The Herald, Robbie Dinwoodie, 30/4/2008

The companies behind a controversial Lanarkshire hospital development stand to gain £145m for an £8.4m initial investment, according to research by a team of leading economists into the huge profits made by firms behind PFI deals.

Jim and Margaret Cuthbert analysed details released through Freedom of Information requests into projects such as the development of Hairmyres Hospital in East Kilbride.

They claim sometimes more than double the capital could have been raised through conventional public means via the National Loan Fund, for the same costs levied by the PFI operators.

Their financial analysis has nothing to do with the other way PFI firms make their money, which is through management and service charges for building, operating and maintaining hospitals, schools or colleges.

The Cuthberts have focused purely on the financing of the deals.

Their presentation to members of Holyrood's Finance Committee today looks in detail at Hairmyres Hospital, claiming documents show that the consortium comprising construction firm Keir and financiers Innisfree put in just £100 in equity to the project initially.

They then put in £8.4m in so-called "subordinate debt", charged at a rate of return estimated at 18.8% annually. Another £65m was raised in outside cash, known as "senior debt" at the much lower rate of around 7.2%.

The contract then provided for the senior debt to be paid off more quickly, while the subordinate debt sat accumulating more interest. The result was that the outlay of £8.4m plus £100 equity will recoup £145.2m - almost as much as the £147.1m repaid to the senior debt which had been initially eight times as much.

The economists claim that under this financial mechanism, the cost of financing Hairmyres was just under double (a ratio of 1.97) what conventional public financing would have cost.

For the Royal Infirmary of Edinburgh this ratio was 2.04; for James Watt College in Greenock it was 1.97; for Perth and Kinross Council office buildings 1.82; for Hereford Hospital in England 1.68; and for a tranche of schools in the Highlands it was 1.49.

There is also concern over the way the original consortium members for such projects can cash in early. At Hairmyres, five years into the project the two original partners sold on part of their share and recouped £8.1m each, almost double what they had originally invested, while three years later the construction firm Keir sold out its remaining stake to Innisfree for £13.8m.

SNP MSP Alex Neil had been in the forefront of demanding the information on the Hairmyres project.

He said last night: "What this shows is that you could have got two and a half hospitals for the price of one using conventional finance. Hairmyres has been a complete rip-off for the taxpayer and shows that PFI is the most expensive way of financing public facilities.

"This has been a licence to print money on the public purse.

"This shows beyond any reasonable doubt that PFI is far too expensive and only exists to allow these companies to line their pockets at taxpayers' expense."