The development of a secondary market has contributed to the growth in transactions involving the sale of shares in PFI projects

3.2  There is now an emerging secondary market for the sale of shares in PFI project companies. This has developed because investors are seeking opportunities to invest in established PFI projects now that the PFI market has matured and there is current liquidity in the financial markets. As a result, whereas previously there was uncertainty as to whether investors would be able to exit from their PFI investments, there is now a reasonably assured market for investors to sell shares in successful PFI projects, should they wish to do so. While sellers may reinvest their proceeds in other PFI projects there is no obligation to do so. The shares are being bought by existing investors and specialist funds (secondary market equity funds (SMFs)) established to build portfolios of shareholdings in PFI projects. Further details about SMFs are in Appendix 4.

3.3  32 projects reported that there had been a change in the shareholdings of their PFI project company which represented 40 per cent of those projects which provided information on their current investors. The timing of these share sales is set out in Figure 15.

3.4  Where a share sale takes place either the initial or the new investors may still wish to refinance a project's debt finance in which case authorities would expect to share in the gains. Depending on their investment strategy there may be less incentive for initial investors to carry out an early refinancing if they can receive part of the project potential refinancing gains in the value they receive for selling their shares. The value at which the shares are sold may include an amount which the purchaser is willing to pay for the potential of the project to yield future gains on refinancing the debt finance after allowing for the uncertainties of whether a refinancing will actually take place. Nevertheless, we found that half of the projects where there had been a share sale had been refinanced by either the initial or subsequent investors which was a higher incidence of refinancing than in projects where there had not been a share sale.

3.5  In addition, it can be possible for investors to sell their economic interests in a project without selling shares. Jarvis had built up interests in a portfolio of around 30, mainly schools PFI projects, when it began to experience financial difficulties in 2004. Jarvis responded by initially selling the rights to the distributions from their shares in most of their PFI projects to the Secondary Market Infrastructure Fund (SMIF) and subsequently sold the shares in certain of the companies to SMIF (Appendix 4).25 In principle, the incentives applicable to Jarvis as sub-contractor are not affected by the sale of its shares or economic interest in shares. However, there is a risk that Jarvis may not have a suitable incentive for satisfactory performance, and indeed may not have the financial resources to fulfil its service obligations. SMIF is likely, however, to be concerned to protect the interests it has acquired in these projects and may be able to bring in specialist asset management capabilities which could improve the way these projects perform.

__________________________________________________________________________________________
25  In December 2005 Treasury guidance on change of ownership restrictions was extended to include the sale of the economic interest in PFI projects.