A1.5  The Full Business Case of 1996 alue for money or fiddling the figures?

In 1995, approval had been given for a 701-bed hospital at Colney, but in 1996, planning permission had to be re-sought since the 1988 planning permission had by now lapsed and in any case new factors such as the closure of St Stephen's were involved (Greenaway et al April 2004, 12). The Keep Our Hospital In Norwich (KOHIN) campaign (formed in 1996) gained some publicity by persuading Michael Innes, a respected local architect, to demonstrate how it would be possible to renovate the St Stephen's hospital, with adequate car parking, on the existing site (Greenaway et al April 2004, 12; see also Eastern Evening News, 24 April 1997). But powerful Norfolk-based interests were by now in favour of the Colney Lane site (see Greenaway et al April 2004, 13) as was the South Norfolk District Council (SNDC). In 1995 the South Norfolk Planning Officer had written to John MacGregor (MP for South Norfolk) that "my brief is to do everything possible to secure the approval of the hospital proposal on the Colney site" and, in 1996, at a SNDC planning meeting discussing the Colney site, the chair of the Norwich City Planning Committee had been allowed only three minutes to present the concerns of the City Council (Greenaway et al 2007, 728 and 731).

Thus, in early 1996, a Full Business Case (FBC) was submitted by the NNHC Trust for a new District General Hospitalm, this time with 809 beds, to be built at Colney Lane and financed by Octagon Healthcare (NNHCT 1996,4). The hospital was expected to be completed by 31 December 1999 with the contract running for 60 years (NNHCT 1996). The terms on which the Trust could terminate the contract were (at this stage) not clear. The FBC implied that the Trust would have the right to terminate the headlease after 30 years on payment of £10 mn (in 1/4/95 prices) to Octagon Healthcare (NNHCT 1996, 36), whereas from the Select Committee on Health hearings about the NNUH, it seemed that the Trust could pull out after 30 years and lose nothing (UK Parliament May 1999, paragraph 70). If the Trust did not want to terminate the contract after 30 years and instead let it run for 60 years, it was stated that the block contract value of the usage fee payments would be reduced by 65% for the remaining 30 years of the contract period (NNHCT 1996, 38).

The financial calculations for the FBC were done by Hambros Bank Ltd., the principal adviser to the Trust, but the FBC was a confusing and confused report. The NPV (at 6% pa) of costs (all costs, including clinical costs) for the Public Sector Comparator (PSC) was given as £1.64 bn only about £10 mn (or 0.6%) more than the NPV of costs for the Privately Financed Option (PFO) (NNHCT 1996, paragraph 602)41. The cash flows and the present values (at a discount rate of 6% pa) of the two alternatives were set out on pages 42 and 43 of the FBC.

It is pretty obvious that the figures were manipulated by Hambros and the Trust to make the Privately Financed Option (PFO) appear to be the best option. First the construction period of the Public Sector Comparator (PSC) was assumed to be about twice as long as that of the PFO (NNHCT, 1996, 42, 43). In spite of the 6% pa discount rate, this longer construction period added to the PSC's present value because of the 6.15% annual inflation rate assumed for the PSC capital costs, the annual rent of £6.347 mn. charged on the old hospitals and the higher operating expenses assumed for the old hospitals (NNHCT 1996, 43 and Appendix 4). Clearly though, this longer construction period was by no means sufficient to make the PFO the best option. A second adjustment had to be made. A cost overrun of 34.22% was assumed for the PSC (NNHCT 1996, appendix4). Note the precision of this. Not 34%. Nor 35%. But 34.22%. This was sufficient to push the PSC capital cost (excluding equipment costs) up from £108.4 mn to £145.5 mn. The £145.5 mn was then raised to £223.3 mn by the assumed inflation in building costs (over and above the retail price index) of 6.15% pa. (NNHCT 1996, appendix 4).

As we have seen, the two adjustments together were just sufficient to make the private option the best one. But only just. The private option had to be best since the public sector alternative was not a real alternative. The government were not intending to finance the new hospital.

The capital costs of the PFO were not given separately in the Full Business Case (FBC). Instead, in the FBC, the capital costs were charged through an annual usage fee (for example £20.1 mn for the year ending 31 March 2001) included with the other annual operating expenses (including an annual service fee of £8.8 mn for the year ending 31/3/2001). However some details of the capital costs of the PFO can be derived from the Minutes of Evidence of the Select Committee on Health. As shown below (in table A1.1) these are shown as totalling £214 million.

In brief, the 1996 Full Business Case (FBC) was a shambles. Many times the Select Committee on Health complained about the Norfolk and Norwich Health Care Trust being excessively secret in its presentation of the FBC (see UK Parliament May 1999 paragraphs 31, 42). Even now, in 2009, the first page of the copy of the Full Business Case, available in the public library, is stamped with "Confirmed for Public Use". As the Chair of the Select Committee on Health put it; "In other words, the full business case does not tell us the full business case" (UK Parliament May 1999, para 20)

41 It is worth noting that at a 3.5% pa rate of discount (the rate now used by the Treasury), the present value of the PSC cost would have been £25 mn lower than that of the PFO