The Norfolk and Norwich University Hospital (NNUH) was among the earliest of the major hospitals to be built under the PFI. In this chapter, I give a brief summary of the history of the NNUH - a more detailed history of the hospital is given in Appendix 1 at the end of this report.
The new NNUH hospital replaced two existing, Norwich-based hospitals. The main one was the St.Stephen's hospital, less than a mile from the city centre. The second, smaller one was the West Norwich hospital, less than two miles from the city centre. In the 1980s, it was recognised that the St Stephen's hospital was in need of renovation, but there was considerable controversy about whether it should be or whether a new hospital should be built further from the centre of the city. After strong pressure from some of the consultants at the hospital, from the Vice-Chancellor of the University of East Anglia and other influential figures, pressure built up behind a new Norfolk and Norwich University Hospital (NNUH) on a greenfield site at Colney, on the western outskirts of Norwich close to the University of East Anglia and next to the Research Park. As a result of this pressure from influential figures, by the end of the 1980s, the site at Colney had emerged as a preferred site for a new hospital, but with the city centre hospital being retained24.
However there were worries about two aspects of these proposals. One was having two major hospitals quite close together but on different sites; the second was about the number of beds required. The choice of the site at Colney was to be clinched by the drive for the Private Finance Initiative (PFI) in the 1990s.
By 1994, at about the same time as the formation of the Norfolk and Norwich Health Care NHS Trust (NNHCT), an Outline Business Case (OBC) was submitted for a hospital to be built under the PFI. This OBC proposed a hospital with 701 beds, a huge drop from a total of 1650 beds under a 1989 proposal.
Thus, in five years, the number of beds thought to be needed had more than halved. There were two possible explanations for this massive drop. One was changes in clinical practice - patients were increasingly being treated on a day-care basis and the average length of stay was dropping. This was true but there is also a strong claim that the hospital size was squeezed to make an expensive private sector option affordable. This suspicion is strengthened by three factors;
• a number of similar downsizing proposals were being made across the UK for other PFI hospital proposals25;
• the 701 beds was the minimum number thought to be required in a study done for the East Anglian area by the Department of Health in 1994
• a discussion about the NNUH at the Select Committee on Health in 1999 indicated that 'affordability' was a major factor
In 1995 a 701-bed, PFI hospital was approved by the NHS Executive on the basis of a recommendation from an Outline Business Case. In the following year, the proposed size was raised to 809 beds and in 1998 a financial contract was signed with Octagon Healthcare to build a hospital of 809 beds. This contract was amended in 1999 to a hospital with 953 beds.
Thus by the mid-1990s, it was clear that if the Norfolk and Norwich Hospital Trust was to get an improved hospital, it would have to be a new PFI hospital regardless of the expense. The 1996 Full Business Case and the comparison of the PFI with the Public Service Comparator was a shambles and there are three reasons why I have no confidence that the PFI version was likely to be better than a publicly-financed one. Firstly the publicly-available versions of the Business Cases have omitted (on grounds of 'commercial confidentiality') the detailed comparisons of the cost of the PFI version and the Public Sector Comparator (PSC); secondly much larger additions seem to have been made to the base PSC cost to cover optimism bias than recommended by the Department of Health; and thirdly in the only case where detailed figures have been given (for the additional 144 beds), by far the best value for money is given by the PSC when the Treasury's latest recommended rate of discount (of 3.5% pa) is used. As the Chair of the Select Committee on Health put it in 1999; ".. the full business case does not tell us the full business case" (House of Commons Health Committee 1999 - see section 5 of the appendix for more details). The conclusion must be that (as for other PFI hospitals across the country) the value for money tests using with (PFI) and without (PSC) comparisons carried out for the NNUH are highly questionable (see also Edwards P et al 2004, 203).
The case was fiddled as was the number of beds stated to be required. Whereas in 1989 the required number was stated to be 1650, this had dropped to 701 in 1995 so that the PFI contract would be 'affordable'. Then, once approval had been given for the PFI contract, the number thought to be needed went back up again o close to a thousand by the late 1990s. According to the NNUH Trust website (accessed in February 2008), the hospital at Colney now has 987 beds in 27 wards, about 18% fewer than the two hospitals that it replaced.
In November 1996, the Trust and Octagon Healthcare signed a commercial contract for the construction of the hospital but the signing of the financial contract was delayed until after the 1997 election and the change in legislation which meant that the companies financing hospitals carried less risk. Construction work under Octagon Healthcare started in 1998 and the first phase of the hospital (809 beds) was completed in late 2001. The second phase of the move began in late 2002 and the move from the old hospitals was completed in January 2003. The NNUH was opened officially in February 2004. In September 2002 a medical school had been initiated as part of a joint venture between the NNUH Trust and other agencies.
The accounts of the NNUH Trust give the value of the project as £229 mn. This is £70 mn more than the basic construction cost of £159 mn as given by the National Audit Office (NAO, June 2005, 18). As pointed out in chapter 7 above, about £17 mn of the £70 mn difference consisted of the cost of highways, IT hardware and catering and other service equipment but at least £19 mn consisted of 'transaction costs' including the consortium's tender cost of £6.6 mn and a 'financing cost' of £5.7 mn.
In December 2003, the NNUH project was refinanced by Octagon Healthcare. The windfall profit arising from the use of cheaper bond finance rather than bank finance totalled £129 mn of which the immediate gain to Octagon Healthcare's equity shareholders was £95 mn. an immense gain to these shareholders who had initially contributed just over £1 mn (£1,325,000 to be precise) since the project had been financed overwhelmingly by long-term, fixed rate finance. The balance of the windfall gain - namely £34 mn. or 26% of the total - accrued to the NNUH Trust, spread over the rest of contract period. The latter he contract period as extended so that the first break point in the contract became the year 2037 rather than the year 2032. In looking at the refinancing, the Chair of the Public Accounts Committee referred to it as the "unacceptable face of capitalism".
The Public Accounts Committee was concerned not only about the very high rate of return to Octagon Healthcare but also about the way in which the extended contract tied the Trust's hands. If the Trust wishes to terminate the contract early, the liabilities would include all the higher borrowings that Octagon Healthcare had taken on. Thus if, in 2008, the Trust wished to end the contract, it would have to pay off £300 mn in liabilities bout double the amount due in 2008 under the old contract (see section 10 of Appendix 1). Clearly as the Public Accounts Committee pointed out, the refinancing deal was a poor one, but it is equally unsurprising that Richard Jewson (chair of Octagon at the time) was reported as saying that "we are pleased that the refinancing has been signed".
This, then, is a brief history of the NNUH. As stated, more details are given in Appendix 1. But here, I continue the analysis of the NNUH by carrying out a before-and-after comparison of the project; that is I compare the Trust's costs before the advent of the PFI with what comes after. There are obvious difficulties in carrying out such a before-and-after test; firstly, the PFI hospitals have been completed only fairly recently so there is little history (see Edwards P et al 2004, 142); secondly, in carrying out a before-and-after test, there are difficulties controlling for changes in conditions over time. Nevertheless in the next chapter, I try to control for such changes.
24 In 1989/90, land at Colney was sold to the Regional Health Authority by Mr Kemp of Thickthorn Farm. Since the construction of the NNUH, planning approval has been given for a link road and a large (750 house) development on the land between the hospital and the A11 highway (see the box in Appendix 1, that is Box A1.1).
25 Pollock et al (1999) reported that "all of the first wave of PFI hospitals, for which figures are available, involve reductions in the number of beds" (quoted in Shaw 2004, 68)