What, if anything, can be done? After all, the NNUH is in its eighth year of payments for the PFI contract and, up to the end of the 2007/08 financial year, had already paid a total of £197 million in rent (in 2007 prices) to Octagon Healthcare35. Furthermore, given the bad deal struck over the project initially and made worse under the refinancing arrangements, it might seem odd that it could still be worthwhile to buy out the contract. This is until it is realised that, given the rent of the building (an average over the past six years of £29.4 a year in 2007 prices) and the first break point in the contract (in the year 2037), the amount payable over the next 28 years (from now, 2009, to 2037) is £823 million (again at 2007 prices).
It is, of course, not the case that the savings from the buy-out would be as large as £823 million. This is because the liabilities of the Octagon Healthcare Group Limited have to be bought out, and bought out immediately whereas the savings from the rent would only be realised year-by-year over the next 28 years. Therefore the rent payable has to be discounted to a 'present value' to allow for the fact that money today is worth more than money tomorrow. Then Octagon's liabilities need to be deducted from this 'present value'.
The discount rate that it seems sensible to use is the discount rate used by the UK Treasury, namely 3.5 per cent per annum. Over 28 years, the cumulative discount factor at 3.5 per cent per annum is about 17.6. Thus the present value of the saving in rent between now and 2037 would amount to £29.4 million multiplied by 17.6 equals £517 million.
What would the NNUH have to pay to Octagon Healthcare? According to figure 4 on page 11 of the report of the Committee of Public Accounts (PAC, 2006), the amount payable now - in 2009 - would be about £300 million36. It is clear that buying out the contract now would save the NHS (and therefore the Government and taxpayer) about £217 million (the £517 million saving in rent, as discounted, minus the £300 million of Octagon's liabilities).
Therefore in spite of having already spent £197 million in rent for the hospital and in spite of having to buy out £300 million of Octagon Healthcare's liabilities, the taxpayer would still save £217 million by buying out the NNUH contract. This is for a hospital the basic construction cost of which in the late-1990s was £158 million. All of which goes to show what an appalling waste of money the PFI contract has been.7
Furthermore it is important to note that the saving in the rent may not be the only saving that can be made by buying out the Octagon contract. If the contract is bought out, there may also be savings in building maintenance and service costs (catering, portering, etc) plus savings from not having to buy more expensive treatment from private hospitals in the region if, following the buy-out, more wards were built at the NNUH.
Therefore my recommendation is that the Government should buy out the PFI contract at the NNUH and then expand the NNUH by as much as 100 beds. The latter would mean that not only would treatment no longer have to be purchased at higher unit cost from private hospitals in the region but also that the NNUH would reduce its very high occupancy rates. Efficiency and staff morale would both be improved.
If there is a case for buying out the NNUH contract, there may be a case for buying out the PFI contracts at other hospitals.
On the one hand, the case for others being bought out is likely to be weaker insofar as the NNUH was an exceptionally bad PFI deal. For example in its report on the NNUH refinancing, the National Audit Office pointed out that "although the Trust has received a share of the refinancing gains, it continues to pay a premium on the financing costs compared to current deals" (NAO, June 2005, 3).
On the other hand, other buy-backs might be equally attractive, given that other PFI hospital schemes are more recent than the NNUH and therefore there are likely to be more years of rent to save. Furthermore, as noted above, because of the refinancing arrangements at the NNUH, the liabilities of Octagon Healthcare were increased so that the cost of buying out the contract may very well be higher at NNUH than at other PFI hospitals.
Therefore buying out PFI hospital contracts may well generate large expenditure savings for the Government. Of course it is hardly likely that the Gordon Brown government will buy them out. Such a u-turn is unlikely. But, at the very least, future PFI programmes should be cut back so as to avoid even higher costs in the future.
35. It paid out £17.1 million in the (part-PFI) year ending 2001/02, plus (and as shown in table 9.3) a further £162.3 million in the subsequent six years (2002/03 to 2007/08). At 2007 prices, these payments are equivalent to £196.8 million, rounded to £197 million in the text above
36. This is in line with figures from the balance sheets of Octagon Healthcare Group. In the latest balance sheet available (that is, for December 31, 2007,) Octagon's long-term liabilities totalled £316 million. But these were £18 million less than a year previously so that as of 31 December 2008 they may well have been close to £300 million.