Examination of Witnesses (Questions 120
- 139)
WEDNESDAY 16 NOVEMBER 2005
DEPARTMENT OF
HEALTH AND
NORFOLK AND
NORWICH UNIVERSITY
HOSPITAL
Q120 Helen Goodman: I understand
that, but my question is you know that a refinancing has happened
in this case; you know that it has produced results which are
very controversial, but have you written in to subsequent contracts
the share that would be agreed in the event of refinancing?
Mr Coates: Yes.
Q121 Helen Goodman: I would like
to ask a question to the Treasury Officer of Accounts, if I could,
which is: have you considered shifting the 50-50 split even further
in favour of the taxpayer?
Mr Glicksman: The 50-50 split
was negotiated with the industry just four years ago now and we
have published it and applied it to all PFI contracts since then.
I do not think that we have had any experience of refinancings
under that 50-50 split, so I do not think we have had any experience
on which to consider changing it.
Q122 Helen Goodman: And there is
no current review of the 50-50 split? You are happy that if another
refinancing occurs you will continue with guidance to departments
on a 50-50 split?
Mr Glicksman: We would obviously
review whatever experience came forward. Our minds are not closed
but we have not had any further refinancings under that arrangement.
Q123 Helen Goodman: Fine, there is
just one point I would like to correct earlier just so that we
have got that on record, if that is possible. Although Octagon
themselves have not previously done a PFI deal, looking at Table
4 on Page 6, ABN Amro, who are one of the major partners, had
been involved nearly three years before so there was some prior
experience. I would just like to place that on the record if that
is possible. Finally, I would like to ask a question of the NAO
which comes back to the points that Mr Trickett was raising. In
Table 2, Note 1, why was the test discount rate 18.94%? Why was
that test discount rate used here? Why was it discounting using
18.94%, which was the internal rate of return for shareholders
and not the standard test discount rate of public sector investment?
Mr Finlay: In that respect it
follows the Treasury guidance and the intention was to compare
with the return that the shareholders originally expected. That
is a very clear explanation. The method of calculation is set
out in Treasury guidance. It is effectively calculating refinancing
gains using as a comparison the rate of return that the shareholders
expected at the outset. You have to use some discount rate and
the Treasury consider that that is the most appropriate rate.
Q124 Helen Goodman: Why do they want
to use the internal discount rate of the shareholders for these
PFIs when they are not using that discount rate for other pieces
of public sector investment or for measuring other long-term future
costs?
Mr Finlay: Because it is a different
type of calculation. The other calculation you are referring to,
where a discount rate is used at the moment of 3.5% in real terms,
is used for calculating investment flows which the Government
is going to enter into. This is a different type of calculation.
This is essentially about the benefits to the private sector from
refinancing and so it is not unreasonable that the test is by
reference to their own particular expected rate of return.
Mr Glicksman: Would it be helpful
if I comment? As Mr Finlay said, what we are looking at here is
quite different from comparing an investment through one route
with another route. What it is doing is trying to look at how
the returns from the financing should be split between the two
parties, so for that purpose it is more appropriate, we have felt
in our guidance, to use the rate of return that was originally
expected in the contract in order to divide up the returns between
the two parties.
Helen Goodman: Could I just make another
comment or ask another question which is I do not fully understand
why you take that view and in particular I would like to challenge
it because this internal rate of return is much higher than the
private sector's internal rate of return across the economy as
a whole, so using that one does seem rather strange.
Q125 Jon Trickett: It is generous.
Mr Glicksman: It is this one because
this was the one that they were using for this particular contract
when we signed up to it in the first place. For another contract
it would be a different figure. It would be the figure that was
proposed for that contract. So we are using the figure that was
proposed for the contract and we are looking at it on the refinancing,
and the impact of using different rates of returns is to change
the way in which sums received earlier on and sums received later
on in the contract are evaluated. That is the impact of using
a different rate of return.
Q126 Helen Goodman: I understand
that but it does make it quite difficult for the Committee of
Public Accounts to compare projects if different numbers are being
used.
Mr Coates: Having been involved
in discussions about the code and the numbers, this is an area
where there is no science to it. It is simply the higher the discount
rate you choose the better the benefit is to the public sector
because it values gains more highly that way. If I may suggest,
we will provide you with a note of what it is at 18.94 to demonstrate
that forcing the private sector to use a high rate benefits the
public sector because the cash yields are deemed to be higher.[7]
Chairman: Mr Davidson?
Q127 Mr Davidson: Could I ask Mr
Forden if you had known at the time you were signing the deal
what you know now what would you have done differently?
Mr Forden: I would have tried
to ensure that my colleagues knew the same as I know now in the
Treasury and Department of Health, that we could renegotiate it
to a higher share of the split.
Q128 Mr Davidson: Can I just clarify
the extent to which you and the Trust had any veto over the refinancing?
Mr Forden: We could have objected
to taking on the potential higher liability and that would have
limited the amount of refinancing.
Q129 Mr Davidson: It does strike
me that you have not played your hand as well as you might have
in this regard because, as I understand it from the Report we
have here, Octagon, which is John Laing and Serco and these other
people, were receiving in the run-up to the refinancing less than
the 18.9% surplus that they had anticipated and that you agreed
to a deal which allowed them to move up to 60% of a surplus from
the position. Now, if you had the opportunity to block that, it
does seem to me you did rather have a stronger hand than it might
appear from the deal that you ended up with. Can you just clarify
that for me?
Mr Forden: Unlike Mr Trickett,
I like to look at the cash and our cash payments have actually
gone down. Whether the shareholders got 60% or 100% or 3% our
cash payments went down, so that was good news for the Trust.
The maximum we could get was very much governed by the guidance
at the time. The guidance at the time was 30% and 50% on the extension.
So we actually got as a trust as much as we possibly could by
following the guidance.
Q130 Mr Davidson: Can I be clear
then about that. I accept that you got a better deal than you
had before but you could have got a better deal than you had before
by getting sixpence off the amount you are paying. You are saying
to me you would have taken anything. If you had the opportunity
to block the deal why is it that you got such a small benefit
and they got such a big benefit?
Mr Forden: The maximum we were
able to go for as a trust was the 30%.
Q131 Mr Davidson: Why was that the
maximum?
Mr Forden: That was the guidance
at the time of the voluntary code.
Q132 Mr Davidson: That was the guidance
under a voluntary code. Why was that the maximum?
Mr Forden: I think maybe Mr Coates
will want to add to that but as a trust we are not allowed to
set the trend for PFI deals for the whole of the NHS; we have
to follow the guidance.
Q133 Mr Davidson: Have you no ambition?
If you had been able to get even more of the share of the benefits
you would have been even happier. Who knows, your bonus might
have been even higher. I just cannot understand why you self-limited
yourself in this way.
Mr Forden: As a Trust we were
not able to go any higher.
Q134 Mr Davidson: Explain to you
me why you were not able to—because the Department would
not let you; is that what you are saying?
Mr Forden: The Department had
very clear engagement with the trust in trying to deal with the
refinancing. We were very much advised by the Department, quite
rightly, as to what we should be able to achieve. We were able
to achieve the maximum on the extension at 50-50 and 30% on the
re-financing.
Q135 Mr Davidson: That was because
that was what the Department was telling you was the maximum?
Mr Forden: That is because all
of the guidance in the voluntary code which had been agreed between
the Treasury and the—
Q136 Mr Davidson: And you regarded
yourself as bound by that?
Mr Forden: Yes.
Q137 Mr Davidson: And you had no
ambition to get more of it?
Mr Forden: We had a great deal
of ambition to get as much as we could. The other way of looking
at it is we certainly did not get less than what we were told
the maximum was.
Q138 Mr Davidson: I understand that
and can I just clarify that Mr Coates. It seems to me that you
were tying hand and foot the trust in terms of what the limits
of their expectation ought to be. That displays, surely, a poverty
of ambition on your part because here we have a PFI organisation
which was making less than they expected under the existing financing
arrangements and they were going to move to a situation where
they were going to get triple what they were expecting. I would
have thought in those circumstances you really ought to have been
able to strike a better deal.
Mr Coates: It is important to
look at this in the context of what was happening at the time.
The first deal that went through under the voluntary code did
not meet the code's requirements in the sense that we could not
persuade the private sector to accept a discount rate of 18.9%.
So we had to make compromises so although the code was voluntary
and was signed it had not been fully adhered to in the market.
Q139 Mr Davidson: By the private
sector?
Mr Coates: By the private sector,
yes, so we had to approach it in a way of trying to force the
code through. Rather than being ambitious we had to try and make
the provisions of the code stick. In this sense this is the first
deal in the NHS where the code stuck and they had to adhere to
it.
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