Examination of Witnesses (Questions 1
- 19)
WEDNESDAY 16 NOVEMBER 2005
DEPARTMENT OF
HEALTH AND
NORFOLK AND
NORWICH UNIVERSITY
HOSPITAL
Q1 Chairman: Good afternoon, welcome
to the Committee of Public Accounts, where today we are looking
at The Refinancing of the Norfolk and Norwich PFI Hospital,
and we are joined from the Department of Health by Mr Peter Coates,
who is the Deputy Director of Finance, and from the Norfolk and
Norwich University Hospital, Mr Paul Forden, who is the Chief
Executive, and Mrs Anna Dugdale, who is Director of Resources.
Perhaps I could ask some questions of the Trust, first of all,
and start with you, Mr Forden, if I may? Thank you for coming,
by the way, we are very grateful. Could you please look at the
Comptroller and Audit General's Report, particularly page 2, figure
2? If we look at that figure we will see that two years after
the new hospital opened the shareholders of Octagon were enjoying
a rate of return of over 60%. Surely you cannot say that this
is value for money, can you, Mr Forden?
Mr Forden: I would not possibly
try to defend any rate of return at 60% as necessarily being the
very best value for money for us. What I can say, though, is that
clearly there is an output from several factors.
Q2 Chairman: You will have to try
to speak up, and speak clearly, and speak to us.
Mr Forden: We do know that the
shareholders took the refinancing very early and that clearly
makes a big difference on the internal rate of return—the
fact they actually took it upfront. From the Trust perspective
though we also see that as something of a return as well because
actually we got back £30 million, which is our contribution
from the success of the project.
Q3 Chairman: We will also look in
a moment at the fact that this rate of return was largely because
they borrowed an extra £100 million, was it not?
Mr Forden: That is correct.
Q4 Chairman: For which ultimately
you are liable in the event of termination; that is correct as
well, is it not?
Mr Forden: In the event of termination
it is much more likely that actually the liability will be sold
on to another investor. It would not be in Octagon's interests
to actually fail and not to try to sell that liability.
Q5 Chairman: Why not?
Mr Forden: Because the future
gains from the hospital would still make it an attractive investment
to anybody else.
Q6 Chairman: But there is still that
possibility?
Mr Forden: There is.
Q7 Chairman: Which you did not foresee
at the time?
Mr Forden: We foresaw that at
the time; we actually did an analysis on that risk.
Q8 Chairman: You foresaw refinancing,
did you?
Mr Forden: No, we foresaw the
potential termination, sorry.
Q9 Chairman: Let us look now at figure
2 on page 2 again and you will see the 60% return, which I have
just mentioned, which is very high, compared to the initial shareholder
expectation of 18%, which is of course an enormous jump. Has the
service from Octagon similarly exceeded your provisional expectations?
The answer must be no.
Mr Forden: Our service from Octagon
is actually very good. I have worked in another hospital where
there is a PFI company, and I have to say that I am more impressed
with Octagon than I was in the previous hospital. It is not necessarily
a 300% improvement, but it is certainly a very satisfactory service.
Q10 Chairman: So you think that is
good enough, that they cannot possibly give you 300% improvement,
but they have given you some sort of improvement so you are happy
with that, are you? And their shareholders are now enjoying a
rate of return at 60%, having thought at the beginning of this
contract that they were only going to get 18.9%, and you think
that is a satisfactory position that this Committee should not
be unduly concerned about, do you?
Mr Forden: There is very little
the Trust could actually do around that. We have followed the
guidance throughout on the programme; we have followed the guidance
around the refinancing.
Q11 Chairman: Could the National
Audit Office just comment to me whether these rates of return
might have been foreseeable, particularly in the private sector,
by the time this contract was undertaken?
Ms Simons: I think the refinancing,
the fact that a loan of 20 years could be refinanced, would have
been foreseen by the lenders or the investors; it is a usual project
finance technique. However, the scale and the speed at which the
markets have moved was probably more difficult to predict.
Q12 Chairman: Thank you. If we look
at figure 6, page 8, we are now looking at Octagon's debt. You
have underwritten it, as I have already mentioned. The debt rose
by 53% to £306 million. The question I would like to ask
you when you come back is why is the taxpayer underwriting debt
used to improve private investors' benefit? Or perhaps you would
like to answer that quickly now?
Mr Forden: We are actually not
underwriting their debt, what we are doing is we have agreed to
make a payment to them in respect of the services we receive and
also obviously the excess to the building. That allows them to
borrow against that; but we are not actually underwriting the
debt.
Q13 Chairman: What is the difference?
Mr Forden: I think one is where
we actually have a liability. It is Octagon who actually entered
into the agreement with the banks, not the Trust itself.
Chairman: We will stop there and go to
vote and we will come back in a moment.
The Committee suspended from 15.37 pm
to 15.43 pm for a division in the House
Q14 Chairman: Mr Coates, what lessons
do you think the Department has learned from these unusually high
returns?
Mr Coates: We have learnt that
we need to be aware that these are potential benefits for the
private sectors to make; that equally we share the view of the
Trust that they are very large sums of money. But equally the
contract gave the Trust no right to access to that money and that
the large sum of money was shared with the Trust at 30%, and therefore
the Trust received a benefit that it would normally not expect
to receive.
Q15 Chairman: It received a benefit
but it is ultimately responsible, potentially, for these increased
borrowings, is it not?
Mr Coates: It is responsible in
the sense that it keeps paying a fee to Octagon if it keeps delivering
the hospital to standard and to quality. The Trust does not pay
any additional costs, any additional fees to Octagon as a result
of the refinancing.
Q16 Chairman: They exposed themselves
on the additional liabilities, did they not? How much thought
do you think was given to this at the time, either in the Department
or in the Trust?
Mr Coates: The potential additional
liabilities?
Q17 Chairman: Yes.
Mr Coates: We, alongside the Trust,
did do a VFM appraisal of the risks against the rewards in terms
of the refinancing, which is table 12, and what we tried to look
at there was what the likelihood of termination was. My recollection
is that we looked at the probability of default based on a typical
project financing rated by the likes of Standard and Poor's and
rated as of Triple B, and they say that in any year any one project
has a 5% to 10% probability of defaulting. We currently have 46
operational major PFI schemes, 23 being open for three years continuously.
We have had no defaults yet and so all we can say is that 5% to
10% probability looks conservative based on these probabilities.
Q18 Chairman: Mr Coates, would you
look at figure 8, page 9? You can see that the shareholders of
Octagon have withdrawn £130 million from the project.
Mr Coates: I do.
Q19 Chairman: Do you think that any
of that is going to be used for the benefit of this hospital or
indeed other PFI hospitals?
Mr Coates: When we have talked
to the industry generally about what they propose to do with the
fund for refinancing, and I think when other consortia have appeared
before various Committees, they have said they would intend to
recycle a proportion of that for bidding against further projects
and investing in further projects.
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