Examination of witnesses (Questions 1 - 19)
WEDNESDAY 15 JULY
MR C REEVES,
MR A BARTON
and MR R DOUGLAS
Chairman
1. May I welcome you and thank you for joining
us today. We appreciate it is an especially busy time for you
in view of the spending review and we do realise that you may
have difficulty in projecting some of the figures in respect of
the review. We appreciate there is obviously a statement tomorrow
where more details will be given. If we do range into that area
and you are unable to respond, then we understand the situation
you are in and it may well be that we want to come back to you
at some point in the future when we are all more aware of the
detail of the statement. May I apologise for the absence of a
number of my colleagues for various reasons. We are thin on the
membership side today. We hope to be joined by at least one other
member. We have the quality with us so we will do our best in
the circumstances. May I ask you to introduce yourselves briefly
to the Committee?
(Mr Reeves) My name is Colin Reeves. I am the Director
of Finance and Performance at the NHS Executive.
(Mr Barton) I am Alan Barton, I am Head of the Resource
Management and Finance Division in the Department.
(Mr Douglas) I am Richard Douglas, I am Deputy Director
of Finance in the NHS Executive.
2. May I begin with a question on capital development
in respect of the hospital health side of our brief? Could you
comment on and explain the apparent reduction in capital spend
in 1996-97, which as far as we can see is £202 million less
than predicted last year and in 1997-98 £229 million less
than was predicted?
(Mr Reeves) May I ask which table you are referring
to?
3. Table 2.1.3.
(Mr Reeves) May I refer to Table 2.1.1? I think you
are referring to the change in total spending on capital and that
is comparing the 1996-97 outturn with the 1995-96 outturn.
4. Yes.
(Mr Reeves) At last year's Select Committee meeting
when we came along we talked about the net spending figure in
1996-97 being a forecast outturn of £1.520 billion and in
actual fact that figure has now fallen to £1.318 billion
in terms of net spending. That is primarily due to the fact that
we have had capital virement which is a traditional problem in
the NHS. When we have produced the forecast outturn, we have presumed
£1.5 billion will be the net spend. In actual fact it fell
to £1.3 billion, primarily because of the pressures on the
revenue account. Indeed the figure shows £271 million of
capital virement taking place. In many ways that reflects the
fact there were more pressures on the revenue account in 1996-97
compared with 1995-96.
5. So we have understood the discrepancy correctly.
(Mr Reeves) Yes; absolutely.
6. You would agree with the figures which we
have come up with.
(Mr Reeves) Absolutely. In terms of total net spend,
the figure has fallen by almost £400 million and that is
predominantly at the end of the day because of the pressures on
the revenue account in 1996-97. We vired across to the revenue
account which has been a judicial mechanism used by the NHS to
safeguard revenue spend. I do not have the figures with me, but
I imagine as well there was slippage in terms of our predictions
on PFI schemes and the spend on those as well.
(Mr Douglas) That figure in Table 2.1.1 does not include
the PFI schemes.
7. May I take you on to PFI? We have previously
asked questions about PFI and this is a whole area of public concerns
and many people in relation to future developments. May I refer
you to a quote from the Minister of State, Alan Milburn, who is
reported as saying, "Previously the whims of the market determined
capital development plans in the NHS. In the future hospitals
will be built where they are needed most and where they will deliver
the greatest benefit to patients". May I ask you what practical
changes in capital development and the arrangements in respect
of PFI have followed on from this statement? I do not want to
take you into the politics of this; obviously we have Ministers
coming next week. In relation to the practical arrangements within
the Department, what changes can we see as a consequence of the
different emphasis made by Mr Milburn?
(Mr Douglas) The biggest shift has been a move towards
prioritising schemes. Up until last summer, schemes were developed
very much on the basis of what the individual trust and the market
actually wanted. If a trust could go out and get a market partner,
the scheme would come forward, we would put the money in to develop
that scheme. What we have changed fundamentally from that is to
set up a capital prioritisation group which will look at individual
proposals coming forward from each region and will then rank them
according to Health Service needs before we actually decide whether
they should go ahead to further development. That is the real
fundamental change there.
8. Is there just one group or is there a group
for each NHS region?
(Mr Douglas) For all schemes over £25 million
there is one group.
9. It is a national group then.
(Mr Douglas) A national group.
10. As I understand it, this group looks specifically
at the financial viability of the schemes.
(Mr Douglas) No, it looks beyond financial viability.
Viability is one of the issues the group will look at, but its
real focus to start with is what the Health Service need is of
that scheme. Each scheme has to come forward and be marked against
various scores which will look at things like access to facilities,
the clinical demands for that scheme. There is a whole ranking
all based around the Health Service needs. It will then move on
to ask whether they have assessed the need here for that scheme.
Is it affordable in its current form? Is it value for money which
is going forward. The driver behind it all is the Health Service
need assessment.
11. Would you say that the CPAG looks not just
at financial viability but also examines in some detail what might
be termed the service viability of PFI schemes?
(Mr Douglas) Very much. The starting point, before
it actually looks at the scheme itself, is whether there is a
real service need for this, a very demanding service need. It
then looks on at the way that scheme will be delivered.
12. In practical terms, could you explain to
us how, in any particular area, this assessment of service viability
might be undertaken by the advisory group? I know that I am not
alone in having concerns that some of the PFI schemes are accused
of skewing services in a particular direction in certain areas.
I can think of one in my part of West Yorkshire. I do not want
to look at that in detail, but there are certainly concerns that
the Calderdale scheme is skewing services in a way which is not
supported elsewhere within the immediate health authority; not
beyond the health authority but within that actual health authority.
I wonder quite how this advisory group has taken account of the
wider concerns within the same health authority about how a PFI
scheme will impact upon services elsewhere as well as in the immediate
environment of a scheme.
(Mr Douglas) May I set aside the Calderdale example?
Calderdale was one of the first round of schemes and did not actually
go through this whole CPAG process. That went ahead on the basis
of the initial prioritisation of which schemes we could actually
deliver. Since then the CPAG process has moved on from that. For
each scheme which is going to come forward, we have what we call
a strategic outline case. Essentially that sets out the case for
the scheme to go ahead. That is not something any longer which
just belongs to the trust which wants to go ahead with this scheme.
It is something which has to be endorsed locally by the health
authority and has to be endorsed by the regional office. In doing
that they will look beyond the impact, the immediate locality,
at the whole health economy around that area and how that will
impact in other areas and try to take a far more strategic view
possibly than we did before when it was purely trust generated.
13. When does the check come in in respect of
whether a scheme should be a public sector scheme or a PFI scheme?
At what stage is that considered and what criteria are used to
consider whether a private finance scheme would be preferable
and more appropriate than a public sector scheme?
(Mr Douglas) The initial review by CPAG will be based
on whether a scheme is needed. At that stage we will also look
at whether it is a scheme which can be realistically done under
PFI. If at that stage we think it can, then it will go ahead down
the PFI route. If at some stage it does not prove viable as PFI,
but we have said this is a needed scheme, then we will look at
ways of trying to find the public capital for it. Indeed on the
first round of the CPAG there was one scheme which has actually
gone ahead not as a PFI scheme but as a smaller publicly financed
one.
14. To summarise your answer, following on the
statement from Mr Milburn you see that the CPAG's role has shifted
and broadened out the whole overview of capital developments in
a much wider way, taking it far beyond just the market's interest
in investing in a particular area.
(Mr Douglas) Very much so; very much so. That development
will carry on further with the plans around health improvement
programmes and some of the other changes which are coming through
as a result of the White Paper.
Dr Brand
15. I was very interested in your detailed evaluation
for PFI, how you put in this factor for risk. What happened to
the risk factor under the previous regime? Did you write something
in or did you expect an overrun in a particular proportion of
schemes?
(Mr Douglas) Under the publicly funded schemes.
16. Yes.
(Mr Douglas) In the past on publicly funded schemes
we had not paid sufficient attention to risk. One of the big improvements
we have had with PFI is the discipline we are now getting in to
public schemes as well, where we do look now not only at what
is the cost of doing this on the basis of the bids we have had,
but what are the risks of cost overruns, of the maintenance costs
in the future. We try to build that into our assessment of public
schemes as well now.
17. That makes it very difficult for us to evaluate
where you have capital cost without risk being compared and capital
costs where suddenly you have a risk equation written in on the
public sector scheme which presumably had to be paid for previously.
I just wondered where that came from or is it just a figure you
have produced?
(Mr Douglas) No; no. When the cost of a scheme overran,
we had to find extra public capital to pay for that. That was
a real cost which we had to meet.
18. That would have appeared in your outturn
figures as opposed to your estimates.
(Mr Douglas) As opposed to the estimates, yes.
19. What was the percentage difference in past
history in your total capital expenditure under the publicly funded
scheme between your budget figure and your outturn which would
give us some handle on the risk that was not covered at those
times?
(Mr Douglas) It has been variable across different
schemes at different times. We have some examples within Table
4.8 of some of the recent schemes. They can vary. Some have no
cost overruns at all; some 12, 13, 14 per cent. In the past we
have also had examples where there have been even more significant
problems than that. We have had some major problems with cost
overruns.
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