PFI returns too high, says Treasury

10 Nov 05
The head of the Treasury's Private Finance Unit has warned Private Finance Initiative investors that he wants their returns on equity to be cut.

11 November 2005

The head of the Treasury's Private Finance Unit has warned Private Finance Initiative investors that he wants their returns on equity to be cut.

Speaking at a conference of private investors into government infrastructure, Richard Abadie said that the 14%-15% returns cash investors currently receive on their start-up investments are 'too high'.

He said that the development of a secondary market in PFI equity – in which an investor can sell their share in PFI deals for considerably more than its original value – illustrated that some investors were prepared to accept much lower returns on their investments.

'What we want to focus on is understanding what an appropriate price is for the primary market,' said Abadie. 'I do believe that the liquidity in the secondary market has set a benchmark price for that market – I've seen prices as low as 7%.'

Equity providers invest cash into the start-up period of PFI projects on the understanding that their risk will be rewarded at a given level of returns. The fact that they can now sell those shares in a secondary market demonstrates that the agreed returns are too high, said Abadie.

'Primary returns are around the 14%–15% level, and simply put, we think that they are too high,' he said. 'In the past, primary funders may have argued that there was no ability for them to make an exit; there was no market for them to sell down into, but that reason has now disappeared.

'So we do expect, and we are watching carefully, to see if those primary returns do reduce. That's a challenge to the market.'

Andrew Porter, director of infrastructure, government and utilities at PricewaterhouseCoopers, told Public Finance that the returns expected by the secondary market had come down to 7% because the PFI was now seen as a stable and attractive market.

But equity providers had been successful in convincing the market that they were still rare and their investments involved large risks. 'It's a question of relative market power,' said Porter. 'If it's perceived that there's a shortage of equity, then the equity providers can get the returns they want.'

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