Why Pre-tax profit?
1. We used the measure of 'pre-tax profit' because even where the PFI companies' profits are taxed we want to know how much 'leaks' from the NHS - i.e. the receipts from taxes on these profits may go to fund other aspects of public services such as defence or transport, and not the NHS. Pre-tax profit is also a standard measure of profitability, as post- tax profit is affected by various adjustments.
2. In order to calculate the amount of pre-tax profit made by PFI companies in the NHS we looked at two sources. The first was the Treasury database of all PFI contracts held by the government. This lists the capital value of all Department of Health PFI projects (i.e. the total funding requirement for all projects at their dates of financial close), the yearly payments to the PFI operator for each year of the contract (known as the Unitary Charge), the companies which have an equity stake in the PFI companies, and the Companies House registration number for each PFI operating company.
3. Special companies have been set up to deliver PFI contracts, known as Special Purpose Vehicles (SPVs). These SPVs are established in order to take out loans to pay for the building of the hospitals and to raise funds from shareholders. For 18 of the entries on the Treasury database there was insufficient information to carry out an analysis of the profits made and the tax paid. In four instances the SPV company number listed in the Treasury spreadsheet was inaccurate and so we had to use the correct company number. In total we looked at 107 NHS capital schemes between 2010 - 2015.
4. The second source was the Companies House database which contains the accounts of all the PFI companies. These accounts include the turnover of the companies, the profit made before tax, the amount of tax paid on the profit and the profit after tax.
5. The vast majority of the income that these SPV companies receive is from the annual unitary charge payments made by the NHS or local authorities for the use, maintenance, and services provided in the PFI-built facilities. In addition, SPVs may receive some income from immaterial interest on bank deposits and other 'Interest receivable…', aside from interest receivable on the finance debtor (part of the unitary charge payment). An example of another income source under 'interest receivable' is gains on financial instruments.
6. Whilst the gains on financial instruments can be large in individual financial years they tend not to be persistent over many years and may partially reverse out as a loss on financial instruments in later years. This gives us some certainty that we can use the unitary charge figures as a reliable proxy for income received by the SPV. Even so, the unitary charge payment in a given year will not tie exactly to the income recognised in the SPV's accounts if different year-ends have been used. We recognise that any remaining differences between total income received by the SPV and the stated unitary charges represent a limitation of the approach used.
7. Having compiled this data for each of the hospital schemes we aggregated it to identify the overall profits and tax paid on PFI schemes between 2010 and 2015. We excluded the profits and losses of any financial years in which the unitary charges had not yet started to be paid.
8. What we have not assessed in our analysis is the overall rate of return on capital or the costs to the NHS and local authorities of the loans which have been taken out by the private companies and which are being paid back each year as part of the unitary charge. Accessing this data and information is much more difficult due to commercial confidentiality restrictions. However, because we have not been able to access this data it should be noted that the figures set out in this report are not a full account of the amount of profit or returns on investment which is leaving the NHS each year due to the use of the Private Finance Initiative. For the individual investors in the SPV further profits can be made from sales of their equity stakes. Sales have typically generated annual returns of between 15-30% for investors.15
9. Finally, in a number of cases the PFI companies which are providing hospitals and other facilities to the NHS declared a loss over the six year period. This does not mean that money was not being made from the NHS during these years, as the banks and other institutions which had lent money to the PFI companies will have been receiving their loan repayments. In addition, the most risky aspect of a PFI contract is building the hospital on time and the potential for cost overruns. This is because the income streams from the NHS or local authority do not start to arrive until the hospital/healthcare facility has been built and can be used. This means that there may be a shortfall between the requirement to make loan repayments and the income received.