This article is more than 2 years old

This article is more than 2 years old

Public sector pension funds have invested hundreds of millions of pounds in Scottish private finance schemes linked to offshore tax havens, a new report has found.



The pension funds, which act for tens of thousands of retired council workers, bus drivers and Environment Agency officials and scientists, have invested money in dozens of privately financed projects in Scotland to build new schools, hospitals and colleges and to make motorway improvements.

An analysis of these projects for the Guardian has traced nearly 30% of the investments in the schemes to companies based in tax havens such as the Channel Islands, Dubai, the Cayman Islands, the British Virgin Islands, Luxembourg and Cyprus.

In all, the analysis showed, those offshore companies stand to earn more than £1.7bn from these contracts over the next 25-30 years, charging interest rates as high as 13% for their financing.



The pension funds earn substantial returns too: one of the UK’s largest, Strathclyde Pension Fund, said last year its investments were “performing in excess of expectations” with their value growing by 12.5%.

MPs vote down attempt to impose windfall tax on PFI contractors Read more

The report was commissioned by the Guardian and the Ferret news website from Dexter Whitfield, a specialist in private finance initiative (PFI) schemes with the European Services Strategy Unit and an associate professor at Flinders University in Adelaide, Australia.



Whitfield analysed the ownership and investments of 47 Scottish projects overseen by the Scottish Futures Trust (SFT), an agency launched 10 years ago by the then first minister Alex Salmond, to provide new hospitals, health centres, colleges, schools and roads.



Mirroring the private finance initiative set up by the Conservative government in the mid-1990s, private companies are contracted to construct public buildings with debt finance which is paid off by the taxpayer over decades.



Private companies also control maintenance of the building for up to 30 years, charging commercial fees for their work. Maintenance contractors at a new psychiatric hospital in Edinburgh built under the SFT programme charge the NHS £33 an hour for an electrician, plus VAT and overhead fees.



Salmond insisted the SFT model would be cheaper than the previous system by capping debt interest payments, and would include some level of public ownership.

Critics argue the model costs governments more over the long term than using cheaper public borrowing and the operations are less transparent than publicly run schemes.



Scottish government data shows the 47 schemes overseen by the SFT were built for a total cost of £2.7bn but will cost taxpayers nearly £8bn by the time the borrowing needed to finance their construction is paid off and their maintenance contracts finish in 25 or 30 years time.

Whitfield’s analysis also shows offshore investments and shares in these projects are spread across 60% of these schemes. Only a small fraction of the shares and ownership of those 47 projects, equivalent to about 16% of their total lifetime costs, is from firms based in Scotland.

The PFI investments cited by the research include Ayrshire College in Kilmarnock, which is 100%-owned by a 3i Infrastructure based in Jersey. It will cost £48.5m to build but the full contract will cost taxpayers £141m by the time it ends in 2042.

There is also a substantial amount of offshore involvement in projects such as Dumfries acute services hospital and motorway improvements for the M8, M73 and M74.

Facebook Twitter Pinterest First minister of Scotland Nicola Sturgeon opens the revamped Kilmarnock campus of Ayrshire College in Kilmarnock, in 2016. Photograph: Reuters

The research found 14 council-run pension funds in England and Scotland, and the Environment Agency based in Bristol, have each invested in a range of funds run by a London-registered firm called Equitix Holdings Ltd which is ultimately 85%-owned by Tetragon Financial Group. Some Equitix funds are specific to SFT projects; others cover PFI projects around the UK.



Tetragon Financial Group is registered in Guernsey via a subsidiary in the Cayman Islands, tax jurisdictions rated among the 10 most secret by the Tax Justice Network campaign group. It made $168m (£125m) in profit last year but was not required to pay UK corporation tax. Such firms base themselves in low tax countries entirely legally.



A source close to Tetragon said all the Equitix companies registered in London paid the tax due to the UK Treasury, and said UK based investors would pay their relevant taxes. But she refused to discuss the tax status of their ultimate owner or confirm its registered office was in Guernsey.



Tetragon’s annual report states: “Investors may suffer adverse tax consequences if Tetragon is treated as resident in the United Kingdom or the United States for tax purposes.”

The public investments in these Equitix funds include: £80m by Strathclyde Pension Fund; more than £71m by Lothian and Lothian Buses Pension Funds; £51m by East Riding council; and £26m by Croydon council.



The councils involved say their pension funds are legally required by the UK and Scottish governments to maximise their returns, by finding the best investments and to ensure they can meet all future pension obligations without needing bailouts by tax payers.



The Local Government Association (LGA), which represents the 11 English councils which invest in these SFT projects, said a pension fund’s first duty was to meet all future pension obligations without needing bailouts by taxpayers.

“Other matters such as the environmental, social or corporate governance impact of individual investment decisions should be considered but should also not result in a material reduction in return and have the support of scheme members,” the LGA said.

The Scottish government admitted that “diverse international holdings”, including offshore companies, were a feature of the investment market.

The SFT programme had supported 5,355 construction jobs with 77% of contracts awarded to Scottish firms, while leaving the financial risk with private firms instead of public bodies, it said.

“The [SFT] programme has enabled investment in schools, hospitals and other projects to be brought forward more quickly than would otherwise have been possible with limited UK government capital funding and restrictions on borrowing,” a spokesman said.



“[It] transfers risks and exerts private sector discipline during the construction phase of a project and throughout its lifetime without the excessive private sector profits associated with past PFI projects.”

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Whitfield said privately financed projects were inherently flawed because they lacked the higher transparency and accountability used in the public sector. “The use of offshore tax havens significantly further reduces transparency and democratic accountability,” he added.



Jackie Baillie, Scottish Labour’s finance spokeswoman, said Whitfield’s analysis presented a compelling case for Nicola Sturgeon of the Scottish National party (SNP), Salmond’s successor as first minister, to review the SFT and consider a buyout by the government of as many PFI contracts as possible.

“This report exposes the staggering hypocrisy of the SNP, who spent years campaigning against PFI only to set up a system that has enabled corporations headquartered in tax havens to own and profit from infrastructure, such as our roads, schools and hospitals,” Baillie said.