9.2 PFI payments at the NNUH

The published accounts for each year identify the operating expenses consisting of total PFI payments. These are given in slightly more detail (as provided by the NNUH Trust in emails to me) in table 9.3 below.

The table shows the average fees paid over the six full, PFI years from 2002/03 to 2007/08 inclusive. The averages, in 2007 prices, are £29.4 million for rent, £3.0 million for maintenance and £10 million for Group A of Facilities and Management Services (FMS). The average for Group B of FMS is not calculated since the fees for these services have not been paid since 2003/04.

By how much have the rent, maintenance and service (Group A) costs risen as a result of the PFI contract?

Firstly consider the rent. The average rent paid over the six full, PFI years is £29.4 million a year in 2007 prices. This can be compared with an estimated rent paid by the NNUH Trust in the years before the PFI contract (and again in 2007 prices) of £11.4 million a year.

How is this estimate of £11.4 mn derived? In 1995, at the time that the new hospital was approved, the newly-created Trust (the Norfolk and Norwich Health Care Trust (NNHCT)27 decided not to take on the ownership of the old hospitals, deciding instead to rent them back from the Secretary of State for Health (see Appendix 1.3). This resulted in fixed assets with a value of £68 million being written off the Trust's Balance Sheet and an annual rise in the Premises cost of £8.4 million (the Premises cost rose from £4.4 mn in 1994/95 to £12.8 mn in 1995/96 - see table 9.1). This was a rise from 4% of total NNUHT costs in 1994/95 to 11% in 1995/96.

The annual rent given in the Full Business Case of 1996 was £6.347 mn. (see NNHCT 1996, 42, 43). This is about £2 mn lower than the increase of £8.4 mn in the 'Premises' cost between 1994/95 and 1995/96. But here we assume that the whole of the increase in 'Premises' cost between 1994/95 and 1995/96 was represented by the rent. In 2007 prices (as shown in Table 9.1) this was £11.4 mn

So here the assumption is that the rent payable in 1995/96 but in 2007 prices was £11.4 mn a year. This is assumed to have been the annual rent that was being paid over the five years before the PFI contract.

Assuming that this £11.4 mn was the rent being paid in 2000/01 (the last full year before PFI), the rise in rent as a result of the PFI is £18.0 mn a year (£29.4 mn less £11.4 mn)

Of course, advocates of PFI may well argue that an annual rent of £11.4 mn (in 2007 prices) between 1995/96 and 2000/01 is far too small a sum to sustain the old hospitals and that the PFI rent should be compared with a higher figure. PFI advocates would doubtless argue that there was a need for substantial renovations at the old hospitals, if not a complete rebuilding.

It is true that if the new hospital had not been built, a lot of money would have had to have been spent on repairing the old hospitals. There was a backlog of maintenance, particularly at the old St Stephen's hospital in Norwich. Thus in the Outline Business Case of 1994, it is stated that; "[a] substantial investment of circa £20 million is required to eliminate backlog maintenance" (NNHCT 1994, 23). In September 2007 prices this is equivalent to about £29 mn.

But as noted, from 1995/96, the NNUH Trust was paying at least £11.4 mn a year (in 2007 prices) to the NHS as a rent for the old hospitals. I say at least because it is not clear what capital charge (if any) the NNUH was paying in 1994/95. But even if we stick to a rent of £11.4 mn, this would have been more than sufficient to replace the old hospitals.

It would have been sufficient because over the life of a hospital (assumed to be 35 years), a rent of £11.4 mn a year would add up to a total of £399 mn. Even if we discount the £11.4 mn at the Treasury's discount rate of 3.5 per cent per annum, the increase in rent would sum (over the 35 years) to £222.8 million28.

Such a total would have been more than enough to pay for a new hospital. Note that the base construction cost of the new hospital, the NNUH, was £159 million (NAO, June 2005, 18). This was the construction cost in 1998. In 1998 prices the annual rent being paid was £9.0 mn. An annual rent of £9.0 mn discounted over 35 years would amount to £180 mn more than enough to pay for the hospital costing £159 mn. Thus it is fair to say that in the run-up to the PFI contract, the Trust was already paying enough to replace the old hospitals.

Thus the amount paid in the form of rent under the PFI contract has increased dramatically from pre-PFI days and it is clear that under the PFI contract, the NNUH Trust is paying in rent many times the construction cost of the new hospital.

As we have seen, the average annual rent which has been paid over the six full years since PFI has been £29.4 million in 2007 prices. If we project this rent of £29.4 million through to 2037 (the first break year of the contract), this will mean that the total rent paid over the whole 35 year PFI period (that is, from 2002/03) will be £29.4 million multiplied by 35 years equals £1,029 million.

This could be said to be equivalent to 1029/159 = 6.5 times the base construction cost of the new hospital, but in fact this comparison is invalid for two reasons. Firstly money today is worth more than money tomorrow so we need to discount the rental payments at the Treasury's discount rate, namely 3.5 per cent per annum. Secondly the new hospital was constructed in 1998 whereas the above £1,029 million is at 2007 prices.

For the first adjustment, we need to discount the rent of £29.4 million (in 2007 prices) over 35 years at the Treasury's discount rate of 3.5 per cent per annum, and the 'present value' of this is £588.8 million.

The second adjustment is to change the present value of the rent from 2007 prices to 1998 prices in order to match the 1998 construction date. Thus £588.8 mn in 2007 prices reduces to £465 mn. in 1998 prices.

Now the rent which is being paid for the NNUH hospital is (even on a discounted basis) equal to £465mn/£159 mn. equals 2.9 times the base construction cost of the hospital.

To put this another way, we can calculate the annual rent which would have to be paid (in 1998 prices) to recover a construction cost (again in 1998 prices) of £159 million over 35 years at the government's discount rate of 3.5 per cent per annum. This would be the cost (£159 million) divided by the cumulative discount factor at 3.5 per cent pa over 35 years. The cumulative discount factor is 20, so the annual rent would equal £8.0 mn. This is the 'replacement' rent. The actual rent paid over the 2001/02 to 2007/08 period and in 1998 prices (to match the construction date of the hospital) has been £23.2 mn. This is (again) 2.9 times as high as the 'replacement' rent.

Thus the annual rent paid under the PFI contract has been £18 million higher than the annual rent paid before the PFI contract.

However it may not have been just the rent which has been higher under the PFI contract. Maintenance costs and the costs of services may also be very much higher. Unfortunately without having access to more detailed accounts in the years before the PFI contract - that is for 2000/01 and previously - it is impossible to say by how much these costs have increased compared to the pre-PFI period. Therefore we do not know whether the average annual maintenance payment of £3.0 million and the average annual Group A services payment of £10 million (both in 2007 prices) are very much higher than the costs incurred for the same items before the PFI contract.

So to recap. The rise in operating costs (in money of the day) over the seven years between 2000/01 (the last complete financial year before the PFI contract kicked in) and 2007/08 (the latest financial year for which accounts are available) has been £167.8 mn (calculated from table 9.1). In fact if the PFI set-up costs incurred by the NNUH in 2000/01 (of £2.2 mn.) are excluded, the increase has been from £153.2 mn in 2000/01 to £323.2 mn in 2007/08 - a rise of exactly £170 mn. Thus, over these seven years, total operating costs have more than doubled. The annual increase over the seven years (and in money of the day) has been more than 11 per cent.

However we have already pointed out that the increase as measured in real terms (at 2007 prices) has been smaller than this, as is to be expected. The general rise in prices, measured here by the retail price index, has (over these seven years) been about 21.2 per cent (since the retail price index has risen from 82.5 to 100 - again see Table 9.1). This means that the total operating costs in 2000/01 (excluding PFI set-up costs) of £153.2 mn are equivalent to £185.7 mn in 2007 prices. Thus the rise in the general price level accounts for £32.5 mn of the £170 mn increase. We are left with £137.5 mn to explain

The increase in rent over the same seven years would seem to have been £29.4 mn (the rent in 2007/08) less £11.4 mn. Therefore the rental increase is £18.0 mn. The rise in costs left to explain is £137.5 mn minus £18.0 mn equals 119.5 mn. What explains this remaining £119.5 mn increase in the NNUH's operating costs? Is any of this due to the PFI contract?

The next section carries out an analysis of the post-PFI costs in an attempt to answer this question.

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27 . The NNHC Trust was created in April 1994. It then became the NNUH Trust in January 2001 (see Appendix 1.3 and 1.8)

28 . The cumulative discount factor over 35 years at 3.5 per cent per annum is about 20.