Examination of Witnesses (Questions 140
- 159)
WEDNESDAY 16 NOVEMBER 2005
DEPARTMENT OF
HEALTH AND
NORFOLK AND
NORWICH UNIVERSITY
HOSPITAL
Q140 Mr Davidson: I bet it was. If
I were in the position of John Laing and I had the opportunity
here to renegotiate something that will give me 60% profit or
I stay in a position where I am earning less than the expected
rate of return, and some gullible guy from the Health Service
comes along and says, "Look, I will strike this deal with
you, you have got to limit yourself to 60%," I would say,
"Thank you very much, I will bite off your arm."
Mr Coates: What John Laing said
to us was, "When we make losses you do not come to us and
say here is a load of money to compensate for our losses";
so why should we give you money when we are making a profit—
Q141 Mr Davidson: Yes, I can understand
why they were saying that, but this was not a question of profits
and losses arising from the original deal. This is a rejigging
of it and it is a rejigging which extended the period and it made
a number of changes, did it not?
Mr Coates: Yes, but you cannot
say to the private sector on this particular transaction you made
a whopping great profit and therefore we are taking it and on
all the ones you made a loss that is your look out. You have to
take these things in the round. The code is in the round—
Q142 Mr Davidson: In the round, that
is a good one. On how many occasions then, in the round, have
John Laing, Serco, 3i, Barclays, Innisfree actually made losses
on any of the constructions?
Mr Coates: John Laing Construction
went bankrupt after a PFI contract. They lost £40 million
and the John Laing you see here is different to John Laing Construction.
Q143 Mr Davidson: So this is a different
John Laing?
Mr Coates: It is.
Q144 Mr Davidson: So the other John
Laing had nothing to do with that then?
Mr Coates: John Laing Construction
that built the hospital is now owned by Laing O'Rouke Construction.
Q145 Mr Davidson: And the other companies?
Mr Coates: The rest are banks.
Q146 Mr Davidson: None of them have
gone bust then because they never do, do they?
Mr Coates: Banks, no.
Q147 Mr Davidson: Right, I think
I understand that extent of it. Can I just clarify in terms of
the potential for striking a better deal—and I can understand
why you settled for this voluntary deal because otherwise they
were not going to give you anything at all—again, is this
the limit of your ambition? Now that PFI deals are well stabilised
and the risks are much more understood, you are quite happy to
settle for a maximum of 50%, are you?
Mr Coates: I do understand the
point you are making but I take the view that you have to see
these things in the round and there is plenty of evidence in the
private sector that they are not all making very handsome profits,
and we cannot say to them the moment you make a profit we want
to share it with you and when you make a loss it is your look
out. We have to say in the round how can we share the benefits
on something that sounds sensible, sounds equal and has equity
about it? I think 50-50 sounds about right in these situations.
Chairman: Thank you, Mr Davidson. Alan
Williams?
Q148 Mr Williams: Can I just ask
the National Audit Office was this Report financed out of the
value for money budget that you have?
Mr Burr: This study—
Q149 Mr Williams: Yes?
Mr Burr: Yes.
Q150 Mr Williams: Why is this not
a value for money Report?
Mr Burr: It does not attempt to
say categorically whether this was value for money but it does
identify a number of risks to value for money.
Q151 Mr Williams: That is what the
value for money budget is for. That is what we gave it to you
for and that is why we increased it from 50 Reports a year to
60 Reports a year. Why do we not have a value for money assessment
in relation to this project?
Mr Burr: We do identify a number
of the risks so in that sense it is a value for money Report,
for example, the fact that there was no provision for sharing
in refinancing gains and that clearly prejudiced value for money.
Q152 Mr Williams: But you were not
able to conclude whether it was or was not value for money?
Mr Burr: I think it is always
difficult to do that with a deal of this kind because you are
comparing it with something that did not happen and therefore
it is difficult to quantify precisely.
Mr Finlay: Can I add to that.
This particular Report developed out a piece of correspondence
raised with us by an MP focusing on specific aspects relating
to the refinancing, so it did not start out as a complete examination
of all aspects of this deal. It focused on the specific issues
which were raised with us. Having completed that piece of work
we felt this was a Report which should be presented to Parliament,
but it started out as a piece of work answering particular questions
which were posed to us.
Q153 Mr Williams: Mr Forden, you
were not there at the time and I know it happened before you were
in office, but do you think in hindsight it was very clever to
modify a contract part way through because our experience has
been that modifying contracts in the middle of the contract means
that you are over a barrel and you virtually have to take whatever
terms you are offered?
Mr Forden: I am a great believer
in future-proofing especially buildings because it is so difficult
to change them later and it is always much more expensive than
if you did it in the first instance. Saying that, the trust did
take advice from the advisers to demonstrate that had the trust
actually built the building the way it finally ended up, it would
have been in line with the original financing. The additional
construction costs were not so different from the original deal
that we actually lost out.
Q154 Mr Williams: I know we came
across a case that looked appalling in Northern Ireland where
a new hospital was built and as soon as it was built the X-ray
department was demolished and a new X-ray department was constructed.
We came here as a Committee (although not this particular
membership) ready to chase them round the room for doing anything
so absurd and they were able to demonstrate to us that it was
cheaper to complete the existing contract and then negotiate in
a completely free position for subsequent contracts. Is there
anything to suggest, despite what you have just said, that you
might have got a better deal if you had done that?
Mr Forden: No, if you actually
visit the hospital, the way the extension has been done is very
much an integrated part of the whole building. It is not a separate
building that has been built. It is part of the whole infrastructure
of the unit. My personal belief is that was the right thing to
do at the time which was to build it as it was needed for the
demand then and the demand as is now.
Q155 Mr Williams: This contract has
been an absolute cash machine as far as Barclays, 3i Laing and
Innisfree are concerned. The trouble is it is a cash machine where
they have drawn out someone else's money. Have they been eager
participants, can I ask the Department, in subsequent contracts?
Mr Coates: 3i are not as far I
am aware bidding for any other PFI contracts at present. All the
other investors are still active in the PFI market.
Q156 Mr Williams: Thank you. This
was an early contract and we recognise that there is a degree
of testing the water and so on in the early phase, and this was
accepted by us when PFI first came before us, but looking at this
particular project, as it was one of the early ones, what are
the key lessons you think the Department has learned from it and
how far have they applied those lessons to future contracts?
Mr Coates: I think for this particular
contract what being Head of the Private Finance Unit in the Department
I felt I learned is that perhaps we could be more pushy on the
private sector and try and push them along more quickly in what
they are trying to do and try and make them be less lawyer and
bank driven than they are at present.
Q157 Mr Williams: That answer rather
worries me because it sounds rather like an off-the-top-of-my-head,
what-the-hell-do-I-say-now reply than an example of systematic
analysis of something that was a bit of a financial debacle. Did
you analyse what had happened, what had gone wrong, and what could
be done differently?
Mr Coates: This particular contract
in terms of outcomes is a fairly good example of a hospital building
contract. It has won awards for design and in our view in terms
of does it deliver a good product and a good-quality product it
does do so.
Q158 Mr Williams: Why has the Department
stuck on the 30-70 formula? When I first started raising questions
about refinancing I put a question down to every department and
the NAO then on the basis of all the answers I received produced
a Report on refinancing. Why have you stuck on the 30-70? Why
have you not pushed for 50-50 because it is still a good deal
as far as the contractor is concerned?
Mr Coates: As I said, at the time
the code was being applied to this contract, it had not stuck.
Q159 Mr Williams: I understand that
was the case then but you are still applying 30-70 now.
Mr Coates: Only to contracts that
have been signed already. New contracts are 50-50.
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