Q21 Chairman: That was the implication of your question but I would like to have more evidence behind that because I would be surprised if that were entirely true. I do not know, but I would be surprised if it was. If you look at page 16, paragraph 2.1, it says there, "There are a range of factors, some of which have yet to be fully analysed by the Department, which will have affected the pricing of current PFI hospital deals." So how can you, Mr Coates, judge whether these deals are good value if you cannot explain all the reasons why the contract prices have changed over time?
Mr Coates: The Department of Health finance team do keep a close watch on the PFI market through a variety of sources. We collect construction and service price trends from the NHS; we have copies of every financial model of every PFI transaction in the NHS; and we also collect data from the Treasury across departmental issues in terms of prices and such like. We believe we do keep a fairly close watch on what the PFI markets do in terms of price and activity.
Q22 Chairman: Let us look at page 14, paragraph 1.5, "After sharing in refinancing benefits NHS Trusts will continue to pay a premium on the financing costs on early PFI hospital deals." So is this kind of refinancing and this deal entirely fair on the NHS Trust who entered into early PFI deals, because they have to bear the higher financing costs?
Mr Coates: Indeed, and I think the Report does go on to say elsewhere that we have to look at other costs that the Trust may have incurred if it had come later in the process. It seems to me that there are two issues for the Department. One is: is the Trust paying more than it should for this hospital? And: is the Trust paying more than others are paying for this hospital? We have undertaken further work in the Department looking at the various factors and it is not easy to bring forward today's cost, but we believe that the additional construction costs and the costs that the Trust would have incurred if it built the hospital today do balance off against it.
Q23 Chairman: My last question to you, Mr Coates, just speaking on behalf of the taxpayer-you are the guardian of the taxpayer on this-are you entirely happy with a situation where private investors have got away with a rate of return of 60%? Does that seem to you a good deal for us?
Mr Coates: It is hard to defend such large returns, but all I can say is that the contract itself gave us no right of access and the private sector has done a deal with the taxpayer generally to share those benefits with us on a post hoc basis.
Chairman: I am sure my colleagues can come back on that. Mr Bacon.
Q24 Mr Bacon: Chairman, thank you very much. I would like to start with the question about the building costs because the NAO Report says on page 4 that additional building costs arising from construction inflation, if you had done it later, probably offset the benefits of lower financing costs that you would get if you were doing it now, and therefore that is all right then, so to speak. Is it not the case, Mr Forden, that at the end of the day nobody trying to let this contract on behalf of your Trust was in a position to know what would happen to construction costs going forward; is that correct?
Mr Forden: That is correct.
Q25 Chairman: Is it not also true that you are basically faced with a premium compared with other PFI deals, even after your refinancing?
Mr Forden: The audit Report says there is a premium that we pay after the refinancing. If you took the same financing terms as we could expect today, if we were able to achieve those when we let the contract and financial close in 1998.
Q26 Mr Bacon: Mrs Dugdale, could you say something about the way the financing was approached because there was no competition for the financing, was there?
Mrs Dugdale: Initially, no. When the initial deal was made there was not a competition.
Q27 Mr Bacon: Why not?
Mrs Dugdale: Because there was a two-year gap between commercial close and financial close, but even during that period the PFI market for health was very new. There were discussions with the PFI partners about the possibility of a competition, but it was determined that there was not enough of the market to actually have a competition at that stage.
Q28 Mr Bacon: How does one determine that other than by asking?
Mrs Dugdale: It was agreed between us that there was not enough of a market at that stage, and if you look at PFI deals closing at around the same time there was no competition because funding competitions were not known.
Q29 Mr Bacon: Mr Finlay, is it not correct that Octagon had a competition when it closed the deal for its refinancing-it had a funding competition?
Mr Finlay: At the time that Octagon carried out its refinancing, yes, it held a funding competition, and that is referred to in figure 23 in our Report.
Q30 Mr Bacon: Mr Glicksman, when the Treasury building, which was a PFI project, wanted to finance it had a competition, did it not?
Mr Glicksman: It did, but I think that was the very first one that we had done in the public sector, and it followed a gap when the project contract had been put on hold for a couple of years, and we picked it up again.
Chairman: We will have to break for about five minutes.
The Committee suspended from 15.52 pm to
15.58 pm for a division in the House