House of Commons - Public Accounts

Select Committee on Public Accounts Fortieth Report

3 The expected benefits of the joint venture

15. At the outset, the proposals for the joint venture included a service level agreement that put an obligation on the Information Centre to procure approximately £600,000 of services from the joint venture.[44] The service agreement contained performance indicators and was one of the ways the joint venture was expected to demonstrate value for money.[45] The service agreement was removed from the deal following an Information Centre review which had highlighted that the joint venture was providing services to the NHS rather than the Information Centre.[46] This review was done at the same time that the National Audit Office questioned the need to comply with EU procurement law and the legality of the service level agreement.[47]

16. In writing to the Information Centre in November 2005, the National Audit Office stated that whilst the removal of the service level agreement reduced the risk of procurement law being breached, it left open the question of what was being purchased, as no services were to be delivered to the Information Centre by the joint venture.[48] In the absence of a clear definition at the outset of what the Information Centre would receive for its investment, the Information Centre is restricted to being simply an arm's length partner or investor. In addition, the Information Centre will need to procure by tender any services that the joint venture might supply. The Information Centre therefore does not receive any measurable benefits from its association with Dr Foster Intelligence, other than a share in future profits and the potential future value of the company at the end of the joint venture agreement.[49]

17. The Department believes that the joint venture will deliver benefits to patients and the NHS through the better use of information in policy development, service delivery, management of NHS services and patient choice.[50] Whilst there were no explicit performance measures included at the outset, following completion of the deal the Information Centre and Dr Foster agreed some performance indicators which are reported on a monthly basis. Whilst these benefits may be measurable over time, there is no baseline against which they can be measured.[51] These indicators also do not link effectively to the objectives of the Information Centre and do not demonstrate the benefits of the joint venture over and above what the company Dr Foster Ltd could have delivered without the public sector intervention.

18. The future value of the joint venture company is largely unpredictable, but the business case for the deal estimated that sales of the joint venture would grow by over 1000% over three years.[52] These projections were subsequently lowered as they were considered to be ambitious. For example, the projected sales for Dr Foster Intelligence were lowered by 24% between the valuation carried out in August 2005 and the business plan produced in early 2006.[53] In the first year of trading it was predicted that the joint venture would make a small profit, yet audited figures show that in practice it has made a £2.8 million loss.[54]

19. By entering into the joint venture the Information Centre has made a commitment to "generally use its endeavours to promote business and the interests of Dr Foster Intelligence and its subsidiary undertaking" and to "use Dr Foster Intelligence as the principal vehicle and channel for NHS market research and knowledge".[55] This commitment does not, however, supersede its obligation to comply at all times with procurement law. The Information Centre told us that Dr Foster Intelligence will not have any privileged access to the information it collects and stated that it has relationships with a wide range of organisations.[56] Despite this assurance there remains a real risk that the joint venture may result in a less competitive health informatics market by virtue of the fact that Dr Foster Intelligence's close connections with the Information Centre give it an advantage.[57]

20. Joint venture companies are usually established because the parties have complementary objectives: each has a contribution to make to the delivery of a successful business or venture, which they would be unable to achieve independently. For a joint venture to work effectively there needs to be some kind of contribution from both sides; greater than just an investment of working capital.[58] The Office of Government Commerce's internal peer review of the joint venture found that the Information Centre lacked the skills to be an equal partner with Dr Foster LLP. On the basis of the findings of the peer review, the Information Centre took more time over the negotiations and put additional resources into building the Information Centre's skills.[59]

21. A joint venture normally expects the parties involved to share the risks in relation to the shareholding whilst trying to achieve their own organisational objectives.[60] Under the initial exit arrangements for the joint venture neither Dr Foster LLP nor the Information Centre can sell their share within the first three years without mutual consent.[61] Any time after January 2009, however, Dr Foster LLP has a put option which requires the Information Centre to buy out its share at market value if it wishes to exit the deal and a buyer cannot be found. This option is not reciprocal,[62] so the risks are greater for the Information Centre.[63] The Department was content with this arrangement because it wanted to retain control in the longer term, and the joint venture represents a substantial part of Dr Foster's business but is only a fractional risk on its side.[64]