Carillion sold 50% of the equity in the Queen Alexandra Hospital, Portsmouth in June 2010 to the HICL infrastructure fund for £31.3m. This transaction is included in the ESSU sample of transactions with profits data and is also one of three case studies in the NAO report on equity investment in privately financed projects (NAO, 2012).
Carillion reported a profit of £16.3m in its half-year results to 30 June 2010 and in its 2010 annual report and accounts (Carillion, 2010 and 2011a). The ESSU database records the transaction, and based on 4.5 years between financial close on 15 December 2005 and the sale of equity in 30 June 2010, records a rate of return of 24.1%.
The NAO report (2012) makes no reference to Carillion's profit statement. Instead, it "estimates the component parts of the investors return". This comprises:
"Estimated changes in the value of equity between financial close and sale, due to changes in post-sale forecast cash flows and the secondary market rate of return (£10.5m).
Time value of money (£7.0m)
Present value of forecast presale distributions in the financial close model (-)
Estimates of the primary investors risks:
• construction contractor default (£2.3m)
• Cost of failed bids (£0.9m)
The primary investors' original investment (£7.2m)
Unexplained residuals (rounded present values at financial close (£3.4m)"
These items total £31.3m.
Other tables in the NAO study examine the estimated premium of primary investor's returns over secondary investors' returns; estimated changes in the value of equity between financial close and the sale due to changes in cash flow and movements in the secondary market; estimated increase in the value of the equity due to the passage of time; reconciliation of sale price to the secondary market valuation of equity at financial close; and residual differences that cannot be explained.
The project's rate of return at financial close in 2005 was 15.0% (NAO, 2012).
So why did the NAO not assess how Carillion made a profit of £16.3m and achieve a rate of return of 24.1%, nearly 61% higher than planned, after less than five years of the 31.5-year contract? As noted earlier, the transaction represents only part of the overall rate of return of the project. The ESSU database uses the widely used method in calculating the rate of return, a method used in the NAO report.
The NAO appears to be using smoke and mirrors to avoid the basic questions. More importantly, the NAO analysis endorses "…the secondary markets rate of return" and market forces in determining the value of PPP equity and assets. This is another example of the way in which hospitals, schools, prisons, public transport and roads are being financialised and marketised to create new pathways to privatisation.
Later in 2010, the Royal Bank of Scotland sold its 39.9% equity in the project in two transactions for £28.5m (no profit details available). The Queen Alexandra Hospital SPC -Hospital Company (QAH Portsmouth) Limited - is now 100% owned by the Guernsey based HICL infrastructure fund (Hospital Company, 2012).
John Laing engineered the fastest profit - £6.3m in four months, net of costs. It acquired the remaining 50% stake in the M40 road project from Carillion in June 2004 for £19.7m and in October that year sold a 50% stake to the Secondary Market Infrastructure Fund for £26.3m (John Laing, 2005). |