Supplementary question from Mr Richard Bacon

Have annual "smoothing payments" in the region of £3.4 million per year have been made to the Norfolk and Norwich University Hospital NHS Trust in recognition of the accelerated rate of depreciation-equivalent incurred by the Trust in purchasing the buildings from Octagon Healthcare over a shorter period than 60 years? Please supply details, including the value and frequency of such payments and stating for how much longer these payments will be made.

Payments to the Norfolk and Norwich University Hospitals NHS Trust under the "smoothing monies" initiative started in financial year 2003-04. The amount was £3,778 million, a fixed annual amount, never inflated, which was paid in full up to 2005-06 (see the attached spreadsheet). The initiative was introduced for a number of the early PFI projects due to the effect on affordability which arises from the difference between the length of the primary contract period, which was typically 25 to 30 years, and the expected life of the asset generated under the project, which is usually 60 years.

In PFI deals the private sector partner will plan to recover the full capital cost during the primary concession period whereas an equivalent public sector scheme would depreciate the asset over 60 years (ie pay the money back through capital charges to the Department). The support, paid when the unitary charge starts as the new hospital opens, therefore created a level playing field between privately financed and public capital projects by spreading capital cost across 60 years rather than the primary concession period.

The spreadsheet also shows that from 2002-03 the trust has received support for the capital charges on the land it contributed to the deal as "bullet payments" to offset the annual charges; these are prepayments (that will reduce over the contract period) and attract capital charges at the appropriate rate. The background to this is that prior to the publication of the guidance "Land and Buildings in PFI schemes" in February 1999, there was uncertainty amongst accountants about whether there would be a requirement to fund the 6% capital charges on land and buildings transferred to the private sector as part of PFI projects. Work for the land and buildings guidance confirmed this was required so it was decided that schemes which had not previously funded this charge should be reimbursed via direct funding from the centre. The capital charge rate changed to 3.5% for financial year 2003-04, which reduced the capital charges payable.

These were two of the reported revenue and resource pressures which emerged from the use of PFI in the NHS. However, at the end of 2003 the Department's Finance and Investment Sub-Committee (FISC) advised that central revenue support mechanisms for PFI schemes could not be justified in the long term and, in principle, should stop immediately. They were not compatible with the changes in the way funds are now allocated to the NHS (ie directly to local health bodies), nor consistent with the way Trusts' income would be determined in future, ie through the amount of activity they deliver under a national tariff rather than simply pricing services to cover costs (Payment by Results). The decision was taken of course in the context of the largest ever sustained increase in NHS Funding-an average of 7.3% over and above inflation each year from 2003-04 to 2007-08.

However, to prevent sudden falls in income for Trusts, we agreed with Strategic Health Authority Directors of Finance that this funding should be phased out over a number of years to give local NHS bodies time to adjust. Funding was due to cease in 2006-07 but the tapering arrangement was actually extended to 5 years from 2003-04 (ie to 2007-08) in line with the tapering proposed under the Payment by Results tariff supplement.