(Update with table, comment and latest share prices) Shares in social infrastructure investment companies took a hit today as investors in the popular ‘alternative income’ funds woke up to the threat of a potential Labour party crackdown on private finance initiatives (PFI).
In addition to reiterating the Opposition’s plans to re-nationalise utilities and the Royal Mail (RMG), shadow chancellor John McDonnell (pictured) yesterday committed the next Labour government to end the ‘scandal’ of private companies being given long, expensive contracts to build and operate hospitals, schools, roads and other public facilities.
McDonnell told delegates at Labour’s conference in Brighton that nearly £200 billion was due to leave hard-pressed, public sector budgets in PFI deals that would line the pockets of shareholders. ‘In the NHS alone, £831 million in pre-tax profits have been made over the past six years,’ he said.
‘We’ll put an end to this scandal and reduce the cost to the taxpayers,’ he vowed.
‘How? We have already pledged that there will be no new PFI deals signed by us. But we will go further. I can tell you today, it’s what you’ve been calling for. We’ll bring existing PFI contracts back in-house.’
Managers of listed infrastructure funds, which have bought many PFI deals so as to provide inflation-linked dividend yields of around 5% to investors and pension schemes, have long grown used to the political flak they generate. In recent years they have sought to diversify into new sectors and internationally as the number of PFI deals - which started under John Major’s government but reached their heyday under Tony Blair’s New Labour administration - has declined.
However, McDonnell’s promise to undo existing contracts takes the threat to the £10 billion sector to a new level, particularly as the shadow chancellor indicated that there could be less compensation for investors in tax havens. The seven infrastructure companies - including GCP Infrastructure and Sequoia Economic which invest in debt, are all based in the Channel Islands to allow their dividends to be paid gross to non-tax paying investors such as pension schemes and ISA holders.
John Laing Infrastructure Fund (JLIF), which has 30% of its assets in health contracts, was the biggest faller, dropping over 4% or 5.6p to 128.4p.
It was followed by HICL Infrastructure (HICL), the sector’s biggest fund with a high 80% exposure to the UK, which sank 3.5% or 5.7p to 157.2p.
Luxembourg-based BBGI (BBGI) and Guernsey-based International Public Partnerships (INPP) both retreated 3% to 143p and 162.7p respectively.
Investments by sector & geography (%)
|HICL Infrastructure (HICL)||17||29||26||6||-||12||10||81||19|
|Int'l Public Partnerships (IPPN)||20||5||17||4||36||10||8||75||24|
|John Laing Infrasructure (JLIN)||10||30||37||5||-||-||18||68||32|
Source: Companies & Numis Securities research
Analysts sought to play down the imminent danger from a Labour party that still had a lot to do to regain power.
‘While the initial remarks are inflammatory, we question whether the clarified comments are materially different from the status quo,’ said Matthew Hose of Jefferies, pointing out that Labour had later said the pledge was to ‘review all PFI contracts and, if necessary, take over outstanding contracts’.
Hose claimed that wasn’t much different from the current situation in which local authorities often review individual PFI deals, with all contracts containing early cancellation clauses, typically with market value based compensation. However, he acknowledged that it was unclear whether PFI contracts would be reviewed by local authorities or by Parliament under Labour plans.
Iain Scouller of Stifel said it was difficult to estimate how much compensation investors would receive if their assets were seized. Labour has said it would pay for them in government bonds, meaning their liabilities would be added to the national debts.
A sum over the £57 billion capital value given to PFI contracts by the Treasury two years ago was likely, he said, and could rise to over £100 billion given the 25-30 year length of many the contracts.
‘Any Labour government says it would borrow to finance the sequestration of PFI contracts, although with borrowing currently around £60 billion a year, we do wonder how much of a priority PFI compensation will be post an election,’ Scouller added.
Ewan Lovett-Turner of Numis Securities said: ‘In the absence of specific details, we believe there is scope for some of the press headlines to “spook” investors. There are many listed companies which could be impacted by any change to existing PFI companies including contractors, and facilities management businesses.
‘Within the investment companies sector, there are four listed infrastructure funds which are predominantly invested in PFI/PPP projects as well as other regulated assets,’ he said referring to BBGI, HICL, International Public Partnerships and John Laing Infrastructure (see table above).
Jason Hollands, managing director of Tilney Group, the wealth manager, said the cost of buying out PFI partners would have to be added to other Labour policies such as scrapping university tuition fees.
‘And then of course once PFI investors are compensated the tax-payer would still need to bear the cost of the state managing these projects directly,’ said Hollands.
He believed the extra political risk could put the ‘eye-popping premiums’ on the companies' shares under pressure. To a certain extent this has already happened. In recent months the average premium on the five social infrastructure equity funds has subsided from 18% to 12% in anticipation of rising interest rates.