The sale of PPP equity has economic impacts, not least in terms of who funds the excessive PPP profits and who suffers the loss of tax revenue. Profits are retained by parent companies and ultimately benefit their shareholders through dividend payments.
It is very likely that fewer PPP projects would have been approved if the high rate of return from PPP equity transactions had been taken into account at the evaluation stage. Taxpayers finance the large profits and any tax payable on profits from the sale of PPP equity makes only a small difference to the overall cost to taxpayers. The high cost of PPPs and equity transaction profits absorb public resources that could fund infrastructure investment and/or other initiatives that support sustainable economic growth (Whitfield, 2010).
The sale of equity in PPP projects serves broader corporate interests. For example, the Lend Lease Corporation (Australia) has PPP projects in Europe, North America and Asia Pacific. The company made an A$653m loss in the year ending 30 June 2009. It was under pressure to return to profitability in the following financial year and in November 2009 sold its 50% equity in the Queens Hospital, Romford, PPP project for £23.9m to the HICL infrastructure fund. The sale featured in the company's key trading events of the year. The profit was never disclosed, but the annual report confirmed the "… increase in profit after tax for the UK business is largely attributable to the sale of the Group's interest in the Queen's Hospital, Romford" (Lend Lease Annual Report, 2010).
Transaction costs incurred in the sale of PPP equity benefit financial institutions and law firms. There is little public information available on the level of transaction costs. Information on two £25m-£30m transactions by Carillion reveal costs of 0.8% and 3.5%. A Serco Group equity transaction incurred costs of 2.6%. On this basis, total fees could range from £40m to £180m on equity sales of £5,123m (excludes the fees charged in the sale of secondary market funds and public sector buyouts or contract terminations - Table 7).
The growth of offshore infrastructure funds holding large portfolios of UK financed PPPs leads to a loss of tax revenue. It is not within the scope of this research to quantify this loss, but it is likely be many millions of pounds given the scale of direct and indirect equity transactions to date.