2.23 THC Dartford's plan to maximise both the amount of the refinancing gains and its ability to increase the early benefits its shareholders could draw from the project relied on THC Dartford increasing its borrowings by 54 per cent from £85.9 million to £132.5 million with the repayment period being extended (Figure 10). THC Dartford therefore proposed to the Trust that the minimum contract period should be increased. After negotiation a seven year extension was agreed increasing the minimum contract period from 28 to 35 years. Had it not been for the refinancing the Trust says it would not, at that time, have sought to extend the contract period. It was still developing its partnership relationship with THC Dartford and wanted to make sure the relationship would work well before giving any thought to extending its contractual commitments. In considering the refinancing, however, the Trust saw the following attractions to THC Dartford's proposed contract extension:
■ the main attraction was that the contract would become more affordable for the Trust. Before taking account of the increased refinancing gains, THC Dartford was prepared to reduce the part of the annual contract payment by the Trust relating to availability by £1.1 million (a cash benefit14 of £24.2 million in aggregate over the remaining 22 years of the original 28 year contract period) in return for the Trust continuing to pay this lower amount relating to availability for a further seven years (an additional commitment in cash terms of £64.6 million15). The Trust, using a 6 per cent real discount rate, evaluated that this arrangement would be neutral in present value terms – that is to say, it would neither increase nor decrease the present value of the total cost of the contract (Figure 15). But the lower annual charge for the first 28 years of the enlarged contract period was attractive to the Trust in cash terms as it would further help the Trust balance its annual accounts;
■ in addition, the refinancing gains would be larger if the contract was extended and the Trust would receive a share of the increased gains. The contract extension needed to be effected at the time of the refinancing to maximise the opportunities for refinancing gains from the proposed bond refinancing. The Trust estimated that the additional refinancing gains that it would secure would have a present value of £4.6 million evaluated at a public sector discount rate of 6 per cent real (Figure 15) which would further help the Trust at a time when it was in financial deficit; and
■ the Trust considered that receiving THC Dartford's services for an additional seven years made sense based on demographic data which suggested the population of the local community would increase. The Trust also placed value on transferring the building life cycle cost and facilities management risk for a further seven years and estimated it would, as a result, save maintenance and management costs with a total net present value of £2.1 million. The new minimum contract period of 35 years which the Trust agreed to is in line with the terms of new PFI hospital contracts currently being entered into by other NHS Trusts.
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14 In real terms. The actual price payable by the Trust each year will be adjusted for inflation as permitted by the contract. After also taking account of inflation, facilities management costs and the Trust’s annual share of the refinancing gains the Trust’s payments under the contract are expected to reduce by around £60 million over the original 28 year minimum contract period (Appendix 3).
15 Including inflation and facilities management costs the Trust’s payments over the seven additional yeFars are expected to be around £230 million (see year by year analysis in Appendix 3).