Determinants of the cost of capital for privately financed hospital projects in the UK. Issue 11 (November 2015)

• Record Type: Journal Article
• Authors: Colla, Paolo; Hellowell, Mark; Vecchi, Veronica; Gatti, Stefano
• Is Part Of: Health policy. Volume 119:Issue 11 (2015)
• Page Start: 1442
• Page End: 1449
• Publication Date: 2015-11
• Subjects: Capital investment -- Private finance initiative -- Public–private partnerships -- Hospitals -- Cost of capital -- Internal rate of return; Medical education -- Periodicals; Medical policy -- Periodicals; Delivery of Health Care -- Periodicals; Education, Medical -- Periodicals; Health Education -- Periodicals; Health Planning -- Periodicals; Public Policy -- Periodicals; Enseignement médical -- Périodiques; Politique sanitaire -- Périodiques; Medical education; Medical policy; Periodicals; Electronic journals; Electronic journals; 362.1
• DOI: 10.1016/j.healthpol.2015.08.018
• Languages: English
• ISSNs: 0168-8510

Abstract

Highlights: We focus on factors influencing returns on hospital PFIs in the UK. We find that macroeconomic conditions and sponsor size influence returns. We find remarkable stability in the return over the study period. Excess returns are likely to be an intractable feature of PFI markets. Abstract: Many governments make use of private finance contracts to deliver healthcare infrastructure. Previous work has shown that the rate of return to investors in these markets often exceeds the efficient level. Our focus is on the factors that influence that return. We examine the effect of macroeconomic, project- and firm-level variables using a detailed sample of 84 UK private finance initiative (PFI) contracts signed between 1997 and 2010. Of the above variables, macroeconomic conditions and lead sponsor size are related to the investor return. However, our results show a remarkable degree of stability in the return to investors over the 14-year period. We find evidence of a 'prevailing norm' that is robust to project- and firm-level variation. The sustainability of excess returns over a long period is indicative of a concentrated market structure. We argue that policymakers should consider new mechanisms for increasing competition in the equity market, while ensuring that authorities have the specialist resources required to negotiate efficient contract prices.