The worlds “local bank”: owner of UK state schools and NHS hospitals
HSBC and other investment funds are taking control of UK schools, hospitals, social housing and other vital pieces of public infrastructure via the Private Finance Initiative (PFI), a report by the European Strategy Services Unit (ESSU) has shown.
These funds are avoiding paying millions in taxes because they are registered in tax havens such as Guernsey and Jersey. At least 91 pieces of public infrastructure are now owned this way in the UK.
HSBC has a controlling stake in 27 PFI projects, which are predominantly hospitals and schools. It is also the outright owner of three NHS Hospitals, which are located in Barnet, Central Middlesex and West Middlesex.
The banking corporation controls the projects through an offshore subsidiary, HSBC Infrastructure Company Limited, which is registered in Guernsey. This means HSBC and its shareholders pay no tax on the dividends they receive.
This model of ownership is becoming increasingly common. Established in 2006, HSBC Infrastructure was the first offshore fund of its kind but there at least four others now registered.
Why does it matter?
Put simply, who would you rather was in charge of your hospital, a local health authority or a bank?
The NHS, for all its flaws, is organised around some noble principles such as universal access and the highest possible quality of treatment, but private ownership could seriously threaten these. HSBC is concerned only with its profitability.
The ownership of hospitals by banks and offshore investment funds sharply reduces accountability and transparency so monitoring the performance of PFI hospitals becomes trickier. The veil of ‘commercial confidentiality’ prevents government from understanding and thereby solving any problems that arise.
HSBC can’t make any changes to signed PFI contracts it purchases but if this trend continues we could end up in a situation where the majority of our public infrastructure is owned by an oligopoly of offshore investment funds and banks. This would give them disproportionate market power and could give them real influence on the provision of public services in the UK.
Most of all, HSBC’s ownership of public infrastructure is another indictment on the PFI system itself, which has consistently proven itself to be inflexible, bad value for money and difficult to regulate.
PFI contracts are legally protected from cuts, which ensures their sustained profitability. When faced with shortfalls in revenue, PFI contracts force hospitals to re-shape around contractual needs, rather than clinical ones. This means that frontline services like beds, doctors and nurses are cut before non-essential items like maintenance and service work.
How did HSBC buy Barnet Hospital?
When bidding for a PFI contract, several companies form a single company, known as a Special Purpose Vehicle (SPV), that provides the construction, maintenance and service of the building over its lifetime.
At all times, companies in the SPV are free to sell their equity stake in the contract in a secondary market. Frequently, after the construction phase of a project is complete, the risk associated with the project plummets and the project can be re-financed, making it attractive to investors.
Construction companies have been exploiting this fact to earn themselves a small fortune. The ESSU report notes that Construction giant Carillion plc has sold its stake in 24 contracts for £278 million, making an average profit of 40%. When considered against Carillion’s average operating profit between 2003-2009 of 1.2% this figure is astonishing.
Other construction companies are enjoying similar levels of profit in the secondary market and the ESSU report estimates they have made in excess of £350 million in profit between them.
Yet these contracts still represent a sound investment to the likes of HSBC Infrastructure and are being snapped by banks and investment funds in a market that has swollen over the past decade.
Although PFI is paid for ultimately by the public purse, there is no regulator in the secondary market or mechanism by which the public share any of the massive profits being reaped.