Examination of Witnesses (Questions 105
MONDAY 29 OCTOBER 2001
105. Can I welcome you to this session of the
Health Committee and thank our witnesses for being willing to
meet us today. Can I also thank the Trust and your colleagues
locally for your reception and the opportunity to look round your
hospital. Before we begin I have been asked to make it clear that
this is a formal evidence session with the same status as if we
were meeting in the Palace of Westminster. The same rules apply,
the meeting is covered by Parliamentary privilege, no photography
is permitted and the gallery should not applaud or make any comments.
Can I invite our witnesses to briefly each introduce themselves,
starting with yourself Mr Flook. I gather Councillor Earley is
temporarily missing. I apologise, this is the Committee's fault,
we tried to do a change round but gathered that the RCN were not
Mr Flook: I am John Flook, Finance Director
for the County Durham and Darlington Health Authority. I have
been on the patch for 16 years and additionally I have a broad
responsibility for capital investment strategy across the patch
for the last five years.
Mr Mason: I am Steven Mason, I am Chief Executive
of the Trust. I have been with the Trust for approximately five
and a half years, the first five years as a Finance Director with
a lead role on the PFI scheme.
Mr Rabin: I am Consort's Chairman and I am also
a Balfour Beatty shareholder representative to Consort.
Mr Archbold: I am Mike Archbold, Chief Executive
of Consort and have been with the scheme from the start.
Mr Thornton: I am Jeff Thornton, Managing Director
of Infrastructure Finance at the Royal Bank of Scotland and a
shareholder Director of Consort.
106. Can I begin by asking you, Mr Flook, a
question about the wider financial implications of the PFI route
to capital resourcing, one of the issues that we have picked up
is there has been some concern about the impact of the consequence
financially of the PFI scheme here. Presumably there is a second
PFI scheme in your area?
(Mr Flook) There are four, but two major ones.
107. The impact of resourcing those schemes
on primary care, one person spoke to me about the difficulties
facing the PCG in the east of your area, where I gather that there
acute patients are referred primarily to hospitals outside the
Health Authority. I understand there is concern particularly about
PCGs, their revenue has been affected and reduced by virtue of
resourcing the PFI schemes. That may or may not be correct but
that is their perception. Their concern is that their patients
do not benefit from the schemes concerned. Can you tell me whether
there is any truth in that, has it been necessary to reduce or
affect the primary care budget in any way as a consequence of
the PFI route being taken?
(Mr Flook) My quick answer would be broadly no. If
I may just expand on that a little, without taking up too much
of the Committee's time. One of the things that we realised in
the first half of the 1990s was that the capital stock infrastructure
across the whole county was unacceptable and could not sustain
the provision of services for many years to come and something
had to be done. This had been reinforced by the then North Regional
Health Authority analysing capital investment over a 30 year period.
I have just earlier given a copy of an extract from that report
to Mr McShane, so that should be available to you, Chairman. It
revealed that Durham and North West Durham had had investments
in respect of £11 per head and £24 per head over a 30
year period, whereas if you took the mid of the table, Hartlepool
had £265 a head and the top three in the table, South Cumbria
£568, North Tyne £469 and Newcastle £390, there
was huge disparity in capital investment and this was reflected
in the stock. The two major schemes that were round at the time
were the Bishop Auckland scheme and the North Durham scheme. Based
on the full business cases at the time, leaving aside inflation
since that point, they had additional revenue costs of about an
additional £7.5 million per year revenue. In North Durham
that was about £4.5 million, of which £3 million was
generated internally by the Trust and £1.5 million by Health
Authority growth going in. The Health Authority supported the
full business cases and we immediately started to put aside, on
a recurrent funding basis, the additional funding that would be
required for those schemes. The bulk of that money was put aside
well before primary care groups were formed. We are talking here,
certainly in Bishop Auckland, of the first half of the 1990s and
with Durham from about 1995 on. We were building up a substantial
recurring reserve to pay for these hospitals when they were commissioned.
Although health authorities did not receive capital resources
we could see quite clearly we had to do something about this capital
stock. We took a conscious decision to use those resources to
support the traditional capital routes of public sector funding
through regional offices and trusts and through PFI. With that
three pronged approach, as it were, we have pursued quite a rigorous
programme to replace capital stock. I think it is reflected in
the written evidence of the Trust in the first couple of pages,
the schemes that we have been pursuing. It is policy that has
had health economy-wide support and it is generally perceived
to have been successful. We have managed in the space of five
years to have made substantial inroads.
108. A brief answer to what I asked you would
be that the primary care provision has not been affected financially
by virtue of the capital scheme here and in Bishop Auckland?
(Mr Flook) No. In terms of Easington, the hospitals
they use, which are essentially round Hartlepool and Sunderland,
had benefited from their capital investment some years earlier.
109. Why would Easington perceive they had been
(Mr Flook) In a resource position Easington is one
of the outliers in the country, it hovers round 90 per cent of
its equitable share of resources, the economy as a whole is 97
per cent or 98 per cent. For the last few years we have had very
flat NHS settlements, so it has not been possible to make substantial
inroad into bringing Easington to its target position. It has
enjoyed, where there have been differential allocations, substantial
additional money, £1 million, because of its target position
last year. There is an issue about the phase at which you can
put additional funding into services.
110. If they have financial difficulties then
that is not as a result of PFI?
(Mr Flook) Easington has not generally had any financial
111. Perhaps the term is wrong, the picture
I was given was that they had some financial restrictions as a
consequence of the revenue costs here.
(Mr Flook) If I may, the final point I was going to
make I do not know the source of the reports that you have phrased
the question round but I suspect that the funding which the restrictions
referred to are entirely unrelated to PFI. I suspect it is to
do with the 2001-02 resource allocation process for this year.
Some £26 million of the additional funding was put into primary
care groups and part of that was pro rata to target to Easington.
Late in the process of finalising the service agreements it became
clear that in common with Trusts across the country the local
acute trusts were facing particular pressures about balancing
their books in this 2001-02 round. The Health Authority took the
decision that an additional nonrecurring allocation would need
to be made to those acute trusts in the service agreement. As
a consequence of that it was necessary to ask the primary care
groups to manage the pace at which they brought on stream their
developments just to release this additional funding in the year.
We have had questions earlier in the year about that and I suspect
that may be the source of the funding question.
112. You are obviously one of the first Trusts
to go ahead with a hospital under PFI, did any of the team have
any previous experience and what resources were available to you?
Did you actually look outside the Health Service for advice when
putting together the proposals?
(Mr Mason) Perhaps I should answer that question,
in term of previous experience of PFI then obviously it was very
much a new initiative and there was nobody within the Trust who
had had previous experience of a deal within the health sector
or indeed any other sector. We had a sort of co-team who were
dedicated to the PFI process, they consisted of a project director,
who was a professionally qualified architect who had worked previously
in the regional office on large schemes and was involved with
the North Tyne side General Hospital scheme. His experience and
input was invaluable to the team in terms of how we managed the
overall project. We then had myself as the Finance Director, the
Director of HR and also the Operational Services Manager who formed
the bulk of the team. We also had external advisers covering legal
issues, financial issues and we got independent advisers round
some of the technical issues, particularly on how you specified
the provision of facilities management services.
113. How did you choose your external advisers,
were they people with experience or were you all working in the
dark, to a certain extent?
(Mr Mason) I do not know if I would use the phrase
"working in the dark", there was a lot of people at
that time who were working on the concept of what the contract
would look like for a PFI scheme. There was a lot of cross working
in terms of the advisers obviously talking to each other about
how the market was developing, particularly on the first five
schemes, and we had input from the private finance unit in that
there was an officer from that unit who was allocated to the Trust,
who would attend some of the negotiations. When we got to certain
issues we would refer those back to the private financier for
advice in terms of what the central line was on a particular issue.
We did have input and support from them at the centre.
114. What about Consort, this is a question
that could be answered by yourselves as well, what experiences
did you have?
(Mr Rabin) In terms of health this was the first hospital
Consort had bid for, it is a two shareholder organisation, the
Royal Bank of Scotland and Balfour Beatty had experience in other
115. Hindsight is a marvellous thing, but what
would you do differently? If you were giving advice to anybody
else what would you say had not gone so well and you would do
differently the next time?
(Mr Mason) As you say hindsight is a wonderful thing.
There has been massive progress made since we did the first scheme.
We are involved with Chester-le-Street Hospital now as a PFI scheme,
admittedly it is a smaller scheme, but that process has been much
more straightforward because we now have the standard contract
which has facilitated negotiations very significantly and provides
a very good template. We are still looking at the payment mechanism
and it would be useful to have a standardised payment mechanism
to go into that contract. There has been a lot of meetings facilitated
through the private finance unit on looking at common approaches
to things such as the provision of facility management services,
specifying the approach to design. A lot of the lessons that have
been learned have been picked up. The standard contract, from
my point of view, is the single most important advance. There
was a lot of issues we discussed at great length which were really
crying out for a standard, national approach and did not really
have a direct bearing in terms of people who were working in the
Trust wanting to secure the new hospital. They did not have a
direct bearing on what we could see as the end product. A lot
of that was round what would happen in the case of a nuclear war
or biological contamination. We spent a lot of time on that, where
really we want to spend a lot more time on the issues about the
hospital, how it would work, how the payment mechanism would work,
how the services would be organised and how we would change them.
That has been a major advance really.
116. Going off the track here slightly, you
say you spent a lot of time consulting, presumably somebody had
to pay for that, would it be fair to say that your consultation
costs were a lot higher than anybody who is going through that
now and is that an unfair burden which has ended up on the shoulders
of this hospital trust when it should have been something more
finally tuned by central government?
(Mr Mason) It is obviously difficult for me to comment
on certain aspects of that question. Undoubtedly the early schemes
will have paid out more in professional advisers fees because
the nature was that we did go through a lot of discussions. As
deals were signed off we had the concept of tram lines being developed,
whereby the private finance unit would say, "we have a position
we have reached on this aspect of the contract which we would
like to stick to". This meant there were occasions when we
had to go back and renegotiate what we had already agreed. I certainly
think the standard contract has led to a significant reduction
in legal fees. In fairness we probably spent more on legal fees
than any other advice, yet the legal fees are the smallest element
of professional advice of the Chester-le-Street Scheme, I think
that reflects the standard contract. Certainly the fees will have
been higher but it is difficult to know how you would develop
that without running a handful of schemes initially to get the
concept off the ground and see how it would develop in practice
in a number of areas, and consolidate good practice from all of
117. Can I go back to Councillor Earley with
your earlier question about the lessons to be learned. We apologise
for the message we put to you. We are pleased to see you. The
question was asked by Sandra Gidley, if you were going through
it again what would you do differently? What lessons have you
learned as the Chairman of the Trust?
(Cllr Earley) I agree with what Steven was saying
about the costs, I think we could have got a lot more help with
those. Steven was the led officer on the whole shebang and there
was an awful lot of pressure on people to perform. I think Steven
did a marvellous job. Perhaps the PFI unit could have been a bit
more of a support unit in the true sense of the word. I hope that
is how things are moving. The transfer of staff is difficult for
the hospital, it creates a lot of uncertainty on a very individual,
person by person basis. Members of staff did talk to me in the
run up and afterwards and, as I said before, one or two of them
are happier working for Consort than they were working for us.
I do not think that is the whole picture. There is nothing worse
than uncertainty. All of the rumours fly round about your pension
rights being changed, you will be sacked after week three, and
then people start moving jobs and you lose folk who have been
working in the hospital for a long time. That kind of jumping
ship is very unsettling. From a personal point of view I would
prefer all of the staff to be working for us. I do not think you
will ever get away from the fact that is better. Having said that,
so far things seem to be working very well and the staff that
I have talked to do not seem to be totally unhappy, but maybe
you will get different views if you spoke to them. I think things
are a lot better than they expected, but maybe that is because
they were fearing the very worst.
118. We were talking about the benefit of hindsight,
I wonder if Mr Rabin from Consort would be able to comment on
whether his company have learned anything from that and are you
using that knowledge to work differently in the future?
(Mr Rabin) I think we reiterate what the Trust has
said in terms of the standard contract. I do not think we can
emphasise too much how important that was or how important its
absence was. Now we appear to have it I have no doubt the process
will run, a) a great deal more smoothly and b), there will be
significant savings in those upfront costs. Yes, I would echo
that. I think everything else really pales into insignificance
compared with that.
119. A National Audit Office report on the Dartford
and Gravesham Hospital found that the public sector comparator
was overstated by roughly £12 million. Are you confident
that North Durham can stand up to a similar audit?
(Mr Mason) One of the points I would emphasise is
as far as we are concerned we complied with all of the guidance
that existed at the time in terms of how the figures were calculated.
Obviously there have been a number of reviews after the event
that have suggested different assumptions could have been made
in different areas. We are confident that all of the assumptions
we made were reasonable, we complied with the guidance. It has
also gone through a very elaborate checking process because the
Trust prepare the submission, we have that checked by our professional
advisers, it then goes to the regional office who review it and
they check the calculations. It then goes to the NHS Executive
and they check the calculations. There are also aspects of certain
schemes that are then further checked by the Treasury. It has
been through a very elaborate process and I do believe our calculations,
based on the guidance that existed at the time, would actually
show that the calculations were valid and fair and I believe it
would stand up to a similar audit.