Select Committee on Public Accounts Minutes of Evidence


Examination of Witnesses (Questions 40 - 59)

WEDNESDAY 16 NOVEMBER 2005

DEPARTMENT OF HEALTH AND NORFOLK AND NORWICH UNIVERSITY HOSPITAL

  Q40  Mr Bacon: And you will have the money with which to do it. Basically you have increased the risk to the hospital; you have taken on this extra. Am I right in thinking that the contract that you have with Octagon says that your termination liabilities are equal to total borrowings?

  Mr Forden: To the maximum of the total borrowings, no.

  Q41  Mr Bacon: That is not correct?

  Mrs Dugdale: May I just help with this?

  Q42  Mr Bacon: Yes.

  Mrs Dugdale: On the event of Trust default we would have to repay the senior debt outstanding.

  Q43  Mr Bacon: I am not talking about Trust default, but if the provider fails?

  Mrs Dugdale: No, then we would not have to repay the borrowing. What we would have to pay is 95% of the usage fee or the core usage fee less the increased costs to the Trust, or the scheduled senior debt service, and we pay the lower of those three. So we would not have to pay the debt outstanding.

  Q44  Mr Bacon: What I understand is this—and I have talked to the National Audit Office about this—that because Octagon borrowed money—and as it happened it was borrowing extra money when they refinanced, they borrowed an extra £100 million or so, which is shown on page 8 in figure 6, which is why it goes from £200 million to £306 million—when they did that I understand that your termination liability also increased. Are you saying that that is not true?

  Mr Forden: Our termination liability increases if we terminate; if Octagon fail then we have to, as Mrs Dugdale has set out, service that debt, but that debt is no more than we would be servicing through our payments to Octagon.

  Q45  Mr Bacon: NAO, would you like to comment on that? Mr Finlay?

  Mr Finlay: I think the situation is that there is this amount of debt outstanding, which is the £300 million. As the Chief Executive of the Trust has said, the Trust would have to service that debt. If the Trust chose to terminate the contract in any event our understanding is that it would be liable for the termination liabilities.

  Q46  Mr Bacon: You accept that?

  Mr Forden: I accept that.

  Q47  Mr Bacon: The point I was making, that debt is now £100 million higher than it was, for no other reason than that Octagon wanted to take its money out early, is it not? It is like what Phillip Green did with BHS. He borrowed money to pay himself a big dividend, and is that not basically what has happened here?

  Mr Forden: Partly, but we did take an analysis of the risk of that and our assessment of that risk is shown in table 12, that shows that actually it was a sensible investment risk to take.

  Q48  Mr Bacon: It seems to me that Octagon have managed to decrease their risk while taking out money early, and you have admittedly a bit of a refinancing gain, but you have had to increase your risk to do that. I remember when Fazakerly Prison refinanced they increased their return from 16% to 39% while reducing their risk. Is it possible that we could have a league table, if you like, of PFI refinancings showing the percentage internal rates of return at contract letting and the percentage of internal rates of return following the refinancing, so that we can see where the gain is biggest? Is that possible?

  Mr Finlay: On Fazakerley?

  Q49  Mr Bacon: No, on PFI refinancings in general, so that we can look at them and compare the before refinancing and the after refinancing situation.

  Mr Finlay: We will see whether we can get this information.[2]

  Mr Bacon: That would be extremely helpful, and I think my time is up.

  Chairman: Jon Trickett.

  Q50  Jon Trickett: Can I ask the Comptroller and Auditor General whether he agrees with the statement that this Report which has been put before us has limited effectiveness in evaluating value for money or managerial context in relation to this particular deal?

  Mr Burr: The Report certainly does not attempt to reach a judgment as to whether the deal was or was not value for money. I think it provides a lot of contextual information which contributes to such a judgment, but it does not reach a view either way on that.

  Q51  Jon Trickett: That sentence I quote from a document that you have, by Oxford University Consulting, and in fact the whole document—which I understand you have commissioned, and in fact I understand you commission one for every Report that comes in front of the Committee of Public Accounts, which was not made available to Members and I had to request it and at first was refused permission to see it—makes it quite clear that this document here avoids the issue of value for money, does it not? Your consultants have told you that this Report does not address value for money issues properly, does it not?

  Mr Burr: It does not attempt to say whether this transaction was or was not value for money.

  Jon Trickett: Have you seen this document before, Chairman?

  Chairman: I have not.

  Jon Trickett: Were you aware that the NAO were commissioning regular reports?

  Chairman: No.

  Q52  Jon Trickett: Apparently you have a contract with two contractors which evaluate each Report which comes before the PAC.

  Mr Burr: We have a very longstanding arrangement under which we get an external academic review of each Report we make.

  Q53  Jon Trickett: I have seen some of these reports and some of them are very, very damning, yet you must have had those reports in hand at the time that the Chair was presented with your Report. Would that be true?

  Mr Burr: There is obviously a range of assessments which are made of these Reports. Some are very good, in some of them there are obviously more criticisms.

  Q54  Jon Trickett: This document gives you marks, does it not?

  Mr Burr: Yes, they all do.

  Q55  Jon Trickett: I do not know if the Chairman was as surprised as I was that these documents are in existence and they are not made available to Members, because at the end of the day we are in a kind of fishing expedition with these Reports. I would have thought that these Reports would be the best that could be presented to us and I now discover in fact that you have independent evaluations of every Report we have ever seen, some of which are very damning, are they not?

  Mr Burr: I do not think they are generally damning. Some of them are very favourable.

  Q56  Jon Trickett: Do you remember I was extremely critical on the LIFT Report, which is somewhat off the subject today, but I want to make the general point first? The report which you received on that was particularly frank.

  Mr Burr: The Oxford University evaluation of that Report—I am not sure off the top of my head I can remember exactly what they had to say.

  Jon Trickett: I will just leave it at that. This report is extremely illuminating. It makes an evaluation on seven separate areas of work, points out of three, as to how good or bad the Report is and in some cases the NAO gets one; in some cases it gets three. The overall conclusion is that the Report itself, "It does address some important consequences of the maturing PFI market but has limited effectiveness in evaluating value for money on managerial context." If the Report is not going to be improved before it comes to us at least we should know why we should be fishing. It is a substantial Report, as you can see, and it would point Members to some very interesting questions. I wonder if we might address this issue as Members perhaps at the end of the meeting or whenever you think is appropriate because I think this is something of a revelation.

  Q57  Chairman: We can discuss it, yes.

  Mr Burr: These reports would not normally be available until a little while after the Report had been prepared and often after the Committee has considered the Report.

  Q58  Jon Trickett: I understand that this Report was clearly available before, since I got it.

  Mr Burr: Yes, on this occasion, yes.

  Q59  Jon Trickett: And the LIFT one, which was a particularly poor Report, I felt, you also had it in advance. Some of my questions are now going to be directed, but not all of them because I have taken up some time on this particular matter, to points which are made in here. First of all, I do not believe that a single figure in this whole Report is accurate in terms of the amount of cash going between the public sector and Octagon because they are all calculated, having taken into account something called a discount rate, are they not?

  Mr Burr: Yes.


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