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National Audit Office report: Darent Valley Hospital: The PFI contract in action

Darent Valley Hospital: The PFI contract in action

"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."

"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."

Sir John Bourn

 

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.

 

Publication details:

ISBN: 0102932190 [Buy a hard copy of this report from TSO]

HC: 209 2004-2005

Published date: February 10, 2005