Determinants of the cost of capital for privately financed hospital projects in the UK

Paolo Colla, Mark Hellowell, Veronica Vecchi, Stefano Gatti

Research output: Contribution to journalArticlepeer-review

Abstract / Description of output

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.
Original languageEnglish
Pages (from-to)1442-1449
Number of pages8
JournalHealth Policy
Issue number11
Early online date8 Sept 2015
Publication statusPublished - Nov 2015

Keywords / Materials (for Non-textual outputs)

  • capital investment
  • cost of captial
  • private finance initiative
  • public-private partnerships
  • internal rate of return
  • hospitals


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