PFI deals need more scrutiny after shareholders receive big windfalls

BMJ 2005; 330 doi: (Published 16 June 2005) Cite this as: BMJ 2005;330:1407
  1. Matthew Limb
  1. London

    The National Audit Office has asked for a scrutiny of hospital deals secured under the private finance initiative (PFI) to see whether newer schemes are delivering better value for money than earlier ones as the PFI market matures. The review was suggested after an investigation by the office into the refinancing of an early PFI scheme, which gave private shareholders an £81m ($45m; €67m) windfall. The trust involved in the scheme, Norfolk and Norwich University Hospital NHS Trust, also benefited from the refinancing, but the office warned that it now faces increased risks and continues to “pay a premium” compared with more recent PFI deals with better terms.

    The office reviewed the PFI deal after concerns were raised by the MP for North Norfolk, Norman Lamb (Liberal Democrat). It concluded that ministers should now analyse how the “pricing of all elements of PFI deals” have changed since the early years of the initiative.

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    The refinancing of the Norfolk and Norwich University Hospital NHS Trust (above) gave shareholders a wi ndfall profit of £81m


    The Norfolk and Norwich University Hospital opened in 2001 and was one of the first PFI schemes. A private sector consortium of banks and property developers, Octagon Healthcare, was contracted to build the hospital, maintain it, and manage the facilities for a minimum of 30 years. Under terms struck in 1998, the trust agreed to pay £42.7m a year in usage payments. The contract was a “pathfinder deal,” which helped the Department of Health to establish a new market in PFI hospital procurement.

    In 2003, Octagon refinanced the project in a climate of lower interest rates, making £115m from the refinancing. It shared £34m of this with the trust. The internal rate of return for shareholders rose from 16% to 60%.

    The office's report reviewed the original PFI deal in the light of the refinancing. It said that the trust appeared to strike competitive terms at the outset, although it suggested that these might have been improved. The report proposed that alternative funding options could have been tested more rigorously, although the trust followed standard practice at the time. However, it acknowledged that by closing the PFI deal in 1998 the trust had benefited from getting the hospital open early and avoided years of building cost inflation.

    Annual trust payments have fallen to £37.8m under the new financing arrangements but these will now be made over a longer period—39 years instead of 30 years. The trust would face higher liabilities if it terminated the contract early but it regards the financing as value for money, said the report.

    Other early PFI deals may also yield windfalls for private companies. But the office said that current schemes strike better terms for the NHS in a “maturing” market, including the provision for a bigger share of proceeds from any subsequent refinancing.

    The head of the National Audit Office, John Bourn, said, “The trust continues to pay a premium on its financing costs for being an early entrant into the PFI market while benefiting from the early use of the new hospital and lower construction costs.”

    Allyson Pollock, who is head of the public health policy unit at University College London, and an expert in PFI, told the BMJ, “This report shows how the public is getting a raw deal and our taxes are flowing into the coffers of private companies.”

    She called for a further inquiry by the House of Commons Treasury and Public Accounts Select Committees into the “true costs” of PFI. “The taxpayer is being left with a much higher burden of debt which they are going to have to service for a much longer period. So the real risks are sitting with the public sector for much, much longer,” she said.

    The report, The Refinancing of the Norfolk & Norwich PFI Hospital: How the Deal can be Viewed in the Light of the Refinancing, is available at

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