The European Services Strategy Unit PPP Database - http://www.european-services-strategy.org.uk/ppp-database/ppp-equity-database/ - and this report focus exclusively on the sale of equity in PPP project companies.
It is also important to highlight:
• The database reports solely on profit/loss disclosures by parent companies.
• PPP equity transactions usually include the sale of subordinated debt, also referred to as loan note interest.
• Normally two or three companies are formed with each PPP project - one to undertake the construction and finance, another to operate the facility after construction is completed, plus a holding company.
• The sale of equity is only once source of profit in PPP projects.
• Profits from equity transactions may not be disclosed for up to a year later when company annual reports are published. Profit/loss may not be attributable to individual PPP projects when they are sold in a bundle.
• The database does not record internal transfers, for example, between subsidiaries with the same parent company.
At financial close of a PPP, the financial model will include a rate of return, usually 12% - 15%, but this does not limit the private sector to this return. It is an indicative return, which the preferred bidder company considers acceptable to sign the contract.
The equity in PPP special purpose companies is owned by the respective parent companies and the profit/loss from the sale of equity is retained by the parent company. A company may sell part or all of its shareholding, whilst other shareholders retain their stakes. The SPC shareholders usually have pre-emption rights, which give them the right to acquire the shares of other shareholders who want to sell their equity. The sale of equity in PPP projects usually includes the sale of debt or loan note interest.
By 2012, about 920 Public Private Partnership (PPP) and Private Finance Initiative (PFI) projects had been signed in the UK (PartnershipsUK database 2011) with about 720 operational PFI contracts (HM Treasury, 2012, records only current PFI contracts).
This research is based on actual profits and rates of return, not those predicted when the contract was signed.
Academic studies have examined prospective returns in PPP projects, based on a small number of PPP business cases (Toms et al, 2011, Cuthbert and Cuthbert, 2012). A few studies have estimated the returns of listed and unlisted infrastructure funds, but the three to four year gap between the date of the information, research and publication in academic journals limits its value in fast changing economic conditions (Newell et al, 2011, Hartigan et al, 2011).
Whilst analysis of financial models can provide useful insights into the business case economics of PPP projects, this is limited. PPPs were claimed to be the 'only option' with risk transfer and pricing being 'flexible' and open to different technical and financial interpretations. This scenario provides only limited assurance that value for money was rigorously pursued and business cases were sound.