Select Committee on Health Minutes of Evidence

Examination of Witnesses (Questions 105 - 119)




  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 here.

  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 affected?
  (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 difficulties.

  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.

Sandra Gidley

  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 sectors.

  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 those schemes.


  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.

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