Buying out PFI hospital could save £217m

5 Jun 09
The NHS could save more than £200m if it bought out a high-profile Private Finance Initiative hospital deal, research has revealed

By Tash Shifrin

05 June 2009

The NHS could save more than £200m if it bought out a high-profile Private Finance Initiative hospital deal, research has revealed.

The study of the PFI deal at Norfolk & Norwich University Hospital argued that a buyout would require a payment of around £300m to private sector consortium Octagon, but would still release savings of £217m.

The Norfolk and Norwich PFI has long been controversial and was heavily criticised by the National Audit Office and the Commons Public Accounts Committee.

In 2006, PAC chair Edward Leigh slammed the refinancing of the deal, which ‘lined the pockets’ of Octagon’s investors, while providing the public sector with only 29% of the £116m gain. That deal deferred the first contract break-point to 2037 and increased the potential cost of terminating the contract early by up to £257m, the PAC found.

But study author Chris Edwards, a senior fellow at the University of East Anglia, said 28 years’ rent on the hospital building would cost £823m (at 2007 prices). He calculated that ‘discounting’ the future rent payments to their present value, using the Treasury’s 3.5% discount rate, meant the saving in rent between now and 2037 would amount to £517m.

A further £300m – the buyout payment to Octagon – would have to be deducted from this figure.

‘Therefore, in spite of having already spent £197m in rent for the hospital and in spite of having to buy out £300m of Octagon Healthcare’s liabilities, the taxpayer would still save £217m by buying out the contract,’ the research, published on June 1, said.

‘This is for a hospital the basic construction cost of which in the late 1990s was £158m.’

Edwards told Public Finance there ‘might be a case’ for buying out PFI contracts at other hospitals, but the case might be weaker because Norfolk & Norwich was ‘an exceptionally bad PFI deal’. However, more recent PFI deals would be likely to offer ‘more years of rent to save’.

Edwards told PF that a full contract buyout would cost ‘£6bn for all the PFI hospitals, not an incredible amount of money compared with bailing out the banks’.

But he added that it was ‘unlikely’ that the government would do a U-turn on the PFI policy championed by Prime Minister Gordon Brown.

A spokesman for Norfolk & Norwich University Hospitals Foundation NHS Trust said a buyout was ‘simply not feasible’. He added: ‘Given the sums of money the government is committing to supporting the wider economy and banking sector, it is extremely unlikely that the money is there to pay off any PFI scheme.’

The hospital had cost £229m to build, not the £158m cited by Edwards, he said, adding: ‘There is also a danger the calculations in this report ignore the fact that much of our spend on PFI would still need to be incurred on services such as catering, cleaning, maintenance and security.’

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