High financing costs include 'unfair' rates of return. PFI rates of profit have been shown to be excessive, that is, higher than conventional profitability for equivalent projects. Several attempts have been made to evaluate rates of return. In 2005, the UK government's own evidence base suggested there were 'excess returns' to investors of 2.5%.9 In 2012, the National Audit Office (parliament's financial watchdog) reported that "the public sector may often be paying more than is necessary for using equity investment" and that "in 84 of 118 projects […], investors were reporting returns equal to or exceeding expected rates of return [generally of between 12 to 15 per cent]. Thirty-six of those projects were forecasting significant improvements [on the expected rate of return]."
In 2013, researchers calculated that sponsors of a sample of UK PFI deals extracted returns almost 10% above the market rate. Where access to normally confidential financial contracts has been obtained, researchers have been able identify far higher returns to shareholders. An analysis of the financial projections for three hospital projects at the time the contracts were signed has shown that shareholders expected to receive £168m for £0.5m of equity invested in one hospital. In a second hospital, equity of £100 was expected to generate £89.14m. Whilst in a third, equity of £1000 was expected to generate £55.7m. These high rewards are contractually protected and underwritten by government.
PFI financing costs have recently been implicated in fraudulent manipulation of the interbank lending rate, or Libor.10 Libor is used to price financial instruments known as derivatives that are common to project finance. The European Union and the US Securities and Exchange Commission are investigating Barclays Capital and several other banks that invest in PFIs for misrepresenting the rate in order to mislead the market about the true cost of bank borrowing. The financial impact on the public sector is currently unknown.
In addition to earning excess rates of return and manipulating prices, many PFI companies avoid taxes by registering off-shore and using transfer pricing. In 2011, the House of Commons Treasury Committee reported a pattern of higher rates of profit and low corporation tax payments by highways PPP projects.11 In 2012, Whitfield calculated that 91 shareholder companies investing in UK PFI infrastructure funds are located in tax havens and therefore not liable to capital gains tax.12 The funds had interests in a total of 314 PFI-created assets (table 2).
Table 2
PPP infrastructure funds located in tax havens
| Company | Tax haven | No. of UK PPP assets | PPP projects |
| Semperian PPP Investment Partners Holdings Limited | Jersey | 106 | Previously known as Land Securities Trillium and Secondary Market Infrastructure Fund |
| HICL Infrastructure | Guernsey | 67 | Substantial stakes in hospitals, schools, police stations, Home Office Headquarters, London, and Dutch High Speed Rail |
| John Laing Infrastructure Fund | Guernsey | 37 | Range of schools, social housing, hospitals, courts, police stations and street lighting projects |
| 3i Infrastructure Fund (3i Groups owns 33.2%) | Jersey | 18 | Norfolk & Norwich University Hospital (36.8%), Alpha Schools, Highland (50.0), Osprey; Elgin Infrastructure Fund (joint venture with Robertson Group with 16 projects). Also 9% stake in Anglian Water owned by a private consortium. |
| International Public Partnerships (formerly Babcock Brown Public Partnerships) | Guernsey | 53 | Includes 31 health projects plus education, criminal justice and transport projects, plus others in continental Europe, Canada and Australia |
| GCP Infrastructure Fund Ltd -Gravis Capital Partners | Jersey | 7 | Investments in Grosvenor PFI Holdings - South Essex Community Hospital, Stanley Primary Care Centre, Lanchester Road Childrens' Health Unit, Braintree Community Hospital): Investment in Leisure Infrastructure Investors Ltd in 3 PFI operational contracts. |
| Bilfinger Berger Global Infrastructure Fund | Luxembourg | 12 | Schools and health projects in UK plus a further seven projects in Germany, Canada and Australia |
| Jersey | 14 | 5 hospitals, 7 school projects and 2 Treasury accommodation projects. | |
| Total |
| 314 |
|
Source: ESSU Global PPP Equity Database 2012 and infrastructure fund websites 12 October 2012.
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9 PricewaterhouseCoopers (2005) Queen Elizabeth Hospital NHS Trust: Public Interest Report, London: Audit Commission.
10 Allyson M Pollock and David Price. PFI hospitals bear the cost of Libor manipulation. BMJ 2012;345:e5095 doi: 10.1136/bmj.e5095 (Published 30 July 2012)
11 House of Commons Treasury Committee. The Private Finance Initiative. 18 July 2011.
12 Dexter Whitfield. PPP Wealth Machine: UK and Global trends in trading project ownership. http://www.european-servicesstrategy.org.uk/ppp-database/. 2012