In 1998, the Norfolk & Norwich University Hospital NHS Trust (the Trust) let one of the first PFI hospital contracts to a private sector consortium Octagon. In 2003, just two years after the new hospital opened, Octagon refinanced the project, dramatically increasing its investors' rate of return to over three times the level Octagon had predicted when bidding for the contract. The Trust only received 29% of the refinancing gains despite taking on substantial new risks following the refinancing.
Octagon achieved this outcome by increasing its borrowings by 53% from £200 million to £306 million. Octagon then used the increased funds to accelerate the financial benefits which the investors would receive from the project. After other financing adjustments, the total refinancing gain was £116 million. £82 million of the gain was retained by Octagon increasing its investors' internal rate of return, which it had said would be 19% when it bid for the contract, to 60%.
In securing the right to receive £34 million of the gains the Trust accepted that the money it would have to pay to end the contract early could increase by up to £257 million following the refinancing as its termination liabilities are related to the amount of Octagon's outstanding borrowings. The Trust also agreed to extend the PFI contract from 34 to 39 years and to receive its share of the refinancing gains over the life of the contract, rather than as an immediate payment.
On the basis of a report by the Comptroller and Auditor General, the Committee took evidence from the Trust and the Department of Health (the Department) on how this PFI deal should be viewed in the light of the refinancing and the implications of these refinancing arrangements for other PFI deals.
In summary, our conclusions and recommendations are:
- The opportunity for large refinancing gains on this early PFI deal does not seem to have been seriously considered as part of the original deal negotiations. Yet, through simply borrowing more, the benefits to Octagon's investors have soared on refinancing to levels which are unacceptable even for an early PFI deal.
- The Trust further contributed to the inappropriate outcome by accepting that, should it wish to end this contract early, its liabilities could now include all the additional borrowings Octagon used to boost its investors' returns.
- We would not expect to see another Accounting Officer appearing before this Committee defending what we believe to be the unacceptable face of capitalism in the consortium's dealings with the public sector.