Press Release - Darent Valley Hospital: The PFI contract in
action
10 February 2005
Sir John Bourn delivered today the National Audit Office’s 50th
PFI/PPP report to Parliament, an update report on the new Darent
Valley hospital which, in 1997, had been the first hospital
procured under the PFI. Sir John reported that the hospital had
been successfully delivered and the Trust had received a reduction
in the overall contract price of £12 million (in present value
terms) through sharing in a £33 million refinancing gain generated
by the contractor THC Dartford. But the refinancing has brought the
Trust new risks as well as benefits. And the THC Dartford
shareholders’ returns are now around 60 per cent higher than they
anticipated when bidding for the contract with the internal rate of
return to them now 56 per cent. In addition, although service has
been satisfactory overall, in the NAO’s opinion the Trust could
have given lower performance scores leading to greater deductions
where there were service lapses.
The new hospital opened in 2000 two months early and for the
price agreed in the contract. THC Dartford has delivered the
facilities and services the Trust contracted for, and to a quality
that overall has been satisfactory. Since 2003 the Trust has been
awarded three stars, the highest performance category.
The NAO report highlights that by refinancing the contract
following the successful delivery of the new hospital the
shareholders of THC Dartford have received much earlier and larger
benefits than had been projected when the contract was awarded. By
increasing its level of borrowings, with better financing terms
available now the PFI market has matured and the new hospital has
been delivered, THC Dartford shareholders were able to immediately
realise £37 million, within just three years of the new hospital
opening, on the basis that they would take reduced benefits in the
later years of the contract. The net benefit to the shareholders
over the whole of the minimum contract period is expected to be £21
million in present values.
Although benefiting from the refinancing the Trust also faces
new risks. The Trust agreed to extend the minimum contract period
by seven years and to accept the possibility of increased
liabilities in the event of the contract being terminated early.
The Trust concluded that these arrangements were value for money
taking into account that the new minimum contract period of 35
years is in line with current PFI hospital contracts and the Trust
considered it very unlikely that the contract will be terminated
early. But the NAO cautions that in future authorities should
undertake further analysis before agreeing to a refinancing which
involves increased levels of private sector debt and higher public
sector termination liabilities.
On day to day contract management, the NAO concluded that,
although the service performance overall was satisfactory, the
Trust could have awarded lower performance scores leading to higher
payment deductions for certain service lapses which occurred in
areas such as cleaning and catering. The NAO recommends that
authorities should learn from the Trust’s experience by
eliminating, where possible, subjectivity in assessing performance
to ensure that payment deductions are commensurate with the impact
of poor performance on the authority and its patients. The NAO also
recommends that authorities should plan for the considerable senior
management effort that will be needed in managing a PFI contract in
the early years.
Sir John Bourn said today:
"My 50th PFI/PPP report continues our current strategy
of reporting on how PFI projects are working out. I am pleased to
be able to report on the successful delivery of the Darent Valley
PFI hospital but this early PFI deal highlights that there are
important issues to manage once the operational phase is under way.
In particular, although refinancing may offer attractive benefits
to the public sector it may also present new risks which
authorities need to fully assess before agreeing to the
refinancing."
Notes for Editors:
- This PFI contract was let by the Dartford & Gravesham NHS
Trust in 1997 and was the subject of a previous NAO report: The PFI
Contract for the new Dartford and Gravesham Hospital (HC 423
1998-99).
- THC Dartford is 60 per cent owned by Barclays Infrastructure.
Barclays UK Infrastructure Fund LP had an initial 30 per cent
shareholding. Barclays Infrastructure Ltd, a general partner of the
fund, acquiried in 2003 a 30 per cent shareholding previously owned
by Carillion Private Finance Ltd. Other shareholders are Innisfree
PFI Fund LP (30 per cent) and UME Investments Ltd (10 per
cent).
- The internal rate of return is the standard measure which the
public sector has used to compare returns expected by shareholders
of consortia bidding for PFI contracts. It is not an indication of
the future rate of annual returns which THC Dartford anticipate
realizing from the project but reflects, and is sensitive to, the
time value of when benefits are received. The rate of 56 per cent
following the refinancing reflects the high value of receiving
large returns early in the contract period.
- Press notices and reports are available from the date of
publication on the NAO website, which is at www.nao.org.uk. Hard
copies can be obtained from The Stationery Office on 0845 702
3474.
- The Comptroller and Auditor General, Sir John Bourn, is the
head of the National Audit Office which employs some 800 staff. He
and the NAO are totally independent of Government. He certifies the
accounts of all Government departments and a wide range of other
public sector bodies; and he has statutory authority to report to
Parliament on the economy, efficiency and effectiveness with which
departments and other bodies have used their resources.
Press Notice 14/05
All enquiries to Mark Strathdene, NAO Press Office:
Tel: 020 7798 7183
Mobile: 07748 181693