Feb 14, 2012

Tax haven based company buys more BC P3s: British Auditor General questions profits in such transactions


Two of British Columbia’s public private partnership (P3) projects have changed hands again and once again the new owner resides in a European tax haven.

In a separate but related development, last Friday Britain’s Auditor General released a report questioning very high level of profits for some British P3 projects partially generated by flipping the assets. 

Since 2002 the BC government has crafted P3s for roads, bridges, hospitals and water treatment plants.  Under the deals the private sector puts up all or part of the capital costs in return for a 35 years contract with guaranteed inflation protection to manage a public sector facility.

Excessive profits are an issue because either taxpayers are paying too much or, in the case of some British hospitals, medical services are undermined by the high P3 costs.

A release dated February 8th announced that Bilfinger Berger Project Infrastructure had sold a 50% stake in BC’s Golden Ears Bridge and a 50% stake in Kicking Horse Canyon P3 projects for a total of £30.8 million.

This was no simple sales transaction with a buyer on one side and a seller on the other. Bilfinger Berger Project Infrastructure (BBPI) sold the 50% shares of the projects to a company with the same name, Bilfinger Berger Global Infrastructure (BBGI).  It was part of a package of 18 projects BBPI sold to BBGI for a total of £240 million and a capital gain of £50 million.

Those profits were by no means an end to the selling party’s involvement in the projects. BBPI has also invested £50 million in BBGI.  According to Bilfinger Berger Global Infrastructure’s prospectus, the selling company will continue to provide day to day management services for the projects as well as providing management teams and personnel.  

As well, “Bilfinger Berger will receive a set-up fee €20,000 and an additional fee of €50,000 in respect of accounting support services plus a fee of €35,000 per annum in respect of treasury support services, payable monthly in arrears.”

So company 1 (BBPI) sells a share of the projects to company 2 (BBGI) but company 1 continues to run the projects and manage the “transitional, accounting and treasury support services,” as well as owning 20 per cent of company 2.

Company 2 makes clear in its prospectus that the large majority of its acquisitions will be limited to projects that have completed construction.

Those sorts of sales have attracted the attention of Britain’s Auditor General.  Last Friday in a report titled Equity Investments in Privately Funded Projects the National Audit Office raised concerns about excessive levels of profit being taken by companies that sold their projects once construction was completed.

The NAO had expected to find investment returns of 12% to 15% when a project was sold after construction.  Instead it found cases where the initial investor “achieved exit returns of between 15 and 30 per cent when they have sold their shares.” 

Depending on the method used, in a few exceptional cases, the exit returns were as high as 40 to 60 per cent, although these were all for deals signed before 2003.

One of the arguments made for high levels of profits in P3 projects is that the investors take on risks. However, the UK Auditor also questions whether or not this risk is real.  Most of the risk is actually passed on to subcontractors through fixed price contracts.

Company 2 (BBGI) has been incorporated in Luxembourg, Nicholas Shaxson in his book on tax havens, Treasure Islands, describes the country this way:

Little known Luxembourg, specializing since 1929 in certain kinds of offshore corporations, is among the world’s biggest tax havens today.

The increasing use of tax havens by P3 companies raises questions about one of the BC government arguments in support of P3 schemes.  Partnerships BC, the government’s privatization agency, publishes its methodology which include reference to taxation. 

The methodology assumes the private partner will pay a certain level of taxation which the government would lose if the project were publicly delivered.

Much of the Bilfinger Berger Global Infrastructure prospectus deals with how little they will pay in taxes in their Luxembourg home. What impact does this have on the BC government’s assumptions about the amount of taxes they will collect on the project?

These are not the first BC P3 projects to see their assets flipped to tax havens. (See here).

In the UK the National Audit Office is asking question about whether taxpayers pay too much for these projects and if the profits are just too high.  Part of the British problem is that with “mature” P3 projects some hospitals are facing crippling ongoing costs.  The National Audit Office examined 22 hospital P3 (called private finance initiatives in the UK) and found

This initial analysis indicated that up to 6 of the 22 trusts were not viable under any of the tested scenarios, because of the scale of their PFI payments alongside a variety of other financial problems

Media reports on February 4th suggest the British government is looking at a £1.5 billion bailout package for hospitals that are facing “severe financial difficulties.” The Times of London reports:

The emergency package will go to trusts unable to meet annual payments for private finance initiative (PFI) deals, which can be up to £70 million a year. Mr. Lansley, the Health Secretary, said some parts of the NHS had been left with a “dismal legacy” of PFI schemes, many negotiated in the last parliament. 

For the main part, in British Columbia we have not even begun to ask questions about these projects.  However, it is only a matter of time before we begin to see here the same cracks that are appearing in the UK’s P3 projects. Our roads, bridges and hospitals are becoming chips in the international financial casino and BC taxpayers will not win at that table.