky for the contractor, once construction is over "a project that is into its operational stage is often considered to be a safer investment. Consequently the equity becomes worth more and is attractive to a different type of investor seeking a lower but more constant return" (NAO p 127).
115. We raised the concern that the ability of contractors to sell their stakes may dilute one of the key positive aspects attributed to private finance projects- that the bundling of maintenance into a contract encourages the contractor to build a higher quality asset. If contractors know they can sell out shortly after construction they might not be so diligent about building low maintenance into an asset.
116. In the NAO's view this concern would normally be met by pre-purchase due diligence carried by buyers in the secondary market, so that a contractor with an eye on eventual sale would still build a high quality asset. "Even if the secondary market were leading to the shareholders undertaking less due diligence, it is not clear what the effect on the contract would be. The sub-contractors, lenders and public authority would still need to work together to deliver the project and their due diligence would still be crucial" (p 127).
117. There is some concern that construction companies which can sell their stakes in PFPs shortly after a project is operational may build a lower quality asset than if they remained shareholders with responsibility for maintenance. Although due diligence and checks by buyers in the secondary market amongst other parties may meet this concern, we saw no empirical evidence in this area. We recommend that the NAO should undertake studies of the effects of secondary markets on standards of quality in PFPs.