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City Site - Limited concern over PFI taxes

FINANCE

THE NEWS that the National Audit Office is set to look into the profits which contractors have made by selling PFI equity stakes ruffled a few feathers earlier this week.

Shares in Carillion, which has been the most active equity stake 'recycler', slipped 2 per cent. But overall, the City does not appear to be greatly concerned that contractors will have to share windfall gains with the public sector.

Shareholders have done well from PFI/PPP stakes, notably through the extra dividend which Carillion paid from the £16.4 million proceeds generated on the sale and refinancing of an original £4.1 million investment in the Darent Valley Hospital PPP concession in Kent.

The recognition of these values has been one of the driving force behind the recent re-rating of contractors' share prices.Yet any clawback would be unlikely to be retrospective and would presumably not take effect for some years. And the Government would hardly want to jeopardise a PPP model on which it has become so reliant.

With experience, public sector clients are likely to negotiate tougher conditions and the scope for windfall profits from refinancing debt is now limited, anyway.

More significant for the City has been the reliability of earnings and the length of the order books which PPP concessions have provided for quoted contractors. Here, opportunities remain plentiful.Last week Costain unveiled two PFI contracts in the health and education sectors with a combined value of around £81 million, with work stretching over 25 years. Carillion is even exporting the concept with a PPP-type partnership contract to finance, build and maintain a £204 million hospital in Canada with a 25-year concession.

For now, investors in the sector remain more worried about house building profits than PPP windfall taxes.Kier Group's shares fell 20p to 707p this week after its otherwise upbeat AGM statement noted, unsurprisingly, that visitor levels and reservations are lower than this time last year.All eyes now are on the spring selling season.