BUSINESSMEN know that sometimes you have to speculate to accumulate. In the case of the country’s first PFI hospital, the private sector is celebrating an early return for its potentially risky investment.
A National Audit Office (NAO) report into the refinancing of the Darent Valley Hospital, Kent, found that shareholders’ returns were 62 per cent higher after refinancing than expected during the original bidding process.
Edward Leigh, the chairman of the Public Accounts Committee, says it is expected to net shareholders a 56 per cent internal rate of return on their investment, reports contractjournal.com.
The hospital trust also benefited, with an overall contract price reduction of £12 million, says Public Finance (Feb 11). The trust accepted additional risks in return, including an extension of the minimum contract period from seven to 35 years and increased termination penalties. It could now face a demand for up to £46 million if it brings the contract to an early end.
Leigh says that the private sector deserved a reward for its risk in taking on the first PFI hospital deal. However, he says, the early realisation of so much of the profit — £37 million within three years of the hospital opening — creates a concern that the private sector will not be as committed to the remaining work. “I am worried that the trust so far has been too lenient on lapses in service,” he says. “It’s fair enough to enjoy the golden eggs, but the goose must not be neglected.”
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The NAO’s report also contains a warning for the public sector: be wary of the potential pitfalls in refinancing deals. “In particular authorities should determine that the private sector parties will be adequately incentivised to perform well over the remainder of the contract after the refinancing.”
www.nao.org.uk