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Revealed: How shareholders of PFI firm are making millions from cash-strapped Norfolk and Norwich University Hospital

PUBLISHED: 12:45 26 September 2016 | UPDATED: 12:45 26 September 2016

The N&N under construction in July 2001 (l). This year it is paying the firm which built it £57m under the PFI deal. Photo: Archant

The N&N under construction in July 2001 (l). This year it is paying the firm which built it £57m under the PFI deal. Photo: Archant

Archant

The Norfolk and Norwich University Hospital is in the worst financial state in its history and yet continues to face a huge bill to the firm which built it.

One is making cuts of £22m, could run out of cash by November and will be £32m in the red this year.

The other paid out almost £7m to shareholders last year, has just reported a record profit, and turned over £42m last year.

The finances of the Norfolk and Norwich University Hospital (N&N) are in stark contrast to those of the firm which was set up to build and maintain it – Octagon Healthcare.

But both are closely linked.

Norwich South MP Clive Lewis. Photo: PA Wire Norwich South MP Clive Lewis. Photo: PA Wire

The hospital opened in 2001 under a deal called a Private Finance Initiative (PFI). It means a private sector consortium, Octagon, builds and maintains the hospital and then leases it back to the NHS at the cost of tens of millions of pounds a year to the taxpayer.

The N&N, which is in financial special measures, estimates it is paying Octagon £57m this year. It cannot get out of the deal until 2037 at the earliest.

Estimates as far back as 2004 predicted taxpayers, through the N&N, will pay Octagon more than £1 billion – nearly five times the £229m cost of building and opening the hospital.

An EDP investigation has found:

•Octagon has paid almost £26m in dividends to its three shareholders since 2009;

•The profits made by Octagon from the hospital are labelled a “disgrace” by one former health minister;

•Octagon was paid £42.5m last year by the N&N – up from £29m in 2010, as the busier the hospital gets, the more money Octagon is paid;

•One Norwich MP describes the PFI as “the worst credit card deal on the comparison site”;

Norman Lamb, North Norfolk MP. Photo: Stefan Rousseau/PA Wire Norman Lamb, North Norfolk MP. Photo: Stefan Rousseau/PA Wire

The hospital estimates the deal is costing it an extra £20m a year than a non-PFI deal. That £20m would pay the wages of 800 nurses, or 200 GPs.

The chief executive of Healthwatch Norfolk, Alex Stewart, said: “If the money could be put back into services, people would potentially be seen far more quickly.”

Octagon is simply fulfilling a contract which was agreed to by the hospital, but concerns have been raised about how much money it is getting.

The hospital is currently in the worst financial state in its history. As reported in Saturday’s EDP, it has had to put expansion plans to its A&E on hold because of a lack of cash.

Chief executive and founder of Innisfree David Metter which is the joint biggest shareholder in Octagon. Photo: Parliament TV Chief executive and founder of Innisfree David Metter which is the joint biggest shareholder in Octagon. Photo: Parliament TV

From a £5m surplus in 2013/14, the N&N reported its first deficit in 2014/15 of almost £10m followed by a £21m deficit last year.

Meanwhile, dividends to Octagon’s shareholders were up 35pc last year from just under £5m in 2014 and have increased by 700pc since 2013 when they were £834,000.

Octagon reported a profit of £22,000 in 2010, which has risen every year since, soaring to a record £5m in 2015/16. North Norfolk MP and former health minister Norman Lamb said the profits made by Octagon were a “disgrace”. “The whole PFI programme was massively ill-judged,” he said.

Mr Lamb called on the government to look at buying its way out of the “dreadful deals” made under PFIs.

The hospital under construction at Colney in 2001. The hospital under construction at Colney in 2001.

And he urged the hospital to request money back from Octagon. He said he would also be writing to Octagon. He said: “I think a further formal request should be made along the lines: ‘You have benefitted massively from this flawed deal. The NHS is on its knees. We urge you to accept the moral case for offering a share in this gain’.”

Ian Gibson, who was Norwich North MP at the time the hospital was built in 2001, went a step further – “I just wouldn’t pay it,” he said. “Why doesn’t the government stand up and say, ‘we are not going to pay’?

“Otherwise you are stuck with it for years and years.” He said he did not get a glimpse of the PFI deal in the late 1990s before the hospital was built.

“When it was first proposed, Frank Dobson (the then health secretary) told us it was signed, sealed, delivered. I was against it in principle,” he said.

Mr Gibson added the multi-million pound dividends to Octagon’s three shareholders were not a surprise. “This is what it was all about at the beginning,” he said.

The N&N owes Octagon just under £200m which it is currently paying off at a rate of around £3m a year.

It hopes to pay Octagon off by 2037 – the earliest opportunity it has to end the contract. But at the current rate of payment it would take more than 60 years to clear the debt.

Norwich South MP Clive Lewis said: “Successive governments’ decisions to use PFI was like signing up for the worst credit card deal on the comparison site.” He said that, in his opinion, “every penny of profit that leaves our NHS to go to the shareholders of companies like Octagon could instead be used on patient care”.

To make matters worse for the hospital, the busier it gets, the more it has to pay Octagon and demand on it has soared. It means Octagon’s turnover is increasing every year. It was paid £42.5m last year by the N&N – up from £29m in 2010.

“The more patients we treat, the higher the PFI usage fee, on the basis that the services are used more intensively and the buildings require greater maintenance,” a spokesperson for the hospital explained.

The hospital’s hands are closely bound when it comes to making £22m of cuts this financial year and getting closer to budget. The PFI costs take up around 10pc of its annual budget.

“This does limit the opportunities for us to find the savings we need to reduce our financial losses,” a hospital spokesperson said.

A Department of Health spokesperson said: “We provide advice and consultancy on PFIs to individual trusts across the country, making savings on their current contracts.”

None of the firms involved in Octagon responded to our requests for comment.

•Who is getting the money?

Octagon is owned by three shareholders called Innisfree (which owns 36.84pc), 3i Infrastructure Seeds Assets Ltd (which also holds 36.84pc) and Semperian (which owns 26.32pc)

Innisfree has made a fortune by investing in PFIs across the UK. It has investments in 57 projects, worth £17.3 billion, according to its website.

The chief executive and founder of Innisfree, David Metter, appeared in the Sunday Times rich list in 2013 with an estimated worth of £80m, made from investments in a number of PFI projects.

Innisfree paid £5.8m to its eight directors in 2015, including £3.2m to one unnamed director, according to its financial report.

The other biggest shareholder, 3i, invests in infrastructure projects across the world. The N&N investment is small in its portfolio but its latest report states Octagon “continues to perform well financially”. It received £3m from Octagon last year.

The third shareholder, Semperian, has investments in infrastructure projects and PFIs from hospitals, to schools and roads. The N&N is about 3pc of its portfolio.

There is little mention of the N&N or Octagon in its annual reprt. Its chief executive, Alan Birch, has previousy defended PFIs.

We have contacted Octagon’s shareholder companies but have not had a response.

We have also tried to contact Octagon’s director.

•How we got here

1998: Labour government announces a new hospital for Norwich

2000: The N&N becomes the first big hospital to be built in the NHS under the Private Finance Initiative (PFI). The initial cost of £229m is paid for through Octagon.

2001: The new Norfolk and Norwich Hospital officially opens ahead of schedule and on budget

2003: The hospital “refinances” its PFI deal with Octagon. “The refinancing will release significant resources for the NHS in central Norfolk,” said a press release from the N&N at the time. It meant £33.9m of funds would be released to the hospital, but the minimum repayment term was extend from 30 to 35 years, meaning it could not get out of the contract and payments to Octagon until 2037 at the earliest. As a result of money released from the refinancing, Octagon paid out £11 million in dividends to its shareholders.

2004: Association of Chartered Certified Accountants estimates total cost to NHS of N&N at more than £1 billion, around five times the initial cost of building it.

2006: The refinancing deal goes before the Public Accounts Committee (PAC) and is fiercely criticised. Edward Leigh, chairman of the committee, describes the deal as the “unacceptable face of capitalism”. The subsequent report says the refinancing deal was “lining investors’ pockets” and putting the trust at increased financial risk.

2014: Hospital goes into deficit for first time. A report to the N&N’s board warns it may struggle to find savings. “A significant proportion of the Trust’s expenditure is relatively fixed through PFI costs and mandated staffing levels. This reduces the scope of savings initiatives,” it said.

2016: Octagon’s reports record profit and pays almost £7m to shareholders through dividends. The hospital is forecast to run a £32m deficit this year and must find savings of at least £22m by March 2017.

How does the PFI work?

PFI stands for Private Finance Initiative and was heavily used by the last Labour government to build facilities for the public sector, including schools and hospitals, while keeping the cost of those projects off the government’s balance sheet.

Under the PFI, a private sector consortium builds and maintains the building and then leases it back to the public sector.

The hospital says it is paying Octagon around £57m a year. That includes £20.7m in operating expenses and £29m in non-operating expenses – the lease, interest and financing the debt to Octagon.

Another £7.2m, does not appear in the trust’s accounts but the hospital said it is paid as an addition to the “life cycle maintenance” of the PFI. The hospital trust can terminate the PFI deal with Octagon in either 2037, 2042 or 2052.

The fees paid by the Trust are partly rent for the buildings, interest on its loan and partly fees for services such as cleaning, maintenance and gardening.

Octagon sub-contracts those day-to-day services to Serco. Octagon has a 60-year contract with the hospital to provide it with those non-clinical services.

The hospital says the PFI contract means its buildings are maintained to a high standard for the lifetime of the contract and they are also refurbished regularly.

Do you have a story for the investigation unit? Email tom.bristow@archant.co.uk

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