Press Notice No. 35 of Session 2005-06, dated 3 May 2006
THIRTY-FIFTH REPORT: THE REFINANCING OF THE NORFOLK AND NORWICH PFI HOSPITAL (HC 694)
Mr Edward Leigh MP, Chairman of the Committee of Public Accounts, said today:
"The refinancing of the Norfolk and Norwich PFI hospital project lined the pockets of the investors in Octagon, the private sector consortium involved in the project. Given the substantially greater risks it incurred, the public sector didn't fare so well, with the local NHS Trust securing the right to only 29% of the £116 million refinancing gain. This was a poor deal.
"The Trust might now have to pay up to £257 million pounds more if it needs to terminate the contract early. This is taxpayers' money and the risk of this large liability was incurred essentially so that investors could have fatter returns. The Trust has also taken a step in the dark in agreeing to extend the minimum period of the PFI contract to 2037. It is surely impossible to predict so far in advance the nature and extent of the services that might be needed.
"Even though this was an early PFI deal, it is hard to escape the conclusion that the staff managing the project were not up to the rough and tumble of negotiating refinancing proposals with the private sector. Such staff should be trained to understand refinancing issues which can be highly complex and should appoint experienced advisers to help in robustly negotiated refinancings.
"My Committee would not expect to see appearing before it another Accounting Officer defending what we believe to be the unacceptable face of capitalism. Such a face was shown by this private sector consortium in its dealings with the public sector."
Mr Leigh was speaking as the Committee published its 35th Report of this Session which examined how this PFI deal should be viewed in the light of the refinancing and the implications of these refinancing arrangements for other PFI deals.
In 1998, the Norfolk & Norwich University Hospital NHS Trust (the Trust) let one of the first PFI hospital contracts to a private sector consortium Octagon. In 2003, just two years after the new hospital opened, Octagon refinanced the project, dramatically increasing its investors' rate of return to over three times the level Octagon had predicted when bidding for the contract. The Trust only received 29% of the refinancing gains despite taking on substantial new risks following the refinancing.
Octagon achieved this outcome by increasing its borrowings by 53% from £200 million to £306 million. Octagon then used the increased funds to accelerate the financial benefits which the investors would receive from the project. After other financing adjustments, the total refinancing gain was £116 million. £82 million of the gain was retained by Octagon increasing its investors' internal rate of return, which it had said would be 19% when it bid for the contract, to 60%.
In securing the right to receive £34 million of the gains the Trust accepted that the money it would have to pay to end the contract early could increase by up to £257 million following the refinancing as its termination liabilities are related to the amount of Octagon's outstanding borrowings. The Trust also agreed to extend the PFI contract from 34 to 39 years and to receive its share of the refinancing gains over the life of the contract, rather than as an immediate payment.
In summary, the Committee's conclusions and recommendations are as follows:
The opportunity for large refinancing gains on this early PFI deal does not seem to have been seriously considered as part of the original deal negotiations. Yet, through simply borrowing more, the benefits to Octagon's investors have soared on refinancing to levels which are unacceptable even for an early PFI deal.
The Trust further contributed to the inappropriate outcome by accepting that, should it wish to end this contract early, its liabilities could now include all the additional borrowings Octagon used to boost its investors' returns.
The Committee would not expect to see another Accounting Officer appearing before it defending what the Committee believes to be the unacceptable face of capitalism in the consortium's dealings with the public sector.
to view Report