In this section, I try to analyse the accounts of the Octagon group of companies. According to the accounts of the Octagon group for the year ending 31 December 2007 (and accessed by me in February 2008 and in April 2009), there are four Octagon Healthcare companies. Two of these companies were set up in 1997 and the other two were set up with the refinancing in 2003.
The holding company is Octagon Healthcare Group Limited, incorporated in 2003. A wholly-owned subsidiary of this is Octagon Healthcare Holdings (Norwich) Limited, incorporated in 1997. There are two further subsidiary companies, namely
• Octagon Healthcare Funding Limited, incorporated in 2003
• Octagon Healthcare Limited, incorporated in 1995.
As of December 31 2006 and 2007, the shares of Octagon Healthcare Group Limited were held as follows50;
• Innisfree Nominees Limited • 3i Infrastructure Seed Assets GP Limited • John Laing Social Infrastructure Limited • Trillium PP Investment Partners Limited • Total | 2006(%) 26.3 26.3 26.3 21.1 0 100 | 2007(%) 0 26.3 26.3 21.1 26.3 100 |
Table A1.5 below shows the sales, expenses, profits and taxes paid by the Octagon Healthcare Group. Unfortunately the published accounts hide as much as they reveal and, in particular, there are two questions which arise, namely;
• What do the sales turnover figures represent in the 1998, 1999 and 2000 accounts when, in these years, the hospital had not yet started paying any fees to the Octagon Group?
• Since 2001, there have been expenses of around £20 mn incurred in each year. It is clear that they do not consist of interest paid since the latter is accounted for separately. What do they consist of?
Table A1.5 Octagon Healthcare Group Limited ales, expenses, profits and taxes |
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- 1998 to 2007 (£mn) |
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| Turnover | Total | Oper. | Other | Profit | Interest | Profit | Tax | |||
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| exps. | profit | income | before | paid | before |
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year ending |
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Dec. 31… |
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1998 | 48.3 | 46.4 | 1.9 | 0.1 | 2 | 2 | 0 | 0 | |||
1999 | 71.6 | 65.7 | 5.9 | 0.1 | 6 | 6 | 0 | 0 | |||
2000 | 61.7 | 50.3 | 11.4 | 0.1 | 11.5 | 11.5 | 0 | 0 | |||
2001 | 42.1 | 30 | 12.1 | 6.3 | 18.4 | 13.4 | 5 | 1.4 | |||
2002 | 29.5 | 26.1 | 3.4 | 15.7 | 19.1 | 14.3 | 4.8 | 3.2 | |||
2003 | 30.4 | 21 | 9.4 | 16.2 | 25.6 | 14.7 | 10.9 | 1.8 | |||
2004 | 29.7 | 19.2 | 10.5 | 16.1 | 26.6 | 21.2 | 5.4 | -1.2 | |||
2005 | 27.4 | 21.5 | 5.9 | 15.9 | 21.8 | 21.6 | 0.2 | -0.6 | |||
2006 | 23.7 | 19.2 | 4.5 | 15.8 | 20.3 | 21.3 | -1 | -0.4 | |||
2007 | 24.4 | 20.2 | 4.1 | 15.8 | 19.9 | 21.8 | -1.8 | -0.5 | |||
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Notes; The figures for the years from 1998 to 2003 inclusive are for Octagon Healthcare Holdings (Norwich) Limited |
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while those for the years from 2004 to 2007 inclusive are for Octagon Healthcare Group Limited |
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From the published accounts, it is difficult to discern the real profits of the Octagon Group. What we do know is that the shareholders' funds at the year ending 31 December 1998 totalled £1.325 mn., and that in the year ending 31 December 2003 the dividends paid to these shareholders totalled £11 mn. (not shown in the table above). Thus in that year the shareholders were repaid their capital more than eight times over. Even if we allow for inflation in the intervening five years, the dividends paid were worth more than seven times the share capital (about £1.47 mn at 2003 prices).
In fact of course the windfall profit to Octagon shareholders on the refinancing deal in 2003 was, as we have seen earlier, £95mn., £11 mn of which was paid to the shareholders in dividends with most of the remainder appearing in the Octagon balance sheet as intangible assets. Thus within five years, the share capital of about £1.47 mn (in 2003 prices) had been recouped more than seven times in the form of dividends and the £95 mn profit on refinancing in 2003 represented an annual rate of return on £1.47 mn of share capital (in 2003 prices), of more than 120% and this ignores the profits in 2001 and 2002 (see table A1.5 above).
50 . Private sector organisations involved in PFI contracts generally have close company status. A close company is, among other things, one that is under the control of five or fewer participants (Edwards P et al 2004, 12). There may be tax advantages in for forming a close company