How tax clawbacks could impact Private Finance Initiatives
“Every penny paid to a PFI company is money withdrawn from those waiting for an operation, money removed from the training of clinicians, and money denied for life-saving treatments.”
The Labour Party in the UK may not be in power – yet – but it is in the process of outlining its policies towards private finance initiatives (PFI) in the UK. Since their introduction in the early 1990s PFIs have become the dominant form of public private partnerships for infrastructure investment in the UK. While many of these contracts were signed when corporate tax rates were around 27% to 28%, companies today typically pay corporation tax rates of 19%.
This corporate tax windfall seems to be a thorn in the side of many Labour MPs and Stella Creasy of Walthamstow has recently suggested that a Labour government should force PFI contractors to pay the corporation tax owed at the beginning of the contract instead of current tax rates.
Based on the portfolio sensitivity analysis presented in their latest annual reports we have estimated the potential impact of a 10% increase in the tax burden of the investment portfolio of listed infrastructure companies in the UK. We assume that the sensitivities given for the overall portfolio in the companies’ annual reports can be applied to the UK share of the portfolio in isolation. In reality, UK projects may have a slightly different tax sensitivity than the overall portfolio due to different maturities and different cash flow projections of UK projects compared to the portfolio average. This introduces an estimation error that is larger for companies with a smaller allocation to UK PFI.
The allocation to UK infrastructure projects of listed companies in the UK varies significantly ranging from almost zero in the case of 3i Infrastructure fund to about 75% of the portfolio in the case of the HICL fund.
Correspondingly, the share price sensitivity of these funds varies between almost zero and up to 4.4% in the case of HICL. We note that four out of the five companies investigated here might suffer a substantial decline in NAV should a Labour government in the UK implement the suggested tax clawbacks.
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