Labour MP Stella Creasy’s proposal for a windfall tax on companies benefiting from PFI contracts marks a ‘credible’ shift in Opposition thinking, says Jefferies analyst Matthew Hose.
The call by a leading Labour backbench MP for a windfall tax on companies benefiting from government private finance initiatives (PFI) is a more ‘credible threat’ to infrastructure funds than the party’s recent attack on public-private partnership contracts, says broker Jefferies.
Although shadow chancellor John McDonnell vowed to scrap hundreds of PFI contracts in a recent party conference speech, he yesterday distanced himself from the proposal by Walthamstow MP Stella Creasy.
Nevertheless, Jefferies analyst Matthew Hose believes her intervention could mark an important shift in the Opposition’s thinking.
Creasy, who this summer forced the government to allow women in Northern Ireland free access to abortion and who previously campaigned successfully against payday lenders, has tabled two amendments to the Finance Bill.
The first, which was rejected, related to a new anti-avoidance measure that would cap the interest on debt that PFI companies can write off against tax.
The second regards corporation tax with Creasy proposing that companies benefiting from PFI pay tax at the rate it was when their contract with the government was signed.
‘Many of these companies signed these deals at much higher rates of corporation tax than they are now expected to pay,’ said Creasy. ‘Many of these deals were done when it was 28% or 27%, now it is 19% and will fall to 17% during the time of their contracts, which is a massive discount.’
If the government was able to calculate that discount, it would then make way for a windfall levy on companies such as HICL Infrastructure (HICL), the oldest and biggest of the social infrastructure funds, half of whose portfolio consists of PFI contracts to maintain and operate schools and hospitals for the public sector. Most of the PFI deals it bought were signed between 2002 and 2007 when corporation tax was 30%.
‘Although the conference rhetoric from the shadow chancellor was to bring existing PFI contracts “back in house”, a potential shift in the line of attack on PFI from Labour is no surprise,’ Hose said.
‘PFI deals are notoriously difficult to unwind and effectively taking them “on balance sheet” would be both time consuming and highly expensive.’
He added: ‘Unfortunately, the implication for the listed funds is that a windfall tax would be a more credible threat.’
‘With a UK corporation tax rate of 17% now applied to project cashflows from 2020 onwards, reductions in tax have been a boon for portfolio valuations and therefore net asset values, and so would be a painful to unwind,’ Hose explained.
Recent investments by infrastructure funds, including HICL, have seen them diversify their activities away from UK PFI contracts as competition for their inflation-linked revenues has pushed up prices and limited future returns. Hose said this would help the funds limit their exposure to political risk.
‘Despite this, the strength of the Labour party vitriol for PFI, combined with an inherently unstable UK political environment at present, still results in gathering clouds on the horizon,’ he said.
Launched by John Major’s Conservative government in the 1990s, PFI contracts took off under the Blair-Brown New Labour regime as it sought to increase private sector investment in the public sector. A total of 700 PFI deals, involving £57 billion of assets, have been signed, according to Treasury figures.
The Centre for Health and the Public Interest think tank has calculated PFI companies will make £1 billion of pre-tax profits on hospitals alone over the next five years. ‘These amendments will show us just how much of a gift these multi-million pound companies are getting from this government in tax breaks and how we could introduce a windfall tax to get our money back,’ said Creasy.
Creasy entered Parliament in 2010 and served as a shadow minister with briefs for home affairs and business under Labour leader Ed Miliband. She has returned to the back benches under Jeremy Corbyn’s leadership. The pro-Corbyn Momentum group is reported to have campaigned to de-select her as MP.
Infrastructure funds are widely held by wealth managers and local authority pension funds for their high dividends and secure long-term cash flows underpinned by contracts to run public sector assets.