UNCORRECTED TRANSCRIPT OF ORAL EVIDENCE To be published as HC 789-i

HOUSE OF COMMONS

ORAL EVIDENCE

TAKEN BEFORE THE

PUBLIC ACCOUNTS COMMITTEE

THE FRANCHISING OF HINCHINGBROOKE HEALTH CARE NHS TRUST and PETERBOROUGH AND STAMFORD HOSPITALS NHS FOUNDATION TRUST

SIR NEIL McKAY, UNA O’BRIEN, DAVID FLORY, ALI PARSA and STEVE MELTON

SIR NEIL McKAY, UNA O’BRIEN, DAVID BENNETT and PETER READING

USE OF THE TRANSCRIPT

Oral Evidence

Taken before the Public Accounts Committee

on Monday 10 December 2012

Members present:

Margaret Hodge (Chair)

Mr Richard Bacon

Stephen Barclay

Guto Bebb

Meg Hillier

Mr Stewart Jackson

Fiona Mactaggart

Austin Mitchell

Nick Smith

Ian Swales

Justin Tomlinson

Amyas Morse, Comptroller and Auditor General, National Audit Office, Gabrielle Cohen, Assistant Auditor General, NAO, David Moon, Director, NAO, and Marius Gallaher, Alternate Treasury Officer of Accounts, were in attendance.

REPORT BY THE COMPTROLLER AND AUDITOR GENERAL

Peterborough and Stamford Hospitals NHS Foundation Trust (HC 658)

Examination of Witnesses

Witnesses: Sir Neil McKay, Chief Executive, East of England Strategic Health Authority, Una O’Brien, Permanent Secretary, Department of Health, David Flory, Chief Executive designate of the NHS Trust, Ali Parsa, Former Chief Executive, Circle 2 and Steve Melton, Chief Executive, Circle Holdings PLC, gave evidence.

Q1 Chair: We are out of room, which is because we are welcoming two delegations. We welcome a delegation from Estonia and another delegation from Guateng PAC in South Africa. I also warmly welcome Lord-Brian-Mawhinney, who was the constituency MP certainly for Peterborough; I think he was your predecessor, Stewart, was he not? Good to see you.

Can I say to our witnesses that you can see there is a lot to do? We want to try to spend an hour on the first panel and an hour on the second. I am going to interrupt you if I think that you are off-answer. Apologies if you think it is a bit rude, but I just want to keep us very focused on the business that we have to deal with.

We will start with Hinchingbrooke, obviously. Thank you, Mr Parsa, for coming to see us this afternoon. This Report was published on 8 November. You and I did a little piece on the "Today" programme, and you were trumpeting the success. Here we are, barely a month later, and you are off. Why?

Ali Parsa: I think partly because of the success. If you think about it, Mrs Hodge, I have now been creating Circle for eight years-

Q2 Chair: Let me just say to you that we love to have honest answers. I cannot believe that anybody would think that setting up a new organisation and the Chief Executive going within six months is sensible planning. It would just be really nice to hear from you, honestly, what has gone wrong.

Ali Parsa: Mrs Hodge, I think if you look at my life as a 16-year-old who left my country because of the integrity-

Q3 Chair: I want to hear about Hinchingbrooke.

Ali Parsa: I do not think honesty is something we should question; I hope not. We have done extremely well in the last five years in Circle. Five years ago, we were an organisation of 15 people and zero revenue. Today we manage about £180 million and about 3,000 people.

Q4 Chair: Can we focus on Hinchingbrooke?

Ali Parsa: Hinchingbrooke is a big part of that. When we took it over, it had clinical and financial issues. Today, it is doing very well clinically. It was losing about £1 million a month when we took it over, but in October it had a surplus of around £400,000, £350,000 of which was-

Q5 Chair: I don’t think we agree with that, but we will come to the figures in a minute.

Why are you off? If I were a shareholder and you were a successful Chief Executive, I would not let you go until you had sorted this out good and proper. You took over a hospital with an appalling financial history in an extremely difficult and challenging environment, and you are off in six months. I just want an honest answer as to why.

Ali Parsa: Mrs Hodge, I am not going anywhere. I am just moving to become the non-executive-

Q6 Chair: You are going. You are going away from running it, and someone else will presumably take over running it.

Ali Parsa: Yes. I will keep fiduciary duty for the organisation, but we built a very good team in Hinchingbrooke and in Circle-

Q7 Chair: Why are you off? If the Committee understood that, we might get further in our understanding of what is going on.

Ali Parsa: I will make an announcement of the next project I am doing in January-

Q8 Chair: No. Why are you leaving this one?

Ali Parsa: I said very clearly that I have a number of other projects, and that Hinchingbrooke and Circle are in great and fantastic hands and will do a very good job of delivering what we promised to deliver. I will stay on the board of Circle to oversee-

Q9 Chair: Just answer the question. Why are you off? Why are you going? Six months into a groundbreaking exercise of trying to franchise out a hospital, you go. Why?

Ali Parsa: Again, I say that I am not going.

Q10 Chair: You are going. You are becoming a non-exec Director. You are quitting as Chief Executive. You have a £400,000 pay-off.

Ali Parsa: No, that is my salary for next year. It is not a pay-off. It is part of my contract, and part of the contract of many of our people. In a private company, people often come and people go, and they take their contractual payment.

Q11 Chair: Okay. That helps me a little. You have taken your annual payment, but you are not going to do the work. Why are you off? It is very simple question. Why are you off?

Ali Parsa: As I explained, I have a number of other projects that are very worth while and require-

Q12 Chair: What have you done wrong at Hinchingbrooke? Why do they want you out of Hinchingbrooke?

Ali Parsa: I don’t think they do. I have not heard from anyone who says I have done anything wrong, but let me explain, Mrs Hodge, because this is important. I used to be an engineer, a physicist. I was not very good at it, but it made me understand that physics is about atoms and molecules. Management is the same. I do not do anything at Hinchingbrooke. The doctors, nurses and health care professionals take ownership.

Q13 Chair: Who asked you to leave?

Ali Parsa: Nobody. I had a conversation with my chairman-

Q14 Chair: Who did you have a conversation with? It is a bit unclear.

Ali Parsa: I had a conversation with our board for a number of months.

Q15 Chair: Who chairs your board?

Ali Parsa: Mr Kirkwood. We have had a conversation for a number of months about the other projects that I want to do, and we decided that this is now the time-

Q16 Chair: And they are paying you for a year-£400,000.

Ali Parsa: I do not see what is unusual about that.

Q17 Chair: I know you want to be honest with us, but it stretches all our credulity to hear that you have been there for six months. The reason we are looking at this is that the project the Government have engaged in is completely new, and you are off with a year’s money, saying that this is completely normal. That stretches my credulity.

Q18 Ian Swales: If you really want to go and do other projects, why should the taxpayer give you £400,000 to do it?

Ali Parsa: The taxpayer certainly does not.

Q19 Chair: Where is the money coming from?

Ali Parsa: Circle is a private company.

Q20 Fiona Mactaggart: What percentage of Circle’s income comes from taxpayers, from public contracts?

Ali Parsa: I don’t know.

Q21 Fiona Mactaggart: It’s a private company, but it makes most of its profits from public contracts, and I would like to know what percentage of Circle’s income comes from public contracts. If you can’t tell us now, perhaps you can send us a note.

Ali Parsa: Circle has only about £180 million of annualised revenue. Probably about £150 million of that, you are right, comes from-

Chair: £150 million.

Ali Parsa: About £150 million comes from various public revenues, because in our private hospitals we also see choose-and-book patients who are paid for by the NHS-and I hope that most of our staff do not ever differentiate between private and public patients.

Q22 Stephen Barclay: The Report makes clear at page 38 that the Trust’s financial position is "worse than projected after six months". If I am reading the Report correctly, it is saying that the performance has been worse than expected. Shortly before this hearing, you announced that you are moving, but you are getting a full year’s salary in advance. What the Chair is trying to drive at is, why are you getting a full year’s salary if you are moving to other duties in the group?

Ali Parsa: Other members of our executive team have left who all received exactly their contractual agreement. It was a contract. This is not a public company, it is a private one. It was a contractual agreement. I think that I was entitled to that. I do not think that we had any conversations around this.

Q23 Chair: Somebody sacked you, Mr Parsa, and you walk away with a £400,000 pay-off, most of which comes from taxpayers.

Ali Parsa: Mrs Hodge, I do not know how much more we are going to discuss this subject, considering the time we have. I have told you I was not sacked. If I was sacked, I would tell you that-I have no issue was that-but I was not. We made that very clear.

Q24 Chair: Why did they give you a year’s salary?

Ali Parsa: Because they did. Other colleagues of ours-

Q25 Chair: That is public money, which is the point Fiona Mactaggart made.

Ali Parsa: It is not public money. We have raised £200 million-

Chair: It is. You have just said that out of your £180 million-

Q26 Fiona Mactaggart: Out of £180 million, £150 million was based on public contracts.

Ali Parsa: As you know, and as you mentioned the other day, in Circle we are still in our investment phase. We have invested over £150 million of private money into Circle. We continue to make that investment. Every company goes through a number of phases at the beginning, and, before it becomes cash-flow generative, a company requires investment. We are proud of the fact that, for the last eight years, we have been investing in Circle. I hope we will continue to invest for a number of years more before we break even. Our philosophy has always been to make that investment.

Q27 Chair: You are becoming a non-exec Director, which is a completely different job. You are getting £40,000 for that, and you have a 2.4% stake in the business-that is my understanding. I read that in The Sunday Times. Presumably you can confirm that?

Ali Parsa: Yes.

Q28 Mr Jackson: I think the problem we have, Mr Parsa, is that, with the best will in the world, you were the public face of a flagship health care policy. You were all over the place, evangelising for Circle and Hinchingbrooke and, within six months, you are gone. Our question is, if it was going so spectacularly well, why are you going? In order to be helpful, can I simply ask, had you met your key performance objectives for the last period on which you were assessed, prior to the decision to move into a new job?

Ali Parsa: Mr Jackson, that is an excellent question, because it gets to the nub of what happens in a private company. The answer is yes. If you look at analysts’ projections for Circle and what we were supposed to deliver this year, we absolutely delivered everything, to the point. In some areas, we would say we exceeded our delivery. Only a few months ago, our investors gave us another £47 million. To put that in perspective, that is about 50% of the market capitalisation of Circle. That is the equivalent of, say, British Petroleum raising £30 billion of new money, which would not be seen as a failure. We have never had an investor selling shares in Circle or leaving us. They have backed us time after time. Our investors have been very supportive, and I think they will continue to be.

On your first point, about me being a huge supporter of Circle and Hinchingbrooke, and the policy that led to that, from both the Labour and the coalition Governments, I will continue to be so. I will remain a mutual ambassador for the Cabinet Office and I will continue to make the point about what I believe is an excellent policy.

Q29 Chair: Let’s get to what you are doing, because according to the information the National Audit Office has given us, you were brought into a hospital that had been failing for many years-I accept that-with hugely difficult challenges, and there have been some signs on the clinical side of welcome improvement; but if you look at the financial side of the equation you were charged with starting to reduce the deficit by figures that you yourself have said. My understanding is that the current deficit-and David Moon will correct me if I am wrong, and David Flory can probably help me on that-is nearly £4 million against, which is about double what you were expecting it to be at this point. Do you want to give the exact figures?

David Moon: As I understand it, at the end of October-so that is month seven-there is a just under £3.8 million deficit, which is £2.6 million adverse of planned debt, which is more adverse from plan than it was in month six.

Q30Chair: Do you agree with that, Mr Flory, before we go back?

David Flory: Yes.

Q31 Chair: So we have got agreement from the Department and the NAO; now, let us see if we can get agreement from you.

Ali Parsa: The number is correct, and if you also look at the monthly numbers you will see that in March, the first month we took over, I believe the hospital lost around £1 million. In October I think it will have a number that says the hospital made a surplus. I think by any stretch of the imagination-and I have done many transformations in my life-if you think about an organisation that clinically goes from the point it was to one of the best performing in the region now; and, financially, within nine months, goes to a point where it was loss-making into a surplus-

Q32 Chair: Is it in surplus, Mr Moon? Can Mr Flory and Mr Moon help us on that?

David Flory: The level of deficit reduced in month seven, which suggests that the in-year trading in month seven was in surplus.

David Moon: But can we just be a bit careful, because, yes, that is correct-I can’t argue with that-but the variance from plan got worse. They were always expecting to do better in October, which is normal for most NHS acute Trusts, because you get through more elective work in October than you do in other months of the year, and the variance from plan was actually bigger.

Q33 Chair: So the variance from plan got worse by-

David Moon: About half a million, I think.

Q34 Chair: Do you agree with that, Mr Flory?

David Flory: On this, I think it is very important to recognise that the financial position improved significantly in month seven, when income exceeded expenditure. In the previous months, expenditure had exceeded income.

Q35 Chair: You’re an NHS guy; is what Mr Moon is saying true? In October-just thinking about my own hospital-it rings true.

Q36 Stephen Barclay: It is a bit like saying Royal Mail is more profitable in December, because it has the Christmas post. I use that for dramatic effect, but the point is, I think that the NAO are saying that there is an upturn in throughput in October, so you would expect better figures in October; but it is looking at the figures for the year: that is the question that was going back to Mr Parsa-what the track record is for the year.

Ali Parsa: Mr Barclay, I can only continue to reiterate what I can do, but I said, Mrs Hodge, when you referred to the radio interview we did together-

Chair: No, you did not do it with me. You refused to do it with me. You did it after me. I would have happily engaged with you.

Ali Parsa: I apologise; I do not believe I refused. I don’t know why they said that. There was nothing to refuse. I would much rather have a conversation with you than the belligerent Radio 4 interviewers.

Chair: I don’t know about that, actually.

Ali Parsa: I said it there, and I say it again. We are nine months into this. I think we are doing a very good job, but it is like judging-whether we do a good job or a bad job-Mo Farah after 1,000 metres in a 10,000 metre event. In my view there is absolutely no reason to say how well or badly we are doing in this. Judge us as we deliver in the longer term.

Q37 Austin Mitchell: And then leave at that time.

Ali Parsa: I am sorry, sir. One thing is, I am not leaving.

Chair: You are leaving. You can’t tell us you are not leaving. You are getting £400 k.

Ali Parsa: Secondly, no contract was given to me as an individual. It was given to Circle-a partnership of thousands of doctors, nurses and Circle professionals, and they are doing an excellent job. Believe me, out of everything you have seen happening in Circle, there is not a single one of those things where I can put my hand up and say that it was the result of my doing it. I am not a big believer in the people at the top doing the work. I think it is the rank and file on the front line who do the work. They are there, they are delivering, and they will do an excellent job.

Q38 Stephen Barclay: You mentioned Mo Farah, but at least at the end of the race we know what the measure of success is. Paragraph 3.20 on page 39 makes it clear that the Department of Health, the Treasury, the Trust board and Circle all seem to have different views "on what would be considered a successful outcome." I take your point about making an assessment partway through the journey, but it is difficult for this Committee to make an assessment at the end of the journey if each stakeholder has a different measure of success.

Ali Parsa: Would you like me to explain my measure of success? Our measure of success was always very clear. This hospital was threatened with closure, merger or losing its emergency or maternity departments. Our measure of success of the partnership that includes the doctors and nurses in the hospital was to keep the hospital open and improve its quality to be among one of the best in the country. It is only right, Mr Barclay, that we focus entirely on the quality of the hospital. We took it from a very low ranking regionally into one of the highest in the region. By the time I left it was the best performing among the hospitals that had emergency units in the East of England and the Midlands. If it wasn’t, it was pretty much at the top. I am proud of what they have done and I think it is successful.

If you want to measure value for money, value in my book is defined as quality over price. We have fixed the quality. We will now fix the cost. We are making good progress in doing so.

Q39 Chair: Even on quality, I have looked at the most recent CQC assessment of your hospital, and on the standards of caring for people safely and protecting them from harm, you have a cross.

Ali Parsa: My understanding is that that is not true. My understanding is that we have passed-

Chair: This is a CQC document.

Ali Parsa: My understanding is that for the first time-and I can check it and come back-

Q40 Chair: May I also say to you that they have not inspected you, so that their assessment is based on declarations and evidence supplied by the service itself?

Ali Parsa: May I ask Steve Melton to share with you a document that he has, published on November 12?

Q41 Chair: No, I prefer to use the CQC.

Ali Parsa: Yes, that is a CQC document.

Q42 Chair: Well, the CQC has: standards of caring for people safely and protecting them from harm-cross. Then, on the side it says that is based on assessments of declarations of evidence supplied by the service itself, because they have not done an inspection, so it is based on the data you provided.

Ali Parsa: Mrs Hodge, this is a CQC document of November 12.

Q43 Chair: I have what they put online. If you are a punter like me and you just want to look at the state of your local hospital, you go online, and that is what I did.

Q44 Mr Jackson: Our difficulty is that if we are unclear about the key objectives in terms of clinical services that we wish to achieve at the end of the period, that is a problem, given that the contract-this is an issue that we will also be asking the Department about-actually says that you will receive a franchise fee of £31 million over 10 years to instigate and complete what are unprecedented revenue savings. Therefore, there may be an imbalance in the contract so that the delivery of quality services is not as carefully managed by the management of the hospital as the delivery of savings, which gives you a direct fiscal interest. That is our problem, so we need to understand whether you are achieving your core objectives.

Ali Parsa: Mr Jackson, you are absolutely right in that. That is why we focused entirely on the qualitative issues-the quality of the hospital and the care-at the beginning, irrespective of the financials, to try and fix that. We got it into a place where we are very proud of it. I think it is doing a very good job now. We will continue to do better. Only then will we start looking at the financials. Also, that £31 million, as your Report rightly says, would only be taken by us after we make savings of £230 million for the hospital. We actually take zero fees-I think that is on the first page of your summary-until we balance the books of the hospital and make it sustainable. It is only then that we do it. I think that is a very good deal for the public sector.

Q45 Chair: But it’s not your plan. I think what we are saying is that you had planned something different from what you delivered.

Sir Neil McKay: I wonder if I might contribute to this part of the discussion. I am conscious of the NAO’s Report and the sense that there has not been a consensus around the purpose of this piece of work, but actually I think there is general agreement that the first priority was to maintain and develop the hospital and its services. The second priority is always linked to that and it is about ensuring safety and quality. The third was to do whatever could possibly be done to contribute towards the debt that the hospital’s predecessors had accrued. I think it is fair to say-I am sure Ali would not disagree-that it is disappointing in one sense that the financial position so far this year is not as we or Circle would have wished, but it is worth bearing in mind that the risk for that, which traditionally would have sat with the NHS, sits with Circle, because of the contract we have with them.

Actually, I am rather pleased that Circle, in its first few months, has given a lot of priority to quality issues. For example, I know from visiting and talking to people there that an enormous amount has been done to improve the consultant body and to make efforts to recruit consultants rather than have expensive locums. That has contributed both to reducing costs and-I have absolutely no doubt about this-to an improvement in quality. The acid test for Circle is next year and beyond: can it deliver the terms within the contract?

Q46 Chair: We want to come to your decision making in a minute, because I have some questions. Can I just ask one final question of Mr Parsa? My understanding is that, to try to get some of these savings, you have cut 46 nursing posts. Is that right?

Ali Parsa: I think we reduced-

Q47 Chair: Have you cut 46 nursing posts?

Ali Parsa: Yes. The net result is as you mention. May I just say something? You say that we did that, but we didn’t do that. We turned our hospital into clinical units and we asked every clinical unit to decide, irrespective of the finances-

Q48 Chair: Your company did. I am not interested in the structure underneath it-

Ali Parsa: But this is very important, because they did that. What is the best way for managing the nursing rota? People decided that the right thing to do is to have longer nursing shifts, so that nurses can look after their patients, who are now clinically ill for a longer period of time-gone are the days when people look after people in the morning and then in the afternoon there is nothing to do; it is throughout the whole time. This means that now they have shorter handover times, which means that our patients are, I believe, getting better care with fewer nurses. No permanent jobs or permanent nurses went. That resulted in the number of locum nurses being reduced, which means that patients are now getting better care, in our view, with permanent staff who are always there.

Q49 Chair: You have brought in locums. Where do you recruit them from? Where do your locums come from?

Ali Parsa: We reduced the number of locums. We kept our permanent nurses.

Q50 Chair: I know you have reduced the full time, but my understanding is that you have taken in contract nurses.

Ali Parsa: No, I am saying that we reduced the number of locums in order to have permanent nurses.

Q51 Chair: So you have not taken on more non-permanent staff through agencies?

Ali Parsa: No. Not at all. Exactly the opposite.

Q52 Chair: But you have reduced the nursing cohort. Okay. I get that.

I want to come to you, Sir Neil. I read both reports. Obviously Peterborough is an absolutely awful story. I think this goes to the Department as well, so to both David Flory and Una O’Brien. You took these decisions in 2007-08 to go out and find someone to do a franchise as the same time as you were building a massive great hospital in Peterborough. It is completely clear to anybody with an ounce of common sense that, given the nature of where we were with the PCTs at that time-both of them fragile and overspending-there wasn’t the business or money to sustain two separate hospitals. I cannot for the life of me see how on earth you ever thought it was a sensible idea to build a hugely expensive hospital in Peterborough-I can probably say this because I am not a local MP-that is going to need a load of throughput to make it viable, and at the same time set up this franchising agreement on a tiny hospital. I have not spoken to anybody in the NHS in the last five years who thinks that 150,000 is a viable population to serve a hospital. That is not a sensible use of public money, Sir Neil. It really shocked me that you took those decisions. Why?

Sir Neil McKay: The benefits and the reasons for a new hospital in Peterborough are many, and perhaps that will be discussed in the later part of this hearing. You are absolutely right about concern over the expenses and the money being utilised in this part of the system. For many years, there were attempts by a traditional management team at Hinchingbrooke hospital to reduce the deficit of £40 million, but they failed. We brought in interim-

Q53 Chair: Can you answer the question? Why did you decide on one hand to build a brand new, very expensive hospital in Peterborough, and on the other hand to put out to a franchise agreement another hospital 12 miles away, when it is pretty ruddy clear that there is not enough business going through and the whole trend of health care is to take people out of the acute sector? Why did you decide that? I bet you that in five years’ time, somebody will be sitting in this Chair and Hinchingbrooke will have failed. It hits you immediately.

Sir Neil McKay: There is a question about whether the franchise will fail, and I do not believe it will, and there is a question about whether there will continue to be a hospital at Hinchingbrooke.

Q54 Chair: Or Peterborough will fail, then.

Sir Neil McKay: I am certain that there will continue to be a hospital in Huntingdon, Hinchingbrooke hospital. The reasons for that are many. It is a much loved hospital, strongly supported by its commissioners and the local population. A public consultation took place in 2007 by the Cambridgeshire PCT about whether or not the hospital should continue in its present form: indeed, there was a question about-

Q55 Chair: Financially and in terms of policies on the direction of travel for the health service, was it a sensible step to take to build a brand-new hospital under PFI and to set up another permanent structure at Hinchingbrooke?

Sir Neil McKay: Yes, it was sensible.

Q56 Chair: Financially sensible?

Sir Neil McKay: It was financially necessary to find a way of trying to deal with the sustainability of Hinchingbrooke hospital, because the PCT had consulted and had come to the conclusion that that was the right decision for the people of Huntingdon, and it was necessary-

Q57 Austin Mitchell: Why not close Hinchingbrooke?

Sir Neil McKay: It was necessary to try and-

Q58 Chair: Can you just answer that question?

Sir Neil McKay: Why not close Hinchingbrooke hospital? Because the PCT consulted in 2007 about the future of the hospital and its services, and came to the conclusion that there was a strong case for retaining it and developing mechanisms for enhancing its services.

Q59 Austin Mitchell: Did you consider closing it?

Sir Neil McKay: As part of the consultation in 2007, that was an open question which the PCT asked. There were enormously contrary views, as one might expect when a much loved hospital could be threatened-

Q60 Austin Mitchell: Of course. People will always say, "Don’t close our hospital," but you are there as the Strategic Health Authority with the knowledge of the finance and the accumulating deficit, and you have to look at that. Did you, as the Strategic Health Authority, consider closing it?

Sir Neil McKay: No.

Q61 Ian Swales: When you talk about consultation, do you just mean public consultation?

Sir Neil McKay: Yes.

Q62 Ian Swales: If we went round the country asking the public what they want-

Fiona Mactaggart: "Do you want us to shut your hospital?" The answer is no.

Q63 Ian Swales -we would have twice as many hospitals as we have got.

Sir Neil McKay: There are good reasons for continuing with a hospital in Huntingdon.

Q64 Fiona Mactaggart: What are they, apart from the fact that the public did not want it shut?

Sir Neil McKay: It provides essential local services for local people-

Q65Chair: Twelve miles away, you have a brand-new hospital.

Sir Neil McKay: I think it is-

Q66 Chair: And Addenbrooke’s. Where is Addenbrooke’s?

Sir Neil McKay: It is highly unlikely-in fact, probably impossible-to close that hospital, should that ever arise, and relocate the facilities and services provided there to somewhere such as Peterborough. People in Huntingdon would not want to travel to Peterborough-

Q67 Fiona Mactaggart: Most people in Huntingdon have cars.

Sir Neil McKay: Can I finish this point? The links between Hinchingbrooke and other hospitals are traditionally far more with Addenbrooke’s in Cambridge than with Peterborough. There is a web of reasons why it is important that a hospital should continue in Huntingdon-Hinchingbrooke hospital-and there are many reasons why a new hospital in Peterborough makes much sense. Others will talk more about that later.

Chair: We are finding it really difficult to get what I would consider to be totally frank answers from our witnesses today.

Q68 Mr Jackson: At that time, in 2007, South Cambridgeshire PCT and Huntingdonshire PCT were £32 million in deficit. That is one of the principal reasons why we resisted the absorption of Peterborough PCT into them-they were not financially sustainable. Also at that time, you must have known, because of demographics, projections of patient numbers etc., that there was no way, with the overcapacity of acute district hospitals in sub-regional areas-Cambridgeshire in particular, the east midlands, Norfolk and south Lincolnshire-that either or both Hinchingbrooke, under whatever governance model, and a new acute district hospital effectively in Peterborough, would be financially sustainable. With all due respect, the clue is the name: strategic heath authority. It was incumbent upon you to make a tough decision, to grasp the nettle, and say that Hinchingbrooke in particular cannot scrub its own face in the short, medium and long term.

Sir Neil McKay: You’re right that there is a clue in the title "strategic". In my opinion, we were strategic. We made a strategic decision on which you clearly have some differences of view, but we made a strategic decision-

Q69 Chair: No, we don’t think it was strategic. I can’t see how you were strategic.

Sir Neil McKay: There was a strong case for continuing with Hinchingbrooke hospital in Huntingdon and, at the same time, there was a strong case for building a new hospital in Peterborough. Now, there are issues relating to Peterborough; we know that and they will be discussed later, but I am sure in my mind that there was not a connection between the two.

Q70 Chair: I can’t believe that.

Sir Neil McKay: There was no sensible proposal to close the hospital in Huntingdon.

Q71 Austin Mitchell: You considered that you can afford to go on with both.

Sir Neil McKay: Since the hospital ran into financial difficulties in about 2006-07 and its position worsened-figure 3 in the Report highlights how that developed-we had worked assiduously with the management team to arrest that problem and to try to find ways of dealing with the deficit

Q72 Austin Mitchell: I don’t see where the strategic management comes in if you’re the Strategic Health Authority and all you are doing is digging two holes and shovelling money into both, which you can’t afford.

Sir Neil McKay: As far as Hinchingbrooke is concerned, there was no question of shovelling money into both, other than the injection that was necessary to enable them to have the cash necessary to be able to manage their affairs, so a £40 million injection was provided. But that is the whole purpose of the franchise contract-

Chair: No it’s not. In the end, if the franchise collapses, we, the taxpayer, pick up the bill.

Q73 Ian Swales: The NAO Report makes it clear that complete closure "was not considered." Those are the words in the Report. I don’t understand how you can take a strategic view of a problem of this scale and not even consider that option, which is what the Report says. Can you be honest with the Committee about why it was not considered? For example, was it a political issue?

Sir Neil McKay: It was a decision based on a consultation exercise, organised by the Primary Care Trust, who wanted to ascertain whether or not the hospital had a future and what kind of future it should have. I was, and I remain, perfectly happy to accept that advice based on the analysis they did and the comments that were received during consultation. The idea that closing Hinchingbrooke hospital would automatically result in large patient flows gravitating towards Peterborough does not-

Q74 Chair: What about Addenbrooke’s?

Mr Jackson: Sixteen miles away.

Sir Neil McKay: There might be the possibility of patients moving to Addenbrooke’s, but Addenbrooke’s is full. Addenbrooke’s is a hospital that works-

Chair: I don’t know why I am telling you this, but the whole thrust of health policy is to get more done in the community and less in hospitals. If you have one that is well used, over time you can absorb the throughput of patients from another area.

Q75 Mr Jackson: At the time, Lord Darzi was saying that the age of the acute district hospital has gone. Did you read anything Lord Darzi said? You were making strategic decisions to consolidate the acute district hospital in an area with over-capacity, at great financial cost in the long term, as we are seeing today, when the Government’s policy was beginning to move towards a stronger focus on care in the community and primary care.

Sir Neil McKay: I recognise that. Had the decision been made that Hinchingbrooke hospital should close, I genuinely did not know-I did not know then and I do not know now-how the activity, the patients treated there, could be absorbed into either Peterborough, Addenbrooke’s or anywhere else in the community. That hospital is needed.

Q76 Stephen Barclay: My constituents use both hospitals. When you made that decision I assume you were aware of the multi-million pound guided bus between Huntingdon and Cambridge-the special transport link to provide faster access from Huntingdon to Cambridge.

Sir Neil McKay: Yes.

Q77 Stephen Barclay: So it is not just about access to Peterborough but access from Huntingdon to Cambridge as well.

Sir Neil McKay: I would just like to make the comment that it is not so much about access between Huntingdon and Cambridge. There are links between those two hospitals. Addenbrooke’s hospital is a very hard-working hospital, probably overworked. It would not have the capacity to take large additional activity from Hinchingbrooke.

Q78 Stephen Barclay: Part of that capacity includes constituents from north-east Cambridgeshire whom I represent. There is a chronic lack of facilities within areas like Fenland because the PCT has merged, with the money being shifted into other areas, including to Hinchingbrooke.

I wanted to come on to the strategic decision making around theatre usage. The acting Chief Executive of Peterborough said that they are considering mothballing their four brand new state-of-the-art theatres because of potentially not having sufficient work. At the moment the theatre on a Saturday is used just 6%, on a Sunday it is used 1% in the mornings and 0% in the afternoons. During the working week it is 71%. We have been hearing from members of the Committee concerns over whether there is sufficient work to sustain both hospitals. Could you explain why the Chief Executive of Peterborough is considering mothballing state-of-the-art theatres, at a time when the NHS is spending £330 million on new theatres across the country?

Sir Neil McKay: As it is a Foundation Trust, that is a question you should put to the Chief Executive when he takes-

Q79 Chair: That is an opt-out, which we are not going to have. You have responsibility for health care in your area, and the East of England appears to perform much worse than any other area in the country.

Sir Neil McKay: In terms of?

Chair: Financially.

Sir Neil McKay: The East of England is performing worse than any other part of the country?

Chair: Yes, but answer the question. We will come to that later.

Q80 Stephen Barclay: We have state-of-the-art theatres being considered for closure. You are looking at it strategically. Could you explain that please?

Sir Neil McKay: I would be happy to offer my views. The Hinchingbrooke contract with Circle requires Circle to make the best use of the facilities there to enable the deficit, among other things, to be reduced. The plan for Peterborough hospital was a plan that the board of that Trust developed in good faith, and presumably included within their hospital plans the capacity they felt that was needed for the activity that was forecast at that time. My authority was very happy to support the PCT’s plans for the activity flows into Peterborough when we were asked to consider the business case. It was not our job to say whether or not the board of that Trust was planning more theatres or not. That was just not part of our statutory responsibility.

Q81 Mr Jackson: It was and is your job not to undermine the financial viability of Peterborough and Stamford Hospitals NHS Foundation Trust. It is beyond their remit to make strategic decisions about capacity issues in acute district hospitals in Cambridgeshire and East of England. That is your responsibility. You can hardly blame the board with the information that they did make mistakes in 2007 if you come along a few years later and drop a big rock into the pond, called Hinchingbrooke hospital franchise. That is the issue. I think you are trying to wriggle off the hook here. It is your responsibility. It is all very well saying, "I am not responsible for the theatres." You are responsible for the strategic planning and the delivery of health care for the East of England, and you must take responsibility for decisions you make that undermine the hospital.

Sir Neil McKay: The decisions that my authority made about Hinchingbrooke were quite legitimately about how the hospital should be managed and run in future. That did not involve a discussion about whether the hospital should remain open or not, because that discussion had already taken place, led by the commissioners-the Primary Care Trust. They had formed the view-

Chair: You have got a decision on capacity.

Q82 Mr Jackson: Chair, could I just say, that is not true? Mr Barclay and I both know, because we are local MPs and I was an MP at the time, that there was a very vocal public campaign at political level, to keep Hinchingbrooke open. You are taking us for fools if you are assuming that we do not know that. We do know. Be honest, that you were subject to ministerial pressure.

Sir Neil McKay: Not at all.

Q83 Mr Jackson: Yes, you were.

Sir Neil McKay: No, I wasn’t. Not at all. Categorically not.

Q84 Mr Jackson: That is completely untrue. They weren’t fantasising, these people, when they said Hinchingbrooke was going to be closed. The local MP, the local district council and others said that Hinchingbrooke was in danger of being closed. Quite rightly-I am not criticising you because you have to work within the political framework-you responded to that. It was not just a cold calculation.

Sir Neil McKay: I refute that completely. If you have evidence to show that we were directly and politically influenced, Mr Jackson, I would be very pleased to see it. It would be news to me.

Mr Jackson: I would be surprised if you weren’t.

Q85 Stephen Barclay: Sir Neil, could we please go back to the issue of theatre usage. It looks like we have potentially paid a large sum for a hospital in Peterborough, which is losing £22 million just from the PFI component, with state-of-the-art theatres that may be empty, so we are paying for an expensive building with empty theatres, at a time when the NHS clinical negligence bill has gone up by £10 billion over the last five years, as I am sure Ms O’Brien is very aware. It has gone up hugely. I would have thought that using state-of-the-art theatres would be better for patient safety and also financially. Could you confirm whether that is being considered and, if so, how that is an acceptable state of affairs?

Sir Neil McKay: I think I need to remind the Committee of the Strategic Health Authority’s role in terms of the Peterborough PFI scheme. Our job is to confirm whether we believe that the commissioner’s activity forecasts, for that new hospital, are reasonable in terms of elective and non-elective activity and patient flows. It is then for the board of the Trust to convert that activity into the facilities that they believe they need; it is not the Strategic Health Authority’s position-nor do we have any statutory entrée to do this even if we wanted to-to say to a Foundation Trust, "You’re overproviding the number of theatres"-

Q86 Stephen Barclay: But you have changed the rules of the game, haven’t you?

Q87 Chair: Quite. Mr Flory or Ms O’Brien, you can’t have this, right? Somebody has to take responsibility. In planning the spending of public money on health, of which there is always too little, somebody has to make sure that we do not overprovide. Is it Sir Neil? Is it you, Una? Is it you, Mr Flory, working for commissioning? Who is it? Come on. It is ridiculous, you cannot pass the buck.

Una O'Brien: The first thing to say is that-

Q88 Chair: Just answer the question.

Una O'Brien: The responsibility for the capacity-we will come on to Peterborough-is a discussion-I agree exactly with what Neil said. Converting that capacity into business is the responsibility of the board of that Trust. There is a separate discussion that we had about the judgment on-

Q89 Chair: But you signed off the PFI.

Una O'Brien: Exactly.

Q90 Chair: But the PFI allowed the capacity. We cannot have this in the Committee. We bang on about accountability all the time. This is such precious money and it is so important. I have no doubt Mr Jackson and Mr Barclay’s constituents will not just say that it is down to Monitor, or the Strategic Health Authority or the Foundation Trust. The buck has to stop with you guys. It’s got to stop with you, I am afraid, Una, and with you, David Flory. What we are alleging here-I did not come at it from this, but it is so obvious when you read the papers; you allowed decisions to be taken which mean that there is overprovision of hospitals in this area. That inevitably means that the financial viability of both institutions is, in my view, completely in danger, it is-

Ian Swales: Compromised.

Q91 Chair: Thank you. It is compromised for many years to come, both for our generation and for future generations. I don’t know how the hell you took those decisions.

David Flory: If I may, Chair, we were certainly not in the situation, as has been implied by some of the discussion today, or as others may interpret it, that the decision about whether to do a PFI in Peterborough and the decision about the future of Hinchingbrooke hospital were side by side. They simply were not.

Q92 Chair: They were not side by side?

David Flory: No.

Q93 Chair: That is shocking.

David Flory: The decision about the PFI at Peterborough was effectively made well before the scale of the problem at Hinchingbrooke was known and a consideration of the future of Hinchingbrooke was undertaken. The decision about the PFI at Peterborough, at that time, was made based on projections for the future that it is now very obvious from the financial situation at Peterborough proved to be wrong. However, the extent to which the costs of the PFI at Peterborough are the key determinant-I guess that this is for the discussion in the second part of your hearing?

Q94 Chair: It is for the second half.

David Flory: But the PFI is just one part, and a relatively small part, of the overall problem at Peterborough hospital.

Q95 Chair: Just let me get this to you. That surprises me. When you sat down and thought about Hinchingbrooke, which is what we are now talking about, you knew you had taken a set of decisions on Peterborough. I accept that.

David Flory: Correct.

Q96 Chair: But knowing those decisions you had taken on Peterborough, how on earth could you then think that any decision around Hinchingbrooke would leave you with a financially viable, necessary hospital when you heard from Mr Parsa that £150 million out of his £180 million comes from us, the taxpayer-comes from your budget? How could you think that?

David Flory: The expectation was-

Amyas Morse: Sorry, Chair. Those numbers were the Circle numbers.

Q97 Chair: Okay. But are they of the wrong order, Amyas?

Amyas Morse: Sorry, £180 million was the Circle turnover number and £150 million is the amount that Circle gets from running public health contracts. I think that is right.

Q98 Chair: But the principle? My figures are not of a wrong order, are they?

Amyas Morse: I think your point is this, if I may: you are saying that there is a certain capacity in the area and there is a debate as to whether the capacity is transferable between these two hospitals. I think your point was, given that you had already decided on the PFI contract to be put in place in Peterborough, to what degree should that have influenced the Hinchingbrooke decision. Can I ask what your view on that would be?

David Flory: Yes. I think that the full scale of the financial problem at Peterborough, of which the PFI is one part-there are other significant factors as to why Peterborough has the problems that it has now; PFI is only one part of that. The decision about Hinchingbrooke, which we took, was based on the assumption that the projections for Peterborough-and I have to say that on the sequencing of time we were unaware of the full scale of the financial problem that has subsequently materialised in Peterborough-the decision about Hinchingbrooke was based on the assumption that on the way forward, the Strategic Health Authority had gone through the process, as Sir Neil has described, with a very clear expectation that not only would the Hinchingbrooke franchise lead to the sustaining of services at that site for that population, but be done on a financially viable basis. Although we heard at the start of this discussion that the numbers are not at this stage where we would expect them to be, and that is of great concern to us, our expectation remains that the financial viability of Hinchingbrooke will be achieved through this franchise arrangement with Circle.

Q99 Stephen Barclay: But those savings are later in the programme, aren’t they? So the programme gets harder as it goes on. It is already missing its early savings so those harder savings are going to get even bigger as the programme proceeds.

David Flory: It is very difficult to speculate, isn’t it? My expectation is that the financial performance of Hinchingbrooke hospital will improve in the course of this franchise agreement.

Austin Mitchell: Improve. But will the problem be cured?

Q100 Chair: But Mr Flory, this report is chock-a-block full of people saying, "Never before anywhere in the NHS has this level of savings been achieved." McKinsey, who are probably the consultants who are around the NHS more than anybody, say that they think it is unachievable. We accept that it is early days. We know from Mr Parsa that they have not got to where they planned to be when they put the bid in to you. We know from the document here that they added 25% savings in at the last minute to give you a viable bid that you could accept. You seriously sit here and think that that will be achieved? You are seriously doing that?

David Flory: I am seriously saying that the financial viability of the Trust can be secured.

Q101 Fiona Mactaggart: When?

David Flory: In the course of this arrangement, and my expectation is without further financial injection from the Department of Health. The nature of the agreement transfers two significant risks to Circle. One is a risk of losses incurred, and the second is demand of services.

Chair: We have read the Report. At the end, you are going to have to pick up the tab if it goes wrong.

Q102 Justin Tomlinson: I want to explore this bit in paragraph 2.6 about the 25% extra savings found in the final round of bidding. What gave you the confidence that it was still viable when, miraculously, an extra 25% was found?

David Flory: The detail of the consideration of the numbers was one for the Strategic Health Authority, which the Department of course looked at. I think we need to distinguish things. The important separation is around the financial viability on a week-by-week, month-by-month, year-on-year basis for that hospital, which gives patients going into that hospital the confidence that services can be secure and maintained and will be there when they need them. That means that income covers expenditure. That is the fundamental part of this agreement that we seek. Over and above that, it is the extent to which further efficiencies and further surpluses will enable the repayment of the almost £40 million of cash that the Department put into Hinchingbrooke in PDC.

Are you asking me whether I am absolutely confident that all of that will come back? No. My first level of confidence is that the organisation will trade in financial viability. Over and above that, I have an expectation that some of the £40 million will come back, but that is a separate issue from the viability of the organisation on an ongoing basis.

Q103 Justin Tomlinson: What you said is blindingly obvious, but the point was about what it was that gave you confidence that, suddenly, in the final bidding process, an extra 25% could be found. What were you told that convinced you that that was still viable?

David Flory: We saw that as the potential there for that to be achieved.

Q104 Justin Tomlinson: Such as?

David Flory: From the proposals in the way that it was put forward by the franchise partner.

Chair: Although McKinsey says that it has never been achieved before, and you have all the challenge and that sort of stuff.

Q105 Mr Jackson: What was the methodology for that?

Sir Neil McKay: Can I help here, because this was the Strategic Health Authority’s responsibility? There were two bidders-Circle and Serco-and both had intimated during discussions with us the level of savings that they thought could be achieved. They were compared against what we call the Trust comparator, which was not a bid, but it was a benchmark against which proposals were developed. We then came to the point of the formal invitation to tender. In other words, the bidders were required to make their full and final offer. Both bidders made a full and final offer that was significantly greater than the position they had offered in the discussions up to that point.

We then had the responsibility to evaluate those proposals, and we had set up a panel of 56 evaluators, half of whom were clinicians-

Q106 Chair: You are just not answering the question, Sir Neil. We are very tight on time.

Sir Neil McKay: The question was how we knew whether-

Q107 Chair: 25%. It was whether the extra 25% was credible. You have now spent a minute and a half not answering the question.

Sir Neil McKay: I was explaining why we got to a position where the bidders increased their bids, because it was a formal invitation-to-tender process. We evaluated the detail of both the bids, and we reduced Serco’s proposals quite significantly, because we did not think they passed muster.

Q108 Chair: Can you answer the question, please?

Sir Neil McKay: For Circle, there were some ups and downs, but we confirmed a figure that enabled us to be able to move forward to make a decision to select Circle.

Q109 Chair: Can you answer the question, please?

Sir Neil McKay: The question was about how we evaluated the quality of the bids.

Chair: No. Do you want to ask the question again, Justin?

Q110 Justin Tomlinson: This is something that has not happened before, so wherever there is some tangible evidence, you have to go on that. Clearly, their first bid was their first attempt at coming to you with what they thought was reasonable. Miraculously, an extra 25% was found. That is brilliant if it comes off, but what evidence was provided? What tangibles did they offer to you? Did they just say, "We will not serve 25% of patients that come through the door"? What was it that made you think that that was a viable figure?

Sir Neil McKay: Circle’s additional proposals included further rationalisation of back-office functions, the possibility of more estates rationalisation, even better length-of-stay reductions and improvements, a review and reworking of the way in which clinical staff operate, a further review of drugs and equipment utilisation, and improved theatre utilisation. They were the essence of the additional proposals they have made. They had made many other proposals prior to that, all of which included these, but these were enhancements to the suggestions that they had previously made. We evaluated them, and we felt that in overall terms their proposals were reasonable.

Q111 Meg Hillier: Can I just chip in on that? To take the point you raised about increasing use of theatres, surely this is where you as a Strategic Health Authority come in. If Hinchingbrooke is increasing its use of theatres because Ali Parsa and his team are doing a really good job, does that not impact on neighbouring hospitals such as Peterborough and their ability to take those patients?

Sir Neil McKay: For the reasons we articulated earlier, that was not a responsibility of the SHA in terms of the new Peterborough development. It is entirely reasonable for an operator and entirely reasonable for an existing in-house NHS management team to think about theatre utilisation and how it might be improved, either by treating more patients or by mothballing theatres, as appears to have been the case in Peterborough.

Q112 Meg Hillier: So really what you are saying is that it was just straight competition between Peterborough and Hinchingbrooke.

Sir Neil McKay: No, it was a competition between two bidders, Serco and Circle.

Q113 Meg Hillier: No, Circle won the bid, so they were trying to increase their theatre use at Hinchingbrooke, and that meant effectively-I am not an expert on the geography of the area-that Peterborough and Hinchingbrooke and other hospitals were in direct competition in terms of how many people they could get through theatre and how quickly, in the marketplace of the NHS.

Sir Neil McKay: The review of theatre utilisation does not necessarily mean additional activity. It might mean a reduction of theatres more in keeping with the activity that is going through the hospital. Circle might believe that by better utilisation of the existing theatres, money can be saved without detriment to the quality or the range of services that are provided.

Q114 Austin Mitchell: I want to put a question to the Permanent Secretary. I have just been watching the sad spectacle of you sitting there silently frowning, and I am concerned to know whether you are frowning at the questions or the answers. Perhaps you could tell us that. My question is this: here we have a pioneering first operating franchise, which is untried in the NHS, and we do not yet know whether it has been a success. Mr Parsa thinks that it has been a brilliant success and that he can move on, but he has not been able to prove that to us and the figures certainly do not prove it. Why are other units in the NHS in discussions with their Strategic Health Authorities about going down the same path? How many are doing so, and why are you allowing them to go ahead when we do not know whether this is successful or not?

Una O'Brien: I am only aware that there is one other in discussion. It may be that David knows of others, but I believe there is only one that is currently being discussed.

Austin Mitchell: Only one?

Una O'Brien: That is right.

Q115 Austin Mitchell: The Report says that there are several.

Una O'Brien: Well, I am only aware of one. There may be others going on that I do not know about, but there is only one that I think is worked up as a proposal for early discussion, which is in the George Eliot hospital, in Nuneaton.

Q116 Chair: So the Report is wrong on the others, is it?

Una O'Brien: I do not know of others.

David Moon: We did not quote numbers. We said several, I think. There was a possibility that it could be rolled out more widely than George Eliot. We do quote George Eliot in the Report.

Una O'Brien: I am not aware of any others.

David Flory: I think where this comes from is the fact that there are a number of relatively small NHS Trusts in other parts of the country whose future is still to be determined by the system. There is one that is going through a process where we will shortly invite all comers, in effect, to try and come and help them solve the problem. But potentially there are others to come later.

Q117 Austin Mitchell: Why not hold them up until this proves a success or a failure?

Una O'Brien: We will certainly take the feedback from this Committee and the advice of the NAO, but the circumstances are different and it may be that we are on the receiving end of a different set of proposals. It is very early days, and to judge this on a micro basis of month by month I think is very tough on the team who have taken over at Hinchingbrooke. Quite honestly, if you talk to the clinicians there and if you talk to the patients, what you are actually seeing is a significant improvement in the quality of care. Nobody cares more about the use of every pound in this system than I do, and I take it incredibly seriously, but I am also interested in securing good quality health services for local populations. Let us face it; there is a genuine debate. We have talked about the provider landscape in this Committee before and about the role of smaller DGHs. Different solutions will be necessary for different parts of the country, and they cannot be dictated from the centre.

Chair: We are judging this against its own plan.

Q118 Ian Swales: I should like to expand a little on what Ms Hillier was talking about a minute or two ago. What assessment did you make in the franchise of the impact on the other hospitals? Did you make any assessment on whether there would be any impact on the other hospitals?

Sir Neil McKay: The franchise proposal was not about changes in service. It was not about diverting activity in or out of the hospital. It was to come up with a solution to run the hospital as it is, as it was. We based our assessment on-

Q119 Chair: Is the answer to Ian "no"?

Sir Neil McKay: We based our assessment-

Q120 Ian Swales: Was it purely stand alone?

Sir Neil McKay: It was stand alone. It was based on the advice from locations about what they wanted from their hospital.

Q121 Ian Swales: The report, in a sense, gives a lie to the independence of this when it says that one of the options that you looked at prior to doing this was transferring significant elements of patient services to other hospitals. I think that the map on page 12 shows just how close this hospital is to the other two key centres. In fact, if you were choosing where you wanted to dominate the area from, as a board-game enthusiast I would choose this one. You have set up now a commercial operator with a merchant banking background to conquer health services from that base. Are you not concerned about the impact on the other hospitals?

Sir Neil McKay: I was not concerned about the impact on the other hospitals. I am worried about the situation that Peterborough brings us into in terms of how we find solutions across the whole of the patch that will be sustainable and value for money. In terms of the Hinchingbrooke contract, I am content that we did the right thing. I am content that we have brought in new and innovative management and we will see whether it delivers. I believe that it has every prospect of doing so.

Q122 Ian Swales: Okay, but given that there is incredulity about the promises being made and so on, do you not see that the way Circle will succeed-if it succeeds-is by pulling in business and services from the other hospitals? That must be the likely outcome.

Sir Neil McKay: They will only succeed in that respect if the commissioners support their intentions. They cannot bring in patients just because they like the idea of bringing in patients; they must persuade the commissioners that that is the right thing to do.

Q123 Ian Swales: It is clear what their strategy is, just listening to Mr Parsa earlier. If they get their service level up to a point where everybody in Cambridgeshire says that it is the place to go, then they will win, won’t they?

Sir Neil McKay: There is a limit to how many extra patients they can take. Of course the objective has to be-and this will be discussed later with people who know more about this than I do-to get the Peterborough Foundation Trust in exactly the same position.

Q124 Mr Jackson: This sort of Pontius Pilate approach does not wash. There are two issues here. One is that every single PCT, prior to the franchising of Hinchingbrooke, was in deficit. You had an over-provision of acute district hospitals. You knew that there was going to be a problem and that establishing the governance model at Hinchingbrooke was potentially going to tip one of the hospitals over the edge. Whether you like it or not, it worries me that there was no strategic overview of what was going to happen from 2007 onwards. That is a very serious issue that I hope comes out of this Report eventually. You also know that it is no good saying the commissioners will make the decisions because one of the problems with Peterborough is that the PCT has not met it obligations in terms of tariffs and payments to the hospital. It is no good saying that the commissioners will make a decision as if it will happen by magic. It is not happening and that is why Peterborough is in the mess it is in financially because you have done nothing to encourage NHS Peterborough, formerly the Peterborough PCT, to do anything about it in terms of commissioning and meeting their contract.

Sir Neil McKay: To be precise-we will get into this later-you will find that £9 million of the Peterborough problem is attributable to a shortfall in commissioning income and/or the Trust being fined for not delivering its contractual obligations.

Q125 Mr Jackson: No, let me respond to that. You have used that figure, which just happens to fall within the budget that the PCT has, without moving on to other efforts by the Strategic Health Authority and the Department of Health to intervene in the PCT in Peterborough. I do not think that that figure stands up.

Sir Neil McKay: It is not my figure, it is the figure included in the NAO Report.

Q126 Mr Jackson: I am aware of that, but it is quite a useful figure for quoting.

Sir Neil McKay: And you will, I’m sure, learn-

Chair: We will come to Peterborough in a minute.

Mr Jackson: I just want to take the point made about commissioners, as if they just get on with what they are doing. It does not work like that.

Chair: Yes, I agree.

Mr Jackson: You do have a strategic role, as does the Department of Health, for having an overview of trying to manage, frankly, this institutional conflict between PCTs and acute hospitals, because if you do not look at that as an issue, you are not going to solve the problem.

Q127 Chair: May I ask you some quick questions regarding page 17, paragraph 1.19? If you were so confident in them, why did you not subject your assumptions to external challenge?

Sir Neil McKay: Well, we did. There are two parts to this. First was the option appraisal we undertook to decide whether the operating franchise was the best model, and we involved PwC to help us with that assessment. We used PwC and a firm of commercial lawyers to help us to determine the options as we were considering the respective merits of Circle and Serco, so I believe we took all reasonable steps to involve external-

Q128 Chair: So that bit of the Report is wrong, Mr Moon?

David Moon: I think we are talking about different parts of the Report here. I think Sir Neil was talking about the Circle-Serco end, and I think this is before we got to that stage, if we are talking about this-

Chair: It’s on page 17, paragraph 1.19.

David Moon: Yes, this is before.

Sir Neil McKay: Sorry if I wasn’t clear. That was the point at which we were deciding whether an operating franchise would be the best way forward. My response to that was that we used PwC, which is well experienced in this kind of area, to give us advice about the respective merits of an operating franchise versus the other options shown in figure 4. When we assessed the options-that is, the bids-we used PwC and commercial lawyers; we had a professional team within the SHA with commercial experience; and we involved clinicians, the PCT and many other stakeholders to help us with that assessment.

Q129 Chair: Why did you not adjust for optimism bias, which is something we see all the time in this Committee?

Sir Neil McKay: We chose instead to look critically at the proposals we had, and, as I mentioned earlier, the Serco bid was significantly reduced because we felt that it had been too optimistic. We looked at the Circle bid critically, and, in overall terms, we were content with it.

Q130 Chair: But actually, you did not. Correct me if I am wrong, but my understanding was that you reduced it, and they then came in with the extra saving after that. It was because you reduced it that they came in with this magical figure of 25%.

Sir Neil McKay: We assessed their full and final offer along the lines that I have described, and we made adjustments-

Q131 Chair: But you didn’t assess using an optimism bias.

Sir Neil McKay: We made adjustments to take account of that. Instead of a formal optimism bias, we used the advice and expertise of people, such as clinicians, who could look at the detailed proposals and tell us whether they looked to them to be reasonable.

Q132 Chair: Mr Moon, do you want to comment on that? It is your Report that says that they did not.

David Moon: Well, and I think this plays back what Sir Neil has just said, they reviewed individual schemes to see whether they looked reasonable. As far as I am aware, what they did not do is check the respective financials of individual schemes. So, if both suppliers were doing length of stay, they did not necessarily look at whether the two levels of savings for the individual schemes were the same. They also let individual bidders assess their own risk, rather than asking them what level of risk they had built into their deals, as I understand it.

Sir Neil McKay: The key to this was the very rigorous, robust assessment of the proposals by people who know how hospitals run and by commercial advisers. Frankly, I cannot recall whether we compared the length of stay proposal from one bidder against the length of stay proposal from another. What we did do was use PwC to test the rigour of the mathematics-the arithmetic behind the proposals in terms of the bidders’ estimate of the savings that would accrue as a result.

Q133 Chair: Why did the two NHS Trusts withdraw from the contest?

Sir Neil McKay: I think both of them probably felt at the time that they had other pressing priorities, and they presumably felt at the time that bidding for this franchise would be a distraction.

Q134 Chair: It is not true, then, that they were only given one chance to create the Trust comparator, whereas the bidders were given three chances to develop their bids?

Sir Neil McKay: They withdrew at an early stage. I cannot quite remember precisely when that was, but they withdrew at a very early stage, before we got into the detail of this.

Q135 Chair: I have an allegation from a whistleblower that, on the Trust comparator, the NHS Trusts were given one chance and the two bidders were given three chances, and it was therefore not fair.

Sir Neil McKay: There’s a difference between the Trust comparator, which was the benchmark and not a bid, and the two NHS bidders who had expressed interest initially. They withdrew their interest at an early stage.

David Moon: Yes, I concur with that completely. If I have interpreted correctly what you just said, the point is whether the Trust comparator was truly comparable to the two commercial bids, because the Trust comparator was risk assessed, and had a risk adjustment made to it-I think it was downgraded by about 22%-whereas the two commercial bids were not subject to the same rigour. They assessed their own risk, and when the 25% increase happened for the two commercial bids, there was not an equivalent increase in the Trust comparator.

Q136 Chair: Okay. The final question to Una O’Brien: what happens if this fails?

Una O'Brien: I am not expecting it to fail.

Chair: What happens if it fails?

Una O'Brien: It depends on the circumstances in which it fails, and what the nature of that failure is.

Q137 Chair: If they walk away?

Una O'Brien: Obviously, the financial penalties-

Chair: What happens to the service if they walk away?

Una O'Brien: The service will be maintained, and at whatever point in time that happens and wherever we are at in the system, it will be for the commissioning board and the clinical commissioning groups together to work with the local provider. It would have to become an NHS Trust, and it would come directly under David Flory’s line of management. We would have to work together between the NHS Trust Development Authority and the new commissioning structure to determine what steps would then need to be taken.

Amyas Morse: I just wonder whether I can bridge this a little. Going back to what David Flory said earlier, if I understand it rightly, with a commercial contract with a significant transfer of risk, in a way what you really need to protect the NHS interest is to make sure that what they were promising to do that would improve the service and make the hospital financial viable was deliverable. A lot of the upside was in fact at risk for the commercial company rather than for the NHS. Is that fair comment?

David Flory: Yes, very fair.

Amyas Morse: So in a way, if they wanted to put an extra 25% in, and thought they could deliver it-I’m not saying you didn’t care at all about it, but it was probably a less significant question to you because you weren’t going to have to underwrite it.

Una O'Brien: That’s correct.

Amyas Morse: I am only saying this because I want to be clear. It is significantly different, and if you are comparing that with an NHS Trust bid, presumably it would not be the case with an NHS Trust bid, so it is not unreasonable that these two things weren’t quite-

Q138 Chair: That is correct. They can put extra money in, but they can also walk away.

Amyas Morse: Well, with the contract penalties provided.

Sir Neil McKay: And there is a Trust board in position which, if all else fails, could assume responsibility for running the hospital, but we don’t expect that to be necessary.

Chair: Thanks very much. We will move on to the next panel.

Examination of Witnesses

Witnesses: Sir Neil McKay, Chief Executive, East of England Strategic Health Authority, Una O’Brien, Permanent Secretary, Department of Health, David Bennett, Chief Executive, Monitor, and Peter Reading, Chief Executive, Peterborough Hospital, gave evidence.

Chair: Okay, we will start with Stewart this time.

Q139 Mr Jackson: Can I start with the permanent secretary? You read the Report. It is pretty grim reading. As the Chair said, it is probably the worst report of financial incompetence in the NHS that we have seen. What in your opinion went wrong and who is responsible?

Una O'Brien: I think there are three components in why there is a financial problem-they are reflected in the Report-and they are the judgment about the PFI; the inability of the Trust to make the efficiency savings that were necessary on the back of the PFI; and there is currently, as you rightly set out, Mr Jackson, a dispute between the Trust and the local commissioner. It is the combination of those circumstances that presented us with the scale of the problem that we have.

It is unacceptable; I am not happy with the fact that we are paying out nearly £1 million a week of taxpayers’ money to help keep the Trust going. On the other hand, I am absolutely determined that, as far as the people of Peterborough and the people who use that hospital are concerned, we will maintain the services for those people while we take the necessary steps to resolve this problem.

Q140 Mr Jackson: What about the deed of safeguard? You could have rescinded that and asked Monitor to invoke its legal powers to stop this scheme, which was clearly unaffordable. It seems to me that the Department took its eye off the ball between 2007 and 2010. I will come to Dr Bennett later, because Monitor does not cover itself in glory over this. There does not seem to have been anyone looking at the figures between 2007 and 2010.

I accept that there was a kind of collective madness that came over the health care community in the Peterborough area around 1995 about having a hospital at any cost, and I accept that I was part of that, because I did not question it as much as I should have. Someone could have stopped this, and I suggest that between you and Monitor, it should have been you, because both of you accepted that at some stage you made a value judgment that the figures did not stack up and that there were issues around disputes with commissioners, a lack of efficiency savings and staff costs that were out of control. You knew that well before October 2010, yet nothing seems to have happened.

Una O'Brien: If I may take your question in part, insofar as the Department had a direct action in this, it was the decision to approve the PFI in the summer of 2007; albeit the PFI is a contributing factor to the problem we are now in, it is not the sole factor. I have gone back and investigated this myself. I got out the original submissions-I wanted to have a look and I wanted to understand it-because clearly it matters to me very much that I draw lessons from that to ensure that such a decision could not happen again.

Q141 Mr Jackson: Can I just say that you have changed the criteria already?

Una O'Brien: A number of things have been changed.

Q142 Mr Jackson: Well, we will come back to this, but, principally, the 15% figure that you have used as the PFI unitary payment figure is now 12.5%, which we are aware of. What other things have you changed?

Una O'Brien: Other things that have been changed, to answer your question specifically, include looking not only for 10-year cash flow income projections, but also for much more detail on years one and two. Secondly, we look at the work force projections in microscopic detail, post by post, because I know myself, from having been involved in delivering a PFI at University College hospital in 2005, that you need to be very much on the case in managing change when you move into a PFI. There are, however, only four more schemes left today in the current PFI programme before we move on to the PF2 arrangements, which were announced in the autumn statement last week.

If I may, I will return momentarily to 2007. It is all too easy to take the "retrospectoscope" of 2012 and run it over that paperwork and that decision, but I have to remember to go back and put myself in the perspective of 2007, where the policy objective overall was to renew and strengthen the hospital building estate across the NHS in England.

Q143 Mr Jackson: Hold on. That was 2007, not 2010. Your Department did not do due diligence. It is clear from this Report. Let us go back to the 15%. I remain to be convinced that you had any really robust methodology in terms of judging the ratio of the 15%. On page 17 of the Report, paragraph 1.16 states: "The Department has told us that its judgement about the 15 per cent ratio was the result of a general assessment of the affordability threshold for Trusts, based on its understanding of the developing PFI market and estates costs in the NHS at the time." Do you stand by that?

Una O'Brien: That is the evidence we gave to the NAO, and that was the case at the time, as I have been able to understand it. As the case was analysed, what was in that pot of what was being paid for was compared with a like for like with other PFIs at the time, and a judgment about the time-I can hardly remember those times now; we are so steeped in these days of austerity. But this was at a point when NHS money was growing every year. People did not in any sense foresee what was to come. From the point of view of that time, comparing it with the affordability of other PFIs that were already in place was not an unreasonable thing to have done.

Now we look back on it and we see all the events that have taken place, you can absolutely see that it was finely balanced. As I have gone back through the papers, I can understand how people made the calculation that they took at the time.

Q144 Stephen Barclay: Could I refer you to Monitor’s letter of 4 April 2007 in which it says that significant concerns as to the scheme’s affordability remain? It was not an issue that it is now with hindsight or a changed climate in affordability. There were real concerns expressed at the time. Who in the Department of Health was accountable for ignoring that warning from Monitor?

Una O'Brien: I don’t think the warning was ignored. As I have said to you, I have gone back and looked at it myself. The approach that was taken-we can see with the benefit of hindsight that it should have been more rigorous-was to go back to the Trust board and ask for assurances that the concerns raised by Monitor had been addressed.

Q145 Stephen Barclay: So why didn’t you heed Monitor’s warning?

Una O'Brien: I think different views were taken. The view of the regulator and the view of the Department of an investor were different views either side of the risk. It was not that the warnings were not taken into account. They were weighed against a number of other factors. Mr Jackson alluded to the huge effort that had gone into the plan to have that hospital and the desire to upgrade. When I learnt about the state of the shocking facilities that were there before, I can absolutely understand why there was such a strong imperative to have a new hospital. In all these matters-as far as I have been able to tell, because some of the officials are not around any more-I have had to go by the paperwork and the evidence in the Report. People did weigh those, but came to different views.

Obviously, it seems to me, looking back on it, that we placed a great deal of reliance on the assurance that we had from the Trust board, which, in parenthesis, has been reliable in many other cases, so that was not a reason. It turned out not to have been reliable in this case.

Q146 Stephen Barclay: You clearly did place reliance on the board, but, as the Report makes clear, between 2007 and 2011 the financial projections produced by the board continued to be inaccurate.

Una O'Brien: We now know that, yes.

Q147 Stephen Barclay: So at what point did the penny drop that the board was giving you inaccurate information?

Una O'Brien: As far as I have been able to understand it, it was only when the scale of this deficit came fully to light.

Q148 Mr Jackson: No, that’s not the case. You were told in June 2006, when you had a review of the business case-you engaged someone to review the business case-

Una O'Brien: That’s correct, yes.

Mr Jackson: You were told that the joint venture in the disposal of land had an important impact on the business case. It should have been a red light to you to say, "Hold on, does this business case cover its face?", and you ignored that. A year later, you had the letter that Mr Barclay referred to, and you and Monitor seemingly ignored that, too.

Una O'Brien: Thank you for mentioning the 2006 review. What you say is accurate, but as I understand the full facts-I can only talk about what I have been able to investigate-that independent review, which did result in a number of other PFI schemes being stopped, nevertheless recommended that this one was safe to go ahead. I think that’s correct, David, isn’t it?

David Moon: That’s what it says in the Report.

Una O'Brien: Therefore, in light of looking back with the "retrospectoscope", perhaps there is a stronger assurance, given that a number of others were dropped because of that review. Of course, what we subsequently discovered is that the ability to realise the financial value of that land has rapidly deteriorated following the downturn in 2007.

Q149 Meg Hillier: I want to broaden this out a bit, and I am sure colleagues might want to narrow it in again, but it seems to me that there are lessons here to be learned about the optimal size for a district general hospital and about the future of that role. First of all, could you outline what you think are the lessons that the Department of Health has learned and how you might be implementing those? Be brief, as I am aware that the Chair won’t like long answers.

Una O'Brien: Certainly I think there are lessons very much from how investment decisions are appraised. We have already taken a number of steps that Mr Jackson alluded to. Yet again, that causes me in my own organisation to ask questions about how we assess risk and how we stress test the assumptions that are being given to us by people who may well have a vested interest in the investment coming about.

I think you are asking a much more difficult question on the optimal size of a DGH. The reason I find it difficult to give you a single answer on that is that it depends on geography, and I think it would be very dangerous if I were to say, "Oh, it is 300 beds," or something like that. The truth is that, number one, we have an inheritance and, number two, we have natural geographies that drive populations and drive a focus on different services.

Q150 Meg Hillier: I appreciate that. If you are in the Western Isles, there is a whole geography. It takes, I think, two weeks for our colleague who is the MP for that area to get around his constituency. If, for example, you live at King’s Cross in London, you are within half an hour’s walk of every major specialist hospital-I won’t list them-from children’s, dentists, neurology, et cetera, and UCH, if you take a general hospital. That cannot be a sensible model. Professor Darzi began to look at that, and he made some convincing arguments to people like me. We lost our stroke specialism at Homerton hospital in Hackney, but I was convinced by the arguments that, actually, my constituents would rather live in the first 48 hours and then be cared for in their local hospital than have all that specialism there. If you can convince cynics like MPs, who all campaign for their local area, why is it that some of Darzi’s recommendations withered on the vine? Where is the strategic leadership from the Department of Health? It is tough, because you all have us all banging on your door saying, "It is outrageous, and we don’t want any of it to happen."

Una O'Brien: It’s true.

Meg Hillier: But we have just discussed Hinchingbrooke and Peterborough, and it seems to me, as an outsider, that they are very close and are trying to do too much of the same thing. Where does the strategic input from the Department of Health come in?

Una O'Brien: The question is less about the optimal size of a district general hospital and more about whether we fully understand the extent to which we can provide care in other settings so that we can recalibrate the size and scale of the provider capacity that we have. That is the exam question that is genuinely on our minds at the moment as a strategic policy question. As you know very well, not only are the politics changing-we talk about reconfiguration in this Committee on numerous occasions-but it is very expensive to get it wrong by getting too much capacity or bringing the capacity down too quickly. The difficulty is that trying to do this on a national scale by saying, "Oh, I will have this hospital here and that hospital there," just does not work; it only works in locality. The strategic oversight will be driven in the new system by a combination of the commissioning board working with local commissioners to determine the clinical pathways-what it is they are going to buy-and the local authority, over a period of five to 10 years, to work with the providers to determine the pace of change and the nature of the provider landscape in those areas.

Q151 Meg Hillier: What about the major national teaching hospitals that we have? The most famous ones are all in London, more or less within walking distance of each other. Is the Department of Health looking seriously at that issue? Is it right, Stewart, that Peterborough is 50 minutes from King’s Cross?

Mr Jackson indicated assent.

Q152 Meg Hillier: If we were looking at Peterborough taking over Barts’ cancer and health specialisms-dare I say this as a London MP adjacent to Barts-would the Department of Health seriously consider that in the future to get the balance right financially and in patient terms?

Una O'Brien: That is certainly something that is being discussed. Maybe David can talk about this in the Foundation Trust world-groups of Foundation Trusts coming together. But you have to bring clinicians and the public with you. You will understand that that is not something we can try to do on a drawing board; you have to manage this change in a way that is clinically meaningful and is acceptable to patients and the public.

Q153 Mr Jackson: I refer you to page 19 of the NAO Report. This is important, because the central premise of your argument is, "Oh, this is hindsight; we didn’t know what was happening." As long ago as 1 October 2006-and this cuts to the chase of our previous discussion on Hinchingbrooke-you may be aware, Sir Neil and Ms O’Brien, that, "The SHA has indicated that the likely result of this review"-into capacity in the north-west of the region-"will be a managed reduction in acute provision overall accompanied by a net transfer of activity to [Peterborough]….there already exists excess capacity within the local health economy (which the SHA review is intended to address)." That was in 2006. My point is that you had financial information from the board that you and Monitor and the SHA were saying was completely unrealistic and did not take into account demographic and other change. You were doing a review that, as we see, eventually gave rise to Hinchingbrooke, and yet you are saying, "We didn’t really know there was a problem." That is not even mentioning this joint venture, which was also integral to the PFI scheme. My suggestion is that between the SHA and yourself, there were claxons blowing and red lights saying, "This scheme does not scrub its face financially," and yet you allowed it go ahead.

Una O'Brien: Can I ask Neil to comment on that review?

Mr Jackson: Particularly as it comes back to what he said earlier-that there was not a review, effectively.

Una O'Brien: Exactly.

Sir Neil McKay: In 2006, we had started a discussion about capacity across the whole of the East of England in terms of the number of A and E departments, maternity services and so forth. We came to the pretty rapid conclusion that there were not overwhelming cases for wholesale reconfiguration in places such as Cambridgeshire or in many other places apart from Hertfordshire, where there was a substantial reconfiguration that actually did take place. The NAO Report is accurate at that point, because in 2006 we were pondering that, but it did not lead anywhere, because we were not convinced there was over-capacity in that part of Cambridgeshire.

Mr Jackson: No, it doesn’t say that.

Stephen Barclay: The quote says "there already exists"-

Q154 Mr Jackson: It says "there already exists excess capacity within the local health economy". You have just contradicted what was in your own SHA memo and what is in the NAO Report.

Sir Neil McKay: I’m not sure whether it was from a memo or from whence it came. It is certainly in the NAO Report, but I don’t believe that there was over-capacity in that part of Cambridgeshire at that time.

Q155 Chair: Sir Neil, the way we deal with these Reports is that they are agreed on the facts before they come to us. We look very dimly on any disagreement when you come before the Committee.

David Moon: This was a difference of opinion between an internal Department document and the SHA. If you go on to read the next sentence of the Report, Sir Neil’s point is made: "The SHA, however, told us that there was no review as such, but that this is probably a reference to a consultation about the future of Hinchingbrooke Health Care NHS Trust."

Mr Jackson: The pertinent issue is not whether there was a review, but the stated belief of the SHA at the time-communicated to the Department of Health, one hopes-that there was excess capacity in this area. That is pertinent to future policy decisions for Peterborough and Hinchingbrooke.

Q156 Justin Tomlinson: Paragraph 1.17 of the Report says that there was "an assumption in the business case that income from developing land through a joint venture with developers could net around £5 million of the contractor’s annual payment from 2013-14". Obviously, this fell by the wayside, and the reviewer had highlighted it as a significant risk. I have two questions. First, why was that ignored? Secondly, what lesson has been learned from that, with a view to future land or development projections in any potential schemes?

Una O'Brien: I think that links to the point I was talking about earlier about getting the unitary payment compared on a like-for-like basis with other PFI schemes at the time. That is the best I have been able to understand it, and I appreciate-

Q157 Chair: Sir Neil was around at the time. Why was it ignored?

Una O'Brien: I think it was in the comparative evaluation of this PFI scheme against other PFI schemes in the Department.

Q158 Chair: Sir Neil, why was it ignored?

Sir Neil McKay: I was not a party to the discussions about the land review. The responsibility of an SHA is not to scrutinise the financial forecasts of the Foundation Trust. Statutorily, that is disallowed by an SHA. That was not part of my responsibility.

Q159 Chair: Who is responsible? I can’t bear this; it is completely irritating. You have strategic responsibility for the area. Who is it? Somebody’s got to have responsibility. You weren’t there; you deny responsibility. What about you, Dr Bennett? Were you responsible?

David Bennett: For-

Chair: The point raised by Justin Tomlinson, which is very pertinent. Part of the arithmetic of saying, "Was this viable?" was the land sale.

Mr Jackson: No, they were not responsible.

Chair: Who was responsible then?

Mr Jackson: I will come on to it later. They are not. I have made reference to a letter, but on the later disposal of the old Peterborough district hospital site, which was pertinent to the capital receipt that would have reduced this, Monitor basically said, "We are not responsible for it." I will come back to that.

Una O'Brien: Mr Tomlinson’s question, as I understand it-please correct me if I have got this wrong-relates to drawing up the comparator of the unitary payment in the analysis that was made, and whether the unitary payment stayed within the 15% ratio. What is in paragraph 1.17 is: why was the income flow from the land sale-the projected income flow from that-not included, which would have raised the ratio of the unitary payment? As I said earlier, I have come to understand that the way the affordability calculation was made was to compare the unitary payment on a like-for-like basis, so you had to look at a comparable basket-

Q160 Chair: This is gobbledygook; I don’t get what you are talking about. Am I wrong in saying that part of the arithmetic of saying-correct me if I am wrong, because I may have got this wrong-that this was an affordable PFI was an assumption that you would sell the land and make some money out of it?

Una O'Brien: That is correct.

Chair: So forget about all the blah, blah, blah. You did not sell the land-I am right about this, am I?-and therefore it was another element, and you didn’t think about the risk. Just answer that. Why?

Q161 Justin Tomlinson: Clearly, this was a highly speculative part of it. It was enough to just get you beneath that 15%, which was the hurdle that you had set yourselves.

Chair: The magic figure.

Justin Tomlinson: At that time, you were obviously warned that there was a significant risk, but was there a developer who was already about to sign the contract? Had somebody said, "Maybe we might be able to get that"? What made you ignore the fact that somebody was saying that there was a significant risk?

Una O'Brien: I really can’t give you that level of detail. That is not a question that I have looked into.

Q162 Chair: But Sir Neil must have been around. You were around at the time, weren’t you?

Sir Neil McKay: I was, and if I had had legal responsibility to scrutinise the financial aspects of this deal, I would have an opinion, but I was excluded from that.

Q163 Chair: Just tell me. In the real world, you must have known. You are part of the NHS, and I don’t know who else was around, but you must have known.

Sir Neil McKay: I was conscious of the fact that part of the proposal involved a land sale, but it was not my position or responsibility to say whether I thought that was feasible or not. I was not the scrutineer of the financial aspects of the business case. That is not allowed by Strategic Health Authorities because this is a Foundation Trust.

Q164 Justin Tomlinson: I don’t understand why it was allowed to proceed without a guaranteed sale. For example, on a considerably smaller scale, I was looking at purchasing a new house recently, but that was conditional on the fact that I would have to sell my other house before I proceeded. I do not understand, as it was such a significant factor-it was not the icing on the cake; it was the factor that took you underneath that 15%-why the whole thing proceeded without that land being disposed of.

Una O'Brien: The only thing I can say is that I believe that that was the practice at the time. Indeed, going back to the PFI-

Q165 Justin Tomlinson: Which was why I asked whether a lesson was learned from this.

Una O'Brien: For the UCLH PFI, which I was directly involved in, the deal was made long before the land was sold. In that case, the land was sold for an amount considerably more than was ever factored into the PFI. I am not trying to excuse it; I am trying to explain what could easily have been the perspective in 2007 of a group of people who had experienced those PFIs that had gone before-by that time, 60 or 70 PFIs had gone ahead. It was a finely balanced judgment, but it was not totally unreasonable to have come to that view.

Q166 Justin Tomlinson: The second part to my question was: what lesson has been learned? If you were to go through this again, would you now make sure that the land sale was crossed and dotted?

Una O'Brien: So many things have changed since 2007 that it is impossible to list them. We have all become profound sceptics about absolutely everything, and of course the lens through which we view these decisions has shifted. I could not say specifically about that sale, but we certainly would be hugely more sceptical about the figures.

Chair: Right. It is wonderful how people are never accountable and responsible when they come to this Committee. It is a real frustration to us.

Q167 Austin Mitchell: The NAO considers that if a body raises concerns about a business case, the Department should not give approval until those concerns have been addressed, but you did give approval before they were addressed. Why was that?

Una O'Brien: To the best that I have been able to understand it, the judgment made by the Department was that the Trust board had acted on, or had taken on board, Monitor’s concerns. It is now clear that that reliance on the Trust board was not as reliable as it should have been, and as it was in many other cases.

Q168 Austin Mitchell: Monitor was told by the Trust that its approach-this is in paragraph 1.9-was "prudent and responsible". Both the Department and the Strategic Health Authority were satisfied that Monitor’s first response indicated that the Trust had adequately addressed Monitor’s concerns. Did Monitor consider that, Dr Bennett?

David Bennett: No. We wrote a second time in April. We wrote first in January, pointing out our concerns.

Austin Mitchell: We have got the letters here.

David Bennett: That included our concerns about the estate. The Trust responded in March, and then we wrote again in April saying that we still had residual concerns.

Q169 Austin Mitchell: Why didn’t the Department listen to that? Did you want to rush this thing through? Did you think it was the only way out? Why didn’t you listen to Monitor?

Una O'Brien: As far as I have been able to tell, the concerns were considered. They were certainly set out in full detail in the final paperwork that was given to the decision maker and-I can only repeat what I have come to understand-a reliance was placed on the response of the Trust board that Monitor’s concerns had been addressed. That turned out to have been too trusting a reliance.

Q170 Austin Mitchell: They wrote to you on 4 April saying that significant concerns as to the scheme’s affordability remained. Did you not speak loudly enough on that matter?

Una O'Brien: With what we’ve done now, that difference could not occur, because the Department relies only on the information from Monitor.

Q171 Austin Mitchell: Yes, now. But why then?

Una O'Brien: Exactly.

Q172Chair: Who was negligent? The frustration here is that I haven’t read a Report as bad as this on the health service. This is probably the worst, which is probably why Stewart Jackson asked us to do it. To be honest, it looks to me that every single one of you sitting there-the Strategic Health Authority; the Trust itself; Monitor; the Department-all failed to do proper due diligence before the decision. That is all four of you, and nobody has been held to account. It almost seems to me like an issue of negligence here. That is what I feel, and I have never felt that on another NHS Report.

Una O'Brien: May I just say that in terms of the judgment that was made in 2007 to go ahead with the PFI, I have gone back through it? Obviously, we can look at how that decision would not happen today.

Q173 Chair: Is the decision maker still working with you?

Una O'Brien: No.

Q174 Chair: Where has he or she gone?

Una O'Brien: I don’t know the details of that, but I can certainly let the Committee have that.

Q175 Chair: What about you, Dr Bennett-you haven’t had a chance so far-because we think you were pretty negligent too?

David Bennett: On the decision to go ahead with the original investment, we wrote clearly-twice-saying that we thought it was a very risky investment.

Q176 Mr Jackson: But you didn’t follow it through. If I may say so, in the last two weeks you have been on a sort of PR offensive of trying to distance yourself from anything to do with the decision. Today, in the Peterborough Telegraph, you have the press release out you wanted: "Elite team to revive ailing city hospital". The press release you issued when the Report was published two weeks ago was astonishing. You basically said, "Well, we told them. They did not listen. There was nothing we could do about it." That is essentially what it was.

The most astonishing sentence in the whole Report, I think, given that you are the regulator of Foundation Trusts , is on page 36, where paragraph 3.8 says: "Monitor’s criteria for assessing financial risk ratings for Foundation Trusts does not take into account concerns about the longer-term financial health of a Trust beyond the current financial year." I just wonder: what is the point of Monitor? Have I missed something? If one looks at the sad history of it, your risk ratings were totally wrong throughout the period, even when we were seeing deficit. Even when you did raise significant concerns with the Department of Health, you didn’t follow them through. Prior to April 2012, you had the legal duty and responsibility to stop the scheme from going ahead. You failed to do that as well. How do you answer that?

David Bennett: The original concept of the Foundation Trusts was that their boards would have primary responsibility for the performance of the Trusts, including for making decisions of this sort. Indeed, with the 2003 Act that set all this up, I will just read two sentences from the Minister of State in the Department at the time: "In broad terms, I would characterise the regulation of NHS Foundation Trusts as light touch. As I said, the regulator’s powers to intervene under clause 23 will be limited to where failure is significant."

So the legislative framework that set us up meant for us to be light touch and to act only when there was significant failure. The financial risk ratings were set up to measure current performance. It is fair enough to say that that is a weakness in the system that was set up and the new legislation allows us to intervene on the basis of prospective risk, not just current risk, and we are in the process of consulting on the detailed way that we will operate this so that we can indeed do that. But at the time, it was set up that we would only act when there was a significant failure. That speaks to why we didn’t. We were not able to stop the decision.

Q177 Mr Jackson: Just one quick point. This is not all in the dim, distant past. I wrote to you on 2 June as the constituency MP raising my serious concerns about the lack of disposal of the Peterborough District hospital site, which had a possible capital receipt of £20 million. It is probably significantly south of that at the moment. That is quite an important issue. You replied to me, incidentally, seven weeks later after I had chased you. This is a major issue that could have offset the PFI financial problems. Incidentally, the site is still not disposed of two years after the hospital moved off, which is another issue. You are the regulator, and you said "On the basis of the information currently before us, we do not propose to take any further action on this particular issue at this time." That is your letter to me, as the constituency MP, seven weeks later. There is light touch and there is being fast asleep at the wheel, frankly, and I suggest that you are the latter. You raised these concerns and you did not follow through. You did not liaise properly with the Strategic Health Authority or the Department. I think, therefore, you are culpable for this negligence, which has led us to a position where this hospital will have a £54 million deficit.

David Bennett: The letter you wrote to me was expressing concerns about the way in which the land sale was proceeding. You were concerned that there was not an open and transparent process, and it is in that context that I replied that we had investigated it, which took us several weeks because you had a number of detailed concerns, and we established that as best we could tell, the Trust was going through proper process. As it happens, the specific deal that you were concerned about did not get completed. They were not happy about it and they were not sure that they were getting the best value for money, which is what you were concerned about, and they went to the open market to sell the land. It was not that we felt it didn’t need to be done, but it had to be done properly. That was the nature of your concern.

Q178 Mr Jackson: And also the fact that there was an inordinate delay in the release of the capital that would flow from selling this land, which is still not disposed of as we speak.

David Bennett: I cannot speak for the details of what the Trust is doing to sell it, but it is, of course, a difficult environment to be selling into at the moment and they have this balance between getting best value and moving as quickly as possible.

Chair: Dr Reading, you answer that. You are the Trust.

Peter Reading: Originally, the plan, as I understand it, was to enter into a joint venture. That was where the £5 million per annum value came from. That scheme was supported by NHS Estates and by the Valuation Office at the time, and its original conception dates back, I believe, to about 2002. The Trust in about 2008-09 came to the realisation that it was not going to be able to pursue the scheme any more, following the collapse of the housing market and the changes in the economy. About the same time, a major national house builder approached Peterborough City Council with a proposal for the site. My understanding is that that was eventually discarded by the Trust board about a year ago.

Q179 Chair: Discarded?

Peter Reading: Yes, on the grounds that they could not guarantee value for money. They received a presentation from this company, and they decided two things. First of all, they could not guarantee value for money, because they had not been through a competitive procurement. Secondly, they were unsure that the value would be delivered as proposed in the scheme. After careful consideration over a period of three months, advised by Jones Lang LaSalle, which is one of the biggest property advisers in the world and which has been advising the Trust throughout, on the basis of their advice and legal advice the Trust decided that the best approach was to go through an open procurement. That process is now well advanced. In May of this year we selected a preferred bidder. We have not yet concluded the deal. There are some complexities associated with the planning permission for the site. There have been some changes in the requirements of the planning authority, which have affected, potentially, the value of the deal. We are currently going through a three-way discussion, again advised by Jones Lang LaSalle, to determine what will be the best value. In fact, we have a meeting next week with the Chief Executive of the city council to try to address some of the planning changes that the city council has required over recent months, to ensure we get best value. Subject to that, I hope in the new year we will proceed to conclude the deal.

Q180 Mr Jackson: Chair, in fairness, Dr Reading inherited this situation and has coped very well with it. Can I just say that that advice-this was obtained by my office under freedom of information-from Jones Lang LaSalle and King Sturge cost £800,000?

Peter Reading: Madam Chair, may I just clarify? Mr Jackson is absolutely right. Some £800,000 in fees has been paid to Jones Lang LaSalle over a period of some four years. My understanding is that a wide range of advice has been provided by Jones Lang LaSalle over that period, partly because of the changing range of options that the Trust has faced.

Q181 Chair: Well, it is in their interests, clearly, to keep changing the rules, isn’t it?

Peter Reading: It is, but the figure is absolutely right.

Q182 Mr Jackson: It has not sold yet, though; it has not been disposed of yet.

Chair: If that’s the way they are being paid, it is in their interests-

Peter Reading: Madam Chair, can I confirm that a few months ago, we came to an arrangement with Jones Lang LaSalle that firmly caps any future payments to a maximum of £100,000 of future payments, or 0.7% of the value of the deal, whichever is the lower figure? But you are absolutely right about previous performance.

Q183 Ian Swales: Having spent a long time talking about the deal, the thing I find most shocking from the Report was the whole area of financial control. It has the feel of an organisation drowning in 10 feet of water and not really caring whether that becomes 15 feet of water. In particular, the operating costs are £58 million higher-or 31% higher-in the last financial year than in the scheme’s original business case. So what’s been going on on the operating cost front? I don’t know if Dr Reading would like to talk about that.

Peter Reading: Well, I have done my best to probe through what has happened over the last five years and my understanding-

Q184 Chair: When did you arrive?

Peter Reading: On 29 February this year.

Q185 Chair: You’re the fifth one in how many years?

Peter Reading: I think the report quotes five since 2005-

Stephen Barclay: In six years-since December 2006.

Q186 Ian Swales: So what is going on on the cost front?

Peter Reading: I think there are two things. First of all, there has been a massive change in the activity profile of the Trust over the last five years. Some of that is very substantially increased activity and the report quotes the huge differences between the actual growth in activity over the last five years and the projected changes in the business case; and the second is a series of changes that apply to all parts of the NHS. So, in many areas we have had to recruit substantially greater numbers of staff. The largest number in any particular case was midwives, following a Care Quality Commission review in 2010.

Q187 Ian Swales: Figure 9 shows the biggest increase has been in administration and estates-in the list of different disciplines there, the biggest percentage increase is in administration and estates. If it was all front-life staff, I could maybe understand it, but what is going on there?

Peter Reading: The increase in administration and estate staff is slightly misleading. In that table, there are two other lines-clinical administration and other-that have substantially different percentage changes. In fact, there have been substantial changes in the categorisation of staff between those three groups over that period. So, when you add them together, it comes in at about 23%. And I think it applies to many Trusts-that staff get recategorised into different groups.

Q188 Ian Swales: But do you think, given the financial problems here, that a 23% increase in staff is reasonable?

Peter Reading: It is a high increase in those particular categories. There are different parts to that. One part is a substantial increase in catering staff, who are recruited under the retention of employment mechanism. There are 33 staff there who were part of a deal that the Trust did in 2010 with Medirest, the catering provider for the Trust, under which Medirest introduced its Steamplicity technology. The deal was that, at the cost of Medirest, those staff were taken on at no extra cost to the Trust.

A second category, involving a dozen staff, relates to security. There was no security provision in the old hospitals. Those hospitals had something which is common in older hospitals: the porters provided security. With changing times and the risks to the site, the decision was made to take on a dozen staff. There are a number of categories where I think quite reasonable judgments have been made.

Q189 Ian Swales: Can I just pick up one other cost point? It is the implication in paragraph 12-in the third bullet point. That paragraph talks about the payment to the PFI contractor. It says:

"At 20% of turnover, that is broadly in line with the business case."

But then it goes on to say:

"The quantity is much greater, partly because cost reductions have not transpired."

In other words, it sounds like the PFI contractor is benefiting. Perhaps it is the choice of words, but can you talk to us about how the PFI contract works and whether the PFI contractor is indeed benefiting? If not, what is the incentive for them to do their bit to get this back in line?

Peter Reading: The differences relating to the actual value of the PFI contract are two. One is about £2.1 million, which is associated with agreed variations and activity changes, and the hospitals are a lot busier than was originally anticipated in the business case.

Q190 Stephen Barclay: That was foreseeable, wasn’t it? A new hospital-you are going to want to change things.

Peter Reading: It was not foreseen, and that is what the business case, I think, failed to do.

Q191 Stephen Barclay: I appreciate that it was not foreseen, but is it not foreseeable, if you have a new hospital, that you will want to make changes?

Peter Reading: Oh yes, it is. If you looked at any PFI around the country, you would find that the UP being paid at the moment has some changes compared with what was originally anticipated, because of natural variations and activity changes. The other reason for the change is inflation, and I think you will find that once those are taken into account, the unitary payment was quite accurately predicted.

Q192 Ian Swales: This NAO Report says "partly because the business case included associated cost reductions that have not transpired". That is a very clear statement suggesting that the PFI contractor has benefited because the costs have not been reduced.

Peter Reading: No, I don’t think it is true that the PFI contractor has benefited, although we have introduced some measures over recent months to tighten the management of the PFI contract. I do not think that those were in place originally and we have further measures planned over the next two or three months.

Q193 Chair: The PFI contract-I am looking at figure 10-was originally supposed to be £30 million a year. In ’11-12, it was £41.6 million a year. That is huge. It is a 25% difference-that’s massive.

Peter Reading: Madam Chair, as I was trying to explain, some of that is down to inflation and some of it is down to change in activity and variations, as I have just described, which amount to £2.1 million. If you net off inflation-

Q194 Chair: What-£8 million is inflation?

Peter Reading: Over the period, yes.

Q195 Chair: From 2006-11? It can’t be.

Peter Reading: I think that is correct.

Chair: I know one year, we had inflation running at whatever it was-3%. It can’t be right.

Q196 Ian Swales: Why is what’s paid to the PFI contractor simply a function of turnover? Surely they don’t simply benefit.

Una O'Brien: No, no, it is just a way of expressing it. There is no direct relationship. Also, I think-although maybe David Moon can help us-that the ’11-12 column actually includes the managed equipment service, and that is not in the left-hand column. I don’t know-

David Moon: That is correct. There was an adjustment made in the original assessment that took out an element of the managed equipment service.

Q197 Chair: Right, so that was another negligent thing, Una O’Brien-that when they did the original assessment, they deliberately took out the cost of managing the equipment to get it under 15%, and then they put it in later.

Peter Reading: Madam Chair, at the time that the contract was let, the metric that the Department of Health required was to look at just the new building element of it. If there are other estate-for example, we have Stamford hospital and managed equipment services, which are not included in the metric, so there was no deception. It was the way that the Department of Health applied it at the time. Subsequently, the Department of Health has adjusted that metric, so that the whole of the estate of a particular Trust and any contract, such as for managed equipment services, are included in the metric. There was no deception; it was just the rule that was applied at that time.

Q198 Chair: Can I just ask you why you have not negotiated that figure down, given the state of your finances?

Peter Reading: We have negotiated elements of it down. In fact, in our savings this year, we managed to take £600,000 out in relation to insurance costs.

Q199 Chair: You have taken them out of the contract, but somebody else has got to pay for them, presumably?

Peter Reading: No, it is an adjustment in the insurance value of the contract. It has been passed through to us, so we have managed to negotiate that down. We are looking-as a Trust, but we aim to have fuller support, I hope, from the Department of Health on this, working with the PFI unit at the Department of Health-at whether there is any scope for renegotiating the whole contract. Currently, on the advice of the Department of Health, we are being advised by Deloitte-of the big four accountancy firms it is the one with the greatest level of expertise in this area-to see what scope there is for renegotiating the contract.

At the moment, I have to say that I am not particularly optimistic, but we are going through exactly the process one would expect to see whether there is any scope for changing the contract.

Q200 Stephen Barclay: Very quickly, on that point. I do not think that there is much scope because when I asked that question when Ms O’Brien and David Flory were on our previous panel, afterwards I got a note provided by Brian Saunders on the NHS pilot in Romford. It says: "The pilot concluded that annual savings of around 5% of the annual unitary charge were achievable." That is the Department’s own estimate, and then the annual unitary change is not the full value of the contract; it is around 24%.

Una O'Brien: That is right. This goes back to the pilot-

Q201 Stephen Barclay: So the Department’s own pilot concluded that only 5% of 24% of the contract is the maximum for renegotiation?

Una O'Brien: That is correct.

Q202 Stephen Barclay: So in terms of understanding expectations, the Department’s estimate is that there is little scope to renegotiate because the Treasury underwrites those contracts?

Amyas Morse: If I may, Chair, I wanted to ask a slightly more informal question to Mr Bennett and Sir Neil. I know that everyone has given the correct answer, given their statutory position and all the rest of it but, if you had had a role, I think that you two were probably in quite good agreement on what you thought about the bid. Therefore, I am left thinking that you two are respected figures, so setting aside questions on who is responsible for what, how this got past everyone is a bit of a mystery to me.

I know that we have had various, possible speculative reasons reconstructed from history, but I do not understand what happened in reality. I am left sitting here, thinking that the heavyweight judgment was that it was an edgy bid-very enthusiastically promoted by the Trust, and I understand that-and the people whose job it was to be the sceptics and to ask the tough questions raised pretty clear red flags, by any standards. Whatever happened that meant that your advice was not taken? You must have a view. The reason that we are digging away at this is not just to go into the distant past-what happened?

David Bennett: First, I should say that, in terms of the original decision, all this happened three years before I joined Monitor, so I can only speculate. From my point of view, I would be concerned if we had looked at a project, said twice that we had serious concerns and we did not seem to be heard. Now, I think that I have an explicit agreement with the Department that, if we find ourselves in this situation again, we will work out what the problem is until we reach a joint point of view. I do not think that it makes sense that we go ahead with Monitor and the Department having different points of view.

Amyas Morse: Sir Neil, I know that you were an onlooker, but probably a very well-informed and expert one. Informally, please, so that we can understand, what caused this to happen?

Sir Neil McKay: My board recognised that there were issues that Monitor had raised. In fact, I think that we minuted that in one of our board meetings.

David Moon: Can I just butt in here? I will go further than that; you actually wrote to the Trust to say that you concurred with Monitor’s concerns and that if you had to make a decision, until those concerns were addressed, you would not support it.

Sir Neil McKay: At a time when it was very difficult for the Strategic Health Authority, with the inception of the new Foundation Trust division and constant reminders about our legal responsibilities in terms of a Foundation Trust and its authority, for an SHA to protest formally about a financial-

Amyas Morse: I am not blaming you. I am just trying to understand what happened.

Sir Neil McKay: I do not recall with precision, but I think that it would have been surprising if, in addition to the letter, we had not expressed some informal concerns about affordability because we were aware that Monitor were anxious. Monitor were the arbiters and experts-

Q203Chair: So whose fault was it, then?

Amyas Morse: How was all this overcome? I am sorry to keep niggling away, but I do not understand how these very serious and informed-you all know each other really well. How come they did not listen to what people were saying?

Sir Neil McKay: My view-I think Una and David have alluded to this-is that the new legislation enables a framework to be constructed whereby this kind of thing is far, far less likely to happen again.

Amyas Morse: I am immensely reassured by that, but I am still wondering whatever happened in this case, for which we will all be paying for quite a long time. Whatever happened? Was it just so oversold by the local community that that somehow overcame everything? It must have been something.

Una O'Brien: Well, look, it was five years ago. It was 2006-07. The world was different. Assumptions, the view of risk and belief in the future were in a different place. It is hard even now to recollect those things-

Q204Chair: Una, are you saying that in those days, which are not that long ago, they did not do due negligence? Sorry-due diligence. I am so full of negligence I cannot remember diligence.

Una O'Brien: No, I am not saying that. The first thing I did when I got this Report and heard this work was being done was think, "I want to see the original paperwork."

Q205Chair: You had to see. Where was the due diligence?

Una O'Brien: Exactly. As I said earlier, I will only repeat the judgment that I made after looking at it. There was an over-reliance on assurances from the Trust board, which were insufficiently tested.

Q206Chair: Presumably those people have all gone now?

Una O'Brien: In practically every other case where we based that reliance on the Trust board, it has turned out to have been reasonable to do so. That is there for everybody to see. I do not want to underestimate for a single moment how seriously we take this. However, it is a question of context and proportionality. It was a finely balanced judgment at the time, and although all Monitor’s concerns were set out, the view was-mistakenly, it seems-that the Trust board was addressing them. The decision was made to go ahead.

The issue now is how we are going to work together. It is a fantastic hospital. I have been up to see it and met members of staff-

Q207Chair: We have heard you have been up to see it, and we have heard you think it is fantastic, but I want to get on with the thing before us.

Una O'Brien -to resolve what needs to happen in future, because that is what we do have an influence over.

Q208Chair: Well, you do. Future generations will come back when that goes bad. What is so frustrating is that there has to be proper accountability and responsibility, and everybody is evading it.

Q209 Stephen Barclay: First, I am reassured that future PFIs will be looked at differently.

Una O'Brien: They will.

Q210 Stephen Barclay: We know this wasn’t alone. We know the Manchester incinerator case was pushed through for EU political reasons. We had to meet a renewable target, so the numbers were fiddled. We know that the AirTanker was pushed through and that an out-of-date set of data were used because there was an imperative. The Department of Health was not alone in pushing through PFI decisions for other reasons, but it slightly concerns me when you say that things have changed in terms of accountability.

I welcome your thoughts on the accountability structure that applies to Foundation Trusts . We see here that there have been five Chief Executives in six years. I had a meeting with East of England MPs and the chair of the Ambulance Trust, because ambulances not just in my constituency but across the East of England are not turning up for constituents in a satisfactory manner at the moment. A number of MPs met the chair of the Trust, who said, "Well, we operate a no-blame culture." There is still a refusal-Sir Neil may want to comment on this-to publish basic data such as how long ambulances are waiting outside each hospital, so we can see the bottom ones, understand if there is a good reason for those and have some pressure on behaviours to improve them. She is refusing, and she cited the Strategic Health Authority as one reason for refusing that disclosure.

What I am interested in is, first, are any of the five CEOs who have been in place during this time working for the NHS now in any capacity, and do you feel that the accountability of Foundation Trusts is operating as it should from a Department of Health perspective?

Una O'Brien: If I may comment on the second one first, perhaps Peter can help me on the first one. In terms of the accountability of the Foundation Trusts , one thing that is already clear to me-David and I have talked about this at some length-is that, for sure, Monitor is going to have to be more prospective in its regime. The scenario that David described that was applied perhaps over-zealously at that point in 2007 was wait until something goes wrong and then act. I do not think that is sustainable for monitoring in the future.

I have already described to you that with a capital investment, a number of changes have been put in place that interrogates much more rigorously and over a longer period the assumptions, the risks and the intended income. In addition, the financial sustainability of FTs needs Monitor to look with those FTs at their cash flow looking forward and to be confident that Trusts have sensible plans in place, so that we don’t find ourselves dealing with a problem only when something has already gone wrong. That is very much the way we want Monitor to work in future-with a risk-based approach. That is different from the very early days of FTs, in those heady days of being a completely free entity without talking to anyone or being talked to by anybody. We must all recognise that we must pull together when resources are tight.

Q211 Chair: On the second question.

Peter Reading: On the second question, of the first three, none are working in the NHS at the moment. I should say that the middle one of those two was in post, albeit for a critical period, for less than two months in the interregnum between the previous substantive and the new substantive coming in, but it was critical because it was the beginning of 2007.

The fourth one is currently Director of Workforce at the Trust. She took over at literally one day’s notice last May, after the substantive Chief Executive then in post became ill during a working day, and she was interim Chief Executive until I came in on 29 February. She covered at very short notice, and is still working in the NHS.

Q212 Stephen Barclay: Thank you for that. In terms of your own role, Dr Reading, you set up a management consultancy. Are you employed by the NHS, or are you on a personal service contract?

Peter Reading: I am employed on a contract basis. I am not employed by the NHS. I left the NHS in 2007, and set up a management consultancy, which is how I have earned a living-

Q213 Stephen Barclay: So you are on a PSC.

Peter Reading: It is a contract for service.

Q214 Stephen Barclay: Do you have a minimum period for which you will be with the Trust?

Peter Reading: I was originally asked whether I would be available as a longish-term interim to see the Trust through to a position where it is able to recruit a substantive Chief Executive commensurate with the size of the Trust. I was asked to consider this position following the failure of the Trust to make a substantive appointment through headhunters at the end of last year. The reason is simple. The size of the Trust means that it is a first Chief Executive post. The complexity of the issues means that it is not. The Trust can dispense with my services at four weeks’ notice, with no financial penalty.

Q215 Chair: But how long are you expecting to stay?

Peter Reading: That really depends on the Trust board and governors, and Monitor; but at the moment, I have been given to expect that I will be around for a good few months to come. Monitor’s announcement today of the introduction of a contingency planning team may change circumstances for the Trust during this year, but subject to the board and Monitor continuing to be happy with my services, I am prepared to stay throughout this year.

Q216 Chair: You also draw an NHS pension. Is that correct?

Peter Reading: Correct.

Q217 Chair: Can I just say to Una again that, given Danny Alexander’s work on personal services contracts and the employment of people in the public sector, this does not seem appropriate.

Una O'Brien: Well, David can comment. I am responsible for the employment of civil servants. I take your point, but I think we are exceptionally fortunate to have someone as experienced as Dr Reading.

Chair: That may well be so, but when Danny Alexander made his statement, he was absolutely clear that he expected the NHS to follow what was happening in the rest of the public sector and that people who were working full time for the NHS should be paying their PAYE and national insurance and not be working through personal service companies, particularly in this instance, where a pension is involved that has been paid for by the public purse.

Q218 Stephen Barclay: Can I just come back to Sir Neil and Ms O’Brien on this accountability? I had an exchange with Sir David Nicholson where he said that, if one hospital has three times the staff of another, it is an issue not for him as an accounting officer but for the local board. A lot of the accountability has been placed on the hospital and on the hospital board, even though there is significant turnover. We have a hospital that is under acute pressure and therefore needs to be making savings. Dr Reading and I had an exchange because I have a number of constituency cases about elderly patients not getting food, but the hospital does not measure food waste, so there are all sorts of controls on what food people get. We do not know whether food goes cold between getting there, whether there is a problem on the ward, or whether the staff know there are measures. There has been a long debate around the performance of surgeons and individual data around surgical performances. I was reading the BMJ report 2002, which promised that that was about to happen and it has still not happened. We have the same problem with the Ambulance Trust. Sir Neil, will you explain why there is such reluctance to having greater transparency of data within the East of England region because that could be a great way of driving more accountability? Indeed, the Secretary of State has spoken about his desire for this, but there seems to be reluctance from officials working on the ground.

Sir Neil McKay: I am very surprised to hear you say that. In particular, you mentioned Ambulance Trusts and ambulance handover times at hospitals. I can talk to you outside the meeting about the detail of that, but I am pretty sure that that data is publicly available. If it’s not, there is no reason why it should not be.

Stephen Barclay: I think Stewart was in the meeting as well.

Sir Neil McKay: I am bewildered to hear that that appears to be a problem.

Q219 Stephen Barclay: How many hospitals measure food waste within your area?

Sir Neil McKay: I don’t know.

Q220 Stephen Barclay: Could you let us know? Why is it, Ms O’Brien, that we still do not have individual performance of surgeons? I can understand that there are some legitimate concerns within the profession about whether it makes people risk-averse and how the data is presented and whether it is weighted. But this is something that has been talked about for a very long time. I asked for a note of it at our last hearing, but the note was not produced. I think that the Clerk asked for a note ahead of the hearing today, and it has not been produced, and yet Sir Bruce went on Radio 4 last Thursday at 8 o’clock and suggested that individual performance might be coming within two years, but that is exactly what we were told five or 10 years ago.

Una O'Brien: First, I am very sorry if you have not had that note. I shall look into that immediately this evening. Secondly, you have rightly alluded to the new Secretary of State’s fresh impetus. He is really driving very hard on the transparency of data, including the data of consultant-led teams. It is complicated by speciality and getting the risk adjustment right, so that we are comparing on a fair basis. Producing data that is meaningful to the public and that drives performance between consultant teams is the task at hand. There is no person in the country more able to drive that than the NHS Medical Director himself. Again, my apologies if you have not had the latest up-to-date details of what the work plan is on that, but I will make sure that you get it.

Q221 Mr Jackson: I’d like to reiterate the point that Mr Barclay has made. The previous Government gave consultants and GPs a very significant rise in salaries, and it is incumbent on the Department of Health to measure outputs in that respect, so it is a very important issue for the Committee.

May I also put it on the record that I am grateful to Dr Reading for the fantastic work that he has done? He inherited a very difficult position and has done a great job, as have the excellent staff at the hospital. I was there on Friday evening in accident and emergency and I was hugely impressed by their compassion, professionalism and all the work that they are doing, given the circumstances.

My final question of the session to Dr Reading: admittedly the governance is changing, but is the relationship with primary commissioner-the PCT-better than it was before? Are there grounds for confidence that that will ameliorate the financial difficulties to a certain extent for the hospital Trust?

Peter Reading: I think it is true to say that the relationship is quite substantially better, but the starting position of 18 months ago was a very poor one. It was poor by the standards of most places in the country and had a very long and difficult history. We have worked hard, and so have the new commissioners, to try to establish a different relationship. At the moment, the test is that we decided between us to go for a contract this year that is very largely a block contract. Activity coming into the hospital has continued to grow at a very high rate-10% above what was originally anticipated. That breaches by some seven percentage points the thresholds that we expected to trigger a review of the contract. We are currently working with the commissioners to see what can be done about that, given their own financial circumstances. I am an optimist about the future relationship. The introduction today into the Trust of a contingency planning team, one of whose tasks will be to look at the relationship with commissioners, is an opportunity to take forward the work that the NAO has done really well, which has shed light on this situation. We now need to crystallise what can be done.

I emphasise that our relationship is not just with NHS Cambridgeshire and Peterborough. The figures in the Report make clear the huge change over the last five years, which was such that Lincolnshire is now a very substantial purchaser of our services. We expect that growth to continue. We are also experiencing substantial growth from Northamptonshire and Rutland, largely because of the new hospital and its high quality, our ambulance turnaround times, which we are told are among the best in the region, and the location of the hospital, which is superb in terms of road links.

Q222 Chair: Can I ask about a couple of things? I am sure that you are doing a good job, but I just think you should be on the books. That is what we expect of public servants. This Committee has been doing a lot of work around people paying traditional national insurance and tax, and I think you should do that. You are employed full time, and you should do that.

Peter Reading: I am not employed full time.

Q223 Chair: How many days a week?

Peter Reading: Four days a week on average.

Q224 Chair: That seems a bit odd to me, but I still think that you should be on the books.

Peter Reading: I understand your point of view.

Q225 Chair: Can I give you an example? If you are a cleaner and you work 12 hours a week cleaning an office every day, you still go on the books and pay your PAYE. I think that people at the top should do the same as the people at the bottom. It is a very simple principle that I have.

Can I ask about the intervention that Monitor talked about today? I hear that you have done that, but if you look at paragraph 3.17, you have spent a fortune on a whole range of consultants coming in to try to sort out this mess. We have Ernst and Young, Deloitte, McKinsey & Co, Monitor, and five Chief Executives, costing nearly £5 million-is that just for 2011-12?

David Moon: £4.72 million.

Q226 Chair: That is just 2011-12, so if one totted it all up, you are talking about something getting on for £14 million. So £14 million has been spent on consultants, and your answer today is yet another set of consultants.

David Bennett: Well, this is a set of experts to try to finally sort the problem out, which needs to be done.

Q227 Chair: But what does the taxpayer have for Ernst and Young’s work and Deloitte’s work? When I looked at this list I thought, "If it had been me, I would have got one of them in." They are all much of a muchness. McKinsey & Co probably know their way around the health service better than the others. I would have got one to do the lot. Instead, we got Ernst and Young in 2010, Deloitte in mid-2012, and McKinsey & Co were probably there all the time. You, Monitor, cost the taxpayer. There was the fifth Chief Executive on a personal service contract. Now we are getting another lot in.

David Bennett: The consultancy in the table has been commissioned by the Trust, not by us.

Chair: I can’t bear this. This is all taxpayers’ money.

Q228 Ian Swales: What is wrong with the work they have done? Can’t they do the job? What is wrong with the outcomes? If they haven’t come up with the answers, why did you pay them?

David Bennett: As I said, we did not pay them.

Chair: We did. We collectively did.

Q229 Stephen Barclay: Also, the financial figures they gave were wrong. In paragraph 13 of the Report, it says: "Between 2007 and 2011 the financial projections produced by the executive board proved to be inaccurate." Were consultants involved in pulling those figures together?

Peter Reading: Madam Chair, my understanding is a whole series of firms were employed over a period of time, which were paid by the Trust, not by Monitor. Their functions were different at different periods of time. One firm looked at the way the board and the governance of the organisation worked; another supported the transfer into the new hospital; another looked at the finance of the Trust-that was Ernst and Young in 2010; when I came into the Trust in February, Deloitte were very active in the Trust and supported us on the development of our financial plan this year. So they have done a range of different things. What has not been done is the piece of work that I touched on a moment ago, which is looking at the health economy situation of the Trust. What is very clear to us, and we have made very public, is that we cannot solve our financial problems on our own.

Q230 Stephen Barclay: So what is the SHA for? Weren’t they looking at your health agreement?

Peter Reading: You would have to ask Sir Neil about that. From our point of view-

Chair: Can you see that, from our point of view, it is all taxpayers’ money? One of you says it is Monitor, one of you says it is the Trust, then it is the SHA, but it is, all the same, taxpayers’ money and we are charged with making sure it works.

Q231 Ian Swales: Just to establish this, let us take the £3.4 million on management support and turnaround: I start from the premise-and a few of us around the table have had experience of consulting in the public sector-that, any time you call those people in, you have to ask what the public sector management are actually doing. In this case, you have the management of the Trust and the management of the NHS, plus the SHA and Monitor. Why have they not got any expertise to come in and do this? Why do they have to commission that amount of work? It is a lot of money.

Peter Reading: As a Trust, we have had a deliberate policy over recent months to wind up all of our consultancy contracts. In October, we spent only £20,000 on consultancy, and that was for a review of nurse staffing. We got an outside body in, because we don’t have the expertise to benchmark, across the country, on nurse staffing. It was part of our efficiency work to do that.

What none of these consultancies have done is look at the opportunities that the Trust has to fill the hospital and therefore spread the costs of the hospital, over the next 30 years of the PFI contracts, across a bigger income base. Our hope is that the work that is being announced today will look in detail at that, build on some of the stuff that the NAO has done and allow us, then, to establish how you make best use of the hospital, because that has to be done on a health economy-wide basis. We cannot, as a Trust, do that on our own.

Q232 Ian Swales: It is a very small example, but on that £20,000 on benchmarking nurse staffing, are you trying to tell us that the NHS has no capacity to do benchmarking of nurse staffing that it shares around? This is one of the massive irritations that we have: every time Sir David Nicholson sits in front of us, we ask him about data and about what his role is, and what the management’s role is, in making the whole service efficient. Now we are hearing the result of what he usually tells us, which is that he does not feel he has a role. So we have people out there, every month, spending money on consulting. It is ludicrous, with the amount of management in the NHS, that there aren’t internal data and resources for you to do that job, and so you have to pay an outside firm to come and do it. I don’t understand it. What do you think, Una?

Una O'Brien: I think you have made the point powerfully in recent times that more needs to be done to share good practice and to share benchmarks. There is also the third area, which we also absolutely understand and is imperative for the group, which is on procurement. We have had the debate about the old model of each organisation doing its own thing, and that imperative to own their own thing, versus the reality of the times we are in, which drive people towards having to use proper, agreed draw-down of contracts negotiated with the NHS as a whole. We are taking all three of those forward, but clearly it has not penetrated nearly far enough.

Q233 Chair: But can I just say to you that today’s hearing has demonstrated people very clearly abrogating responsibility and passing the buck to somebody else? We have had it from Sir Neil, from Dr Bennett and from Dr Reading. Can one of you answer the question that either Ian or Steve asked? Is it not your job, Sir Neil, to know about the local health economy and how Peterborough hospital fits into it?

Sir Neil McKay: Yes, it is. We have talked about that at some length.

Q234 Chair: So why do we need this new bit of work?

Sir Neil McKay: I believe that what is particularly attractive in the new Monitor process is the credibility it gives to the whole of the system, including Foundation Trusts that will be required to participate in the discussion.

Q235 Chair: Why do we need this new bit of work? Just answer the question. We are told that we have to know how Peterborough fits into the health economy, where it cannot work out how to survive. Why can’t you tell them?

Sir Neil McKay: It is a question that requires considerable thought. It requires-

Q236 Chair: That is your role.

Sir Neil McKay: It requires contributions from commissioners, NHS Trusts, Foundation Trusts and a variety of other agencies. The contingency planning team approach is by far and away, I think, under the new legislation next year, the best method I have come across-

Q237 Chair: What is your role? What does an SHA do?

Sir Neil McKay: We have lots of roles.

Q238 Chair: If there isn’t a plan to understand your local health economy and therefore to plan that your provider Trusts have the right amount of capacity to meet demand, I don’t understand what you are doing.

Sir Neil McKay: I am sorry-there is not much else I can say, other than to revert to the previous comment that I made.

Q239 Mr Jackson: We have struggled now for the thick end of three hours to understand what your role is. You collectively, as the Strategic Health Authority with other bodies, have failed properly to plan the health economy of this part of the East of England. And yet you nonchalantly say, "Well, I don’t know what else I can say." In fact, what is the point of you? Frankly, I’m failing to understand what you do if you don’t actually say, "This is not going financially to scrub its face. These are the clinical priorities here across our region." You cannot just say, "Well, it’s up to Monitor or up to the Department."

You have consistently failed properly to address the issues, and your nonchalant approach is mildly irritating, if I may say so, because you should be saying, "We failed. We dropped the ball. We didn’t look at the evidence. There wasn’t a methodology and I apologise." I am sorry that you have not said that, and you need to.

Sir Neil McKay: I am going to run the risk of irritating you even further, because I am going to repeat some of the things that I have said already. In terms of the Peterborough PFI scheme, my board’s responsibility was to attest to whether the commissioners’ activity forecasts looked reasonable, and whether we thought there was an argument for a new hospital in Peterborough because of the circumstances of the city and its needs. We felt that the activity forecasts from the commissioners were reasonable and we were certainly persuaded and convinced that there was a necessity for a hospital in Peterborough.

We also believed, and I have said this amply already today, that there was a case for the continuation-there continues to be a case for the continuation-of a vibrant hospital in Huntingdon called Hinchingbrooke hospital. The two are not counter-intuitive. The two are not inconsistent.

Q240 Chair: They are not counter-intuitive, but they are inconsistent. We have shown that in these two Reports.

Sir Neil McKay: The two can continue to survive. If we look at the population forecasts from the last census, they would suggest that the health needs in this part of the country will significantly increase. It is therefore important that we think about that kind of aspect as well as anything else.

Q241 Stephen Barclay: What is the output expected in your eyes, Sir Neil, of the Monitor review? Is it some sort of carve-up as to who does what? What is the Monitor review to deliver as far as the SHA is concerned?

Sir Neil McKay: This is a new concept. We have limited experience. It has been trialled in one area in Staffordshire. I have to say that the early signs in terms of bringing together interested parties to consider a way forward out of the difficult situation there are promising. I would hope that Monitor’s contingency planning team would bring people around the table in a similar way and help us find solutions for the future.

Q242 Stephen Barclay: I get that they are bringing people together. I am sorry for this, Amyas, but most major consultancy teams actually come in with a load of junior staff-you have the senior staff who sell it, and then a load of junior staff doing the work and taking a view.

What I am really interested in is-and of course we have yet another review with Monitor coming in-what is the output, other than getting people around the table? Dr Reading said very candidly in his letter to me that they are looking actively at mothballing their four state-of-the-art theatres, which, given the cost of the PFI and everything else, does not make sense. We have explored the perceived overcapacity between Hinchingbrooke and Peterborough, but I am trying to understand what the Monitor review is seeking to achieve as far as the SHAs are concerned. We will come on to those, but I am trying to establish what the SHA is for.

Sir Neil McKay: I would like to see the contingency planning team produce a plan for a clinically and financially sustainable future for Peterborough and the other parts of the health care system.

Q243 Chair: And you have no role in that?

Sir Neil McKay: I would expect to be involved in that process for as long as the Strategic Health Authority-

Q244 Chair: Involved to what purpose? If you have no responsibility, what is the point of having you?

Sir Neil McKay: Well, I have responsibilities in terms of commissioner input, and I have responsibilities for NHS Trusts-in other words, the organisations that are not Foundation Trusts .

Q245 Mr Bacon: What is your salary, Sir Neil?

Sir Neil McKay: About £200,000.

Q246 Mr Bacon: Is there a performance bonus on top of that?

Sir Neil McKay: No.

Q247 Ian Swales: The people carrying out this work that we are referring to, are they Monitor staff?

David Bennett: No.

Q248 Ian Swales: So they are consultants?

David Bennett: They are, because we are not staffed-

Q249 Ian Swales: Which consultancy firm?

David Bennett: Well, we will have to run a competitive process to work out who is going to give us best value for money.

Q250 Ian Swales: How much do you think that is going to cost?

David Bennett: I think somewhere between £2 million and £3 million.

Q251 Ian Swales: Gosh. For this small study of nursing, we spend £2 million or £3 million on a huge amount of what is actually intellectual property. How does the NHS actually bring that in-house? Or do we simply have the same big-ticket consultancy going on all over the country?

David Bennett: These are very fair points. Monitor is not staffed to deal with big issues like this. Our running costs for looking after 144 Foundation Trusts are about £16 million, which is slightly over £100,000 per Trust, so we are not equipped to deal with major issues of this sort. There is some specific expertise that we do not yet have. However, one of the things I am doing as we adapt to our new role is to bring more of this in-house. Over time, we have to do more of that. I think far too much is spent on management consultants to do work that really should be done in-house.

Q252 Ian Swales: Part of the challenge is Mr Barclay’s question: when you are putting this out to tender, what is the headline? What are you actually asking people to tender against?

David Bennett: We are asking them to do five things. First, they just have to confirm the cost outlook in the Trust. The Trusts have been working hard on ensuring that they get this cost as low as possible, while protecting the quality of service.

Q253 Ian Swales: So the financial forecasting.

David Bennett: So we just need to check that, and it is only right that we do due diligence on that. Secondly, and Peter has already referred to this, we need to look with the Trust and with the Department at what options there are to reduce the cost of the PFI. There are some things that might reduce the day-to-day costs of PFI, but I think there are some bigger opportunities, and we at least need to have a look to see whether we can reduce them. The third thing that we need it to do-

Q254 Stephen Barclay: Sorry, just on that, Dr Bennett, the Department of Health’s own pilot suggested that-we explored this in the previous hearing, and I asked for a note on it-there is 5% of a quarter of the contract in play. There is very little scope to renegotiate on that second point.

David Bennett: The sort of thing we need to look at is not just the contract but what lies behind it. For example, some of these PFIs are funded by publicly traded bonds. Can you buy the bonds and take hold of the contract in that way?

Q255 Stephen Barclay: So you can buy the bonds on the secondary market.

David Bennett: Exactly. I am not saying I know what the answer is, but I am saying that I think we need to look at it. If that is a better way of reducing the costs of PFI, we should look at it. That is the second thing that we need to do.

The third thing we need to do is look at the outlook of the commissioners. As Peter says, the relationship between the commissioners and the Trust has improved, but we still need to ensure that we have as good a picture of the likely revenues to come from the commissioner as possible because, obviously, that determines the gap that we are looking at.

The fourth thing is to look more widely beyond the immediate commissioners. Again, as Peter said, there are issues across the local health economy that we should look at. You talked at length about the relationship between Hinchingbrooke and Peterborough, for example. We need to see whether there is something that we can do there.

Q256 Ian Swales: The thing that strikes me is that-sorry, we have not heard the fifth.

David Bennett: The fifth is that you do all of that and you finish up with how big the gap is and then we have to work out the best way to fill the gap.

Q257 Ian Swales: I have to say, given the number of highly paid managers staring at this, it is incredible that you need to pay £2 million or £3 million to do what are largely management activities, supported by accountants: things like talking to your customers about the likely demand and so on. This is not rocket science; this is about managers taking responsibility for what they manage and going out and talking to their suppliers and customers. It is unbelievable.

David Bennett: I support Mr Jackson’s point. Peter and his team, who inherited this problem, are doing as best a job as they can to fix it, but there are limits to their capacity. They are trying to run a sizable hospital and fix the problems within the hospital itself. We need extra capacity to deal with the surrounding issues and that is what this is meant to do.

Q258 Chair: Dr Bennett, you are putting this in the context of the Nicholson challenge of £20 billion and you know, because the Chancellor said so in his autumn statement, that there will be further cuts, so there will be less money. In the end, you will have to fill a gap to keep Peterborough open.

David Bennett: Yes.

Q259 Chair: That will mean a continuing public subsidy to this Foundation Trust.

David Bennett: Yes.

Q260 Chair: And you accept that?

David Bennett: I think it is unavoidable. The decision to sign the contract for the PFI has led us to where we are. That contract is signed.

Q261 Chair: I’m not sure it is just that; it is also that there is too much acute hospital provision in an area that we know-whatever this greatest, latest £2 million or £3 million study tells us-will mean that you will have too many places and too many beds for too few people.

David Bennett: That looks very likely to be the situation. We need to work out what is the very best we can do, which is why I say that we should at least look-

Chair: I don’t think it is a job for you; it is a job for Una and Sir Neil. Austin, finally. You have been really patient.

Q262 Austin Mitchell: I have been very patient. I am as silent as Monitor was in 2007. I want to go back to that, because I am not clear how Monitor reached its assessment that there were problems with this contract. You gave fair warning to the Department, but do you look just at the figures, or do you look at the competence of the financial management within the Trust?

David Bennett: Yes, we do look at that.

Q263 Austin Mitchell: Do you talk to them? Do you go down to assess them?

David Bennett: Absolutely. We will talk to most Trusts at least every month, and with a Trust like this, we would probably be having daily conversations.

Q264 Austin Mitchell: Were you happy with the financial competence of that Trust?

David Bennett: We weren’t happy with the proposal. That is why we wrote twice and said that we had significant concerns about it. We were not happy with it.

Q265 Austin Mitchell: Sir Neil, was the Strategic Health Authority happy with the financial competence of the Trust?

Sir Neil McKay: The point at which we became aware, as other people did, about the financial-

Q266 Austin Mitchell: Were you happy, or were you not? Did you look at it?

Sir Neil McKay: It was not our responsibility to do that. We do not have responsibility. Legal responsibility does not rest with the Strategic Health Authority to make judgments about the financial competence of a Foundation Trust.

Q267 Austin Mitchell: That’s extraordinary. Here was a problem where you have a number of regulators looking at it. They do not talk to each other or listen to each other, and as a result, they have to call in consultancy houses. I am sure that the national association for the prevention of cruelty to the big four accountancy houses, which is also spelt ICAEW, will be very happy to hear what has been spent, but it is surely the job of somebody in the health service to look at the competence of the management. You are the Strategic Health Authority.

Sir Neil McKay: At the risk of being irritating, Mr Mitchell, I repeat again-

Austin Mitchell: I don’t get irritated; I am very benign.

Sir Neil McKay: I realise. The Strategic Health Authority does not have any legal powers whatever in management of a Foundation Trust. We have no locus in terms of management competence within a Foundation Trust-that is a matter for others, not the Strategic Health Authority.

Q268 Austin Mitchell: Just one more question: why did the Department fix on 15% of turnover as the maximum that could be paid for PFI? How was that figure reached? It does not seem to apply, on the figures, until well into the contract.

Una O'Brien: What I have been able to understand is that 15% was a norm that had been developed over the period running up to 2007, which was applied to PFI final business case assessments.

Q269 Austin Mitchell: Was it reduced subsequently?

Una O'Brien: It was; it has been reduced to 12.5%.

Chair: Stewart, a final word.

Mr Jackson: As I said at the beginning, this is one of the most appalling reports of incompetence. Would that we could just close the book and say, "Well, it’s all over", but it is not-it is a nightmare that is continuing, with the no doubt laudable decision to send in another group of consultants to sort out the financial position, at huge cost to the public purse.

From my point of view, it is an issue that the Treasury needs to look at, but the Department and in particular the Strategic Health Authority have to learn some very important lessons. There was absolutely no accountability. There were letters written; there were memos written; there were different groups of consultants sent in; and yet no one was reading anything and everyone was blaming the lowest common denominator, which is the board, and my constituents, Mr Barclay’s constituents and the taxpayer have to pick up the bill.

I have to say, this should never ever happen again, because it is a financial disaster for value for money and for taxpayers. I hope that procedures are put in place so that, at the very least, you have a good idea of the health care economy in your part of the region or the country, because it is simply unacceptable to say, "We couldn’t predict it," or "It just happened." It did not just happen, and people were paid a lot of money, so it should have been foreseen.

Finally, finally, I think you may very well rue the day you franchised Hinchingbrooke hospital, because in that decision you have undermined the financial viability of, perhaps, not just Peterborough but other hospitals as well. We should think very carefully about the involvement of the Department and the value judgment made to franchise and not to give it to another senior management team.

Chair: Thank you.