http galagreacuk2001612001620MERCERNationalisingSpecialPurposeVehiclestoEndPFI202018pdf Public Authority Public authority signs PFI contract with the SPV SPV contracts to DBFO infrastructure ID: 1029969
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1. Nationalising Special Purpose Vehicles to end PFIhttp://gala.gre.ac.uk/20016/1/20016%20MERCER_Nationalising_Special_Purpose_Vehicles_to_End_PFI%20_2018.pdf
2. Public AuthorityPublic authority signs PFI contract with the SPV.SPV contracts to DBFO infrastructure.Public authority agrees to regular payments – the ‘unitary charge’SPV is a shell company. Private company registered at Companies HouseSpecial purpose vehicleUnitary charge consists of:Availability charge, mainly payment of debtService charge (60% of total)“Understand the weapon, understand the wound”The mechanics of the private finance initiative
3. Public AuthoritySpecial purpose vehicleConsortium receives: dividends on profits of SPV +Interest on its loan – interest rate 10-15%.Investor consortiumConstruction contractorFacilities management contractor (maintenance and servicing)Investment companyConsortium provides ‘equity finance’. It owns shares in SPVs; lends 10% of finance required to provide infrastructure
4. Public AuthoritySpecial purpose vehicleInvestor consortiumConstruction contractorFacilities management contractor (maintenance and servicing)Investment companyConsortium receives dividends on profits of SPVInterest on its loan – interest rate 10-15%.Consortium provides ‘equity finance’. It owns shares in SPVs; lends 10% of finance required to provide infrastructureDebt investor: bank loans and bonds.Interest / inflation rate swapsConstruction contractorFacilities management contractor: Hard FM (maintenance)Soft FM (cleaning, catering etc)
5. Dismantling PFI Two elements:Transferring ownership of the SPVs to the governmentThe contracts
6. Public AuthoritySpecial purpose vehicleInvestor consortiumConstruction contractorFacilities management contractor (maintenance and servicing)Investment companyAll equity (shares) in the SPV is transferred to the government which now owns the SPV.GovernmentGovernment pays compensation to former shareholders. This has been calculated at about £2.5bn
7. Public AuthoritySpecial purpose vehicle now owned by government bodyDebt investor: bank loans and bonds.Interest rate/ inflation rate swapsConstruction contractorFacilities management contractor: Hard FM (maintenance)Soft FM (cleaning, catering etc) Public authority continues to pay to SPV that part of the unitary charge which covers debt and principalGovernment body honours outstanding liabilities but refinances loans, reducing interest rates.Public authority contracts directly with facilities contractors. Estimated savings from bypassing SPVs = £1.4bn per year, or about 14% of total unitary charges 2018.
8. In summaryUK law says parliament fixes compensation for nationalised assets. £2.5bn is full book value of equity.As facilities management contracts expire, provision of services can be brought ‘in-house’.No contracts are broken or terminated so no claims possible for premature termination or breach of contract.Transferring service contracts to public authorities eliminates the SPV margin on service contracts – total annual saving of £1.4bn.Savings of £1.4bn per year are big return on £2.5bn cost of compensation for nationalising equity.