Examination of Witnesses (Questions 20
- 39)
WEDNESDAY 16 NOVEMBER 2005
DEPARTMENT OF
HEALTH AND
NORFOLK AND
NORWICH UNIVERSITY
HOSPITAL
Q20 Chairman: That still does not
really say a great deal. You may want to send us a note on that[1];
we would like to have some evidence behind that. Basically you
are saying that this £130 million that the shareholders have
withdrawn from this project is going to be recycled into other
hospitals, are you?
Mr Coates: I said a proportion.
Q21 Chairman: That was the implication
of your question but I would like to have more evidence behind
that because I would be surprised if that were entirely true.
I do not know, but I would be surprised if it was. If you look
at page 16, paragraph 2.1, it says there, "There are a range
of factors, some of which have yet to be fully analysed by the
Department, which will have affected the pricing of current PFI
hospital deals." So how can you, Mr Coates, judge whether
these deals are good value if you cannot explain all the reasons
why the contract prices have changed over time?
Mr Coates: The Department of Health
finance team do keep a close watch on the PFI market through a
variety of sources. We collect construction and service price
trends from the NHS; we have copies of every financial model of
every PFI transaction in the NHS; and we also collect data from
the Treasury across departmental issues in terms of prices and
such like. We believe we do keep a fairly close watch on what
the PFI markets do in terms of price and activity.
Q22 Chairman: Let us look at page
14, paragraph 1.5, "After sharing in refinancing benefits
NHS Trusts will continue to pay a premium on the financing costs
on early PFI hospital deals." So is this kind of refinancing
and this deal entirely fair on the NHS Trust who entered into
early PFI deals, because they have to bear the higher financing
costs?
Mr Coates: Indeed, and I think
the Report does go on to say elsewhere that we have to look at
other costs that the Trust may have incurred if it had come later
in the process. It seems to me that there are two issues for the
Department. One is: is the Trust paying more than it should for
this hospital? And: is the Trust paying more than others are paying
for this hospital? We have undertaken further work in the Department
looking at the various factors and it is not easy to bring forward
today's cost, but we believe that the additional construction
costs and the costs that the Trust would have incurred if it built
the hospital today do balance off against it.
Q23 Chairman: My last question to
you, Mr Coates, just speaking on behalf of the taxpayer—you
are the guardian of the taxpayer on this—are you entirely
happy with a situation where private investors have got away with
a rate of return of 60%? Does that seem to you a good deal for
us?
Mr Coates: It is hard to defend
such large returns, but all I can say is that the contract itself
gave us no right of access and the private sector has done a deal
with the taxpayer generally to share those benefits with us on
a post hoc basis.
Chairman: I am sure my colleagues can
come back on that. Mr Bacon.
Q24 Mr Bacon: Chairman, thank you
very much. I would like to start with the question about the building
costs because the NAO Report says on page 4 that additional building
costs arising from construction inflation, if you had done it
later, probably offset the benefits of lower financing costs that
you would get if you were doing it now, and therefore that is
all right then, so to speak. Is it not the case, Mr Forden, that
at the end of the day nobody trying to let this contract on behalf
of your Trust was in a position to know what would happen to construction
costs going forward; is that correct?
Mr Forden: That is correct.
Q25 Chairman: Is it not also true
that you are basically faced with a premium compared with other
PFI deals, even after your refinancing?
Mr Forden: The audit Report says
there is a premium that we pay after the refinancing. If you took
the same financing terms as we could expect today, if we were
able to achieve those when we let the contract and financial close
in 1998.
Q26 Mr Bacon: Mrs Dugdale, could
you say something about the way the financing was approached because
there was no competition for the financing, was there?
Mrs Dugdale: Initially, no. When
the initial deal was made there was not a competition.
Q27 Mr Bacon: Why not?
Mrs Dugdale: Because there was
a two-year gap between commercial close and financial close, but
even during that period the PFI market for health was very new.
There were discussions with the PFI partners about the possibility
of a competition, but it was determined that there was not enough
of the market to actually have a competition at that stage.
Q28 Mr Bacon: How does one determine
that other than by asking?
Mrs Dugdale: It was agreed between
us that there was not enough of a market at that stage, and if
you look at PFI deals closing at around the same time there was
no competition because funding competitions were not known.
Q29 Mr Bacon: Mr Finlay, is it not
correct that Octagon had a competition when it closed the deal
for its refinancing—it had a funding competition?
Mr Finlay: At the time that Octagon
carried out its refinancing, yes, it held a funding competition,
and that is referred to in figure 23 in our Report.
Q30 Mr Bacon: Mr Glicksman, when
the Treasury building, which was a PFI project, wanted to finance
it had a competition, did it not?
Mr Glicksman: It did, but I think
that was the very first one that we had done in the public sector,
and it followed a gap when the project contract had been put on
hold for a couple of years, and we picked it up again.
Chairman: We will have to break for about
five minutes.
The Committee suspended from 15.52 pm
to 15.58 pm for a division in the House
Q31 Mr Bacon: I was asking about
competitions and Mr Glicksman had agreed that the Treasury building
had a competition for its financing, although it was the first
one, he said, and Mr Finlay agreed that Octagon had had a competition
for its financing. When most people go out into the market place
looking for a mortgage to buy a house they do not necessarily
go to the first building society that gives them the price, do
they?
Mrs Dugdale: No, but I think that
you have to appreciate that we were the groundbreaker for the
market for PFI financing, and at the time when the original deal
was struck there was not such a thing as a funding competition.
Q32 Mr Bacon: There was not such
a thing as a PFI bond market. You say that there was not such
a thing as a funding competition and I find that is not possible
to believe. For PFI per se maybe, because PFI was new,
but 20 years ago when I left university and started working in
an investment bank we did what were commonly known as "beauty
parades"; they are a standard feature of the City, a standard
feature of how things work. You go along with three or four other
banks, you tout your stuff, you strut your stuff, you tout you
wares and then the client chooses. Is that not obvious, and why
was that not done?
Mr Coates: Can I come in there?
Q33 Mr Bacon: Actually I was asking
Mrs Dugdale. Was that not an obvious thing to do?
Mrs Dugdale: In the PFI market
at the time, funding competitions did not take place in the market,
they were not something that were done ordinarily in the market.
Also, PFI at the time was very much the concept of a package,
so that the private sector brought a package deal to the public
sector, which included the finance as part of that overall package.
Q34 Mr Bacon: I will not pursue that
any further. Can I ask you to turn to page 12? The hospital, I
think I am right in saying, is now paying £1.7 million per
year less in the annual unitary charge than would otherwise have
been the case before the refinancing; is that right? That is basically
how you are taking your gains?
Mr Forden: It is paying a total
of £3.6 million a year less—
Q35 Mr Bacon: Is it?
Mr Forden: Of which £1.8
million was due to the refinancing gain and £1.8 million
was as a result of extending the contract period.
Q36 Mr Bacon: I am talking specifically
in relation to the refinancing gain, it was £1.7 million?
Mr Forden: Yes.
Q37 Mr Bacon: And it is true that,
as the Chairman said at the beginning, you have taken on additional
potential termination liabilities because of the refinancing?
Mr Forden: We have not taken on
additional termination liability unless we terminate the contract
ourselves, sorry.
Q38 Mr Bacon: Termination liability
will only kick in if there was termination, I would have thought
that was self-evident. The point I am referring to is maximum
increase in termination liabilities in figure 12, £257 million.
Obviously it is a contingent liability, if you like, a contingent
situation, but it seems to me that in return for getting this
extra refinancing gain that you shared, which means you pay £1.7
million per year less, you have taken on the risk—the risk,
mark you—of £257 million extra should, for any reason,
Octagon fail. That is correct, is it not?
Mr Forden: Should we wish to withdraw
from the contract—
Q39 Mr Bacon: If Octagon fail—
Mr Forden: No, if Octagon fail
actually we have not taken on that liability, no, because what
happens then is we become responsible for servicing the debt,
which is true.
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