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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