Huge windfall for hospital's PFI investors as staff face job cuts

The impact of the Private Finance Initiative (PFI) in the National Health Service will be questioned today in a highly critical report from parliament's spending watchdog.

The public accounts committee details how some of the top business names in the country, including an arm of Barclays bank, took money out of a hospital project and left it with huge debts.

The Norfolk and Norwich hospital is facing hundreds of job cuts as it seeks to balance its books, and there are concerns about the way the refinancing of other PFI hospitals may add to wider problems.

The contract to amalgamate two old hospitals - one in Norwich city centre - and bring them together on a new 63-acre site was 16 years in the planning and four years in the construction phase.

Norfolk and Norwich was completed in 2001 but two years later, Barclays, Serco, Innisfree and John Laing decided to refinance their joint working company, Octagon, so that they could take early profits.

By increasing the size of the borrowings - from £200m to more than £300m - and the time taken to repay that money from the year 2017 to 2037, they managed to take out a windfall of £115m. They gave only £34m of that to the hospital trust and kept the rest for themselves.

The Commons public accounts committee (PAC) will say today that the refinancing "lined the pockets of the investors" and increased their rate of return from 16% to 60%.

"My committee would not expect to see appearing before it another accounting officer defending what we believe to be the unacceptable face of capitalism. Such a face was shown by this private sector consortium in its dealing with the public sector," said the PAC chairman, Conservative MP Edward Leigh, last night.

"The trust might now have to pay up to £257m more if it needs to terminate the contract early. This is taxpayers' money and the risk of this large liability was incurred essentially so that investors could have fatter returns," Mr Leigh added.

He partly blames poor negotiating by the public sector officials as well as greed by the private firms. Mr Leigh is mindful that refinancing is increasingly common in all kinds of PFI schemes - for hospitals, prisons and schools - and so these windfalls could be repeated elsewhere.

The strategy of allowing companies to increase the debt of their PFI companies and extend the borrowing period is controversial, but this is the first investigation of the practice by the PAC, and its conclusions come at a sensitive time for the government. The Norfolk and Norwich trust warned last week that it may have to axe 450 jobs to address serious financial problems, caused in part by the extra costs of the PFI deal.

Anna Dugdale, its director of resources, told the board that the trust was heading for a deficit of £14.8m by the end of 2006-07 - the year set by Patricia Hewitt, the health secretary, for the NHS to take the tough action needed to return to balance. The companies involved in the scheme defended their role, saying their good fortune came out of the amount of risk they were prepared to take at an early stage of the PFI process.

David Metter, chairman of both Innisfree and the PPP Forum, a trade body representing PFI firms, said: "This was a first hospital in PFI after a long period of public sector contracts which had come in over cost and over time. It's important to remember that for every gain there has been a loss for the private sector, such as the National Physics Laboratory, which knocked John Laing out of construction, and the wider problems of Jarvis."

He said it was fair for companies to take some money out of a project once they had got it up and running.

Serco described the criticism as "wild" and pointed out that it had voluntarily shared the benefits with the health trust although it did not legally have to. Barclays was unable to comment.

The job losses at the Norfolk hospital are among the largest to be announced by trusts in the current wave of cuts to tackle the £600m-plus deficit that the NHS in England will declare shortly for 2005-06. A trust spokesman said the PFI investment added between £5m and £7m to the trust's annual costs. This was offset partly by a "smoothing payment" worth £3.8m which had been guaranteed by the government for the first 30 years of the contract. "This is a financial problem for us. To date we have been able to break even consistently, but this year is a massive challenge. There is no doubt that PFI plays a part," he said.

Paul Forden, the trust's chief executive, said: "It is reassuring that PAC has recognised that the trust has been paying a premium for having one of the first PFI schemes in the health service.

"PFI has since its inception been a controversial initiative, which clearly brings benefits as well as risks to the public sector. We are confident the people of Norfolk are receiving the benefits of excellent new hospital facilities available in Norwich as a result of this PFI scheme."