KOHIN
Keep Our Hospital in Norwich
KOHIN - The increasing cost of the hospital
The Increasing Cost of the Hospital
On 23 September 1997 the following question was tabled for a public meeting of the East Norfolk Health Authority:
Q. How has the Public Sector Comparator been adjusted since the original Outline Business Case was prepared ? (Giving the dates and values for the effect of each adjustment and explaining the methods used.)
On 8 December the following out of date document was supplied:
NEW NORFOLK AND NORWICH HOSPITAL
Adjustments included in the Full Business Case Submission in January 1996
Refinements to the Capital Cost
The capital cost of the Public Sector Comparator (PSC) has been refined to take account of the following:
- Capital Exclusions - the OBC assumed that certain elements of capital expenditure would be provided by the private sector under a publicly funded scheme. These items were subtracted from the capital cost as it was argued that the capital charges consequences would be offset by the lower service costs of the private sector. In order to evaluate the full capital costs of both options and their impact on cash flows, these have now been included as part of the capital cost of the PSC as agreed with NHS Estates.
- Roads access - the costed estimate of building an access road to the Colney Lane site was revised to £3.97m which represents an increase of £478,000 on the estimate included in the OBC.
- The capital costs within the Outline Business Case were at November 1994 prices and are now restated to 1st April, 1995 prices, representing a move of 245 to 260 on the MIPS building index and from 540 to 567 on the ECAG equipment index. This enables accurate comparison with the PFO which is shown at this price base.
- The capital cost of the PSC has been adjusted to reflect capital indexation during the construction period. The OBC had no allowance for indexation as all options considered using public sector funding and therefore common assumptions on indexation.
The preferred privately financed option has offered a fixed price construction contract which will be inclusive of indexation, based on the NEDO index and Octagon Healthcare will take the risk of inflation exceeding their assumptions. In order to reflect the likely inflationary increase on the capital cost of the PSC during construction, prospective indexation using the MIPS fixed price index has been included. NHS Estates have forecast an increase in this index of 6.15% per annum until year 2000. In the absence of any projections beyond this point, indexation has been assumed to continue at this rate until the end of the PSC construction period in 2005. This gives an adjustment to the capital cost of £66.957m, including VAT.
The Trust has been alerted to the very real risk of capital cost inflation by analysis of such reports as the National Audit Office review of the Chelsea and Westminster project and consider that it is important to reflect the cost of this risk transfer to the PFO in the DISC.
Refinements to the OBC Revenue Position
- The OBC was based on 1994/95 price levels. The first year of analysis of the PSC will be 1995/96, it is necessary, therefore, to restate the position at 1995/96 price levels.
- Capital Exclusions and Indexation - the revenue consequence of the capital exclusions and indexation (as explained above) have been taken into account.
- Timescale - the OBC assumed that capital expenditure on the scheme would commence in 1995/96. The NHS Executive Regional Office has confirmed that funding will not start to be available until 1998/99 at the earliest but still subject to further programme revisions. The most optimistic forecast would not release revenue savings until 2005/6 at the earliest.
- Car Parking - research has determined net income of £146,000 arising from 1,100 car park spaces.
- Security - at the time of OBC no security arrangements were in place and hence no expenditure was included for this item. The cost of public sector procurement would be in the order of £265,000, based on current market rates, and this is now included as additional expenditure in the PSC.
Adjustments included at November 1996
The following revisions to the Public Sector Comparator have been made:
- Service Costs have been increased by £406,000 per annum reflecting the larger size of the hospital. This cost is the same as that quoted by Octagon for an additional 108 beds.
- Maintenance Costs have been increased by 5.7% reflecting the increase in floor areas and this increases costs by £84,000 per annum.
- Insurance Costs have increased by £30,000 per annum to reflect the larger size and higher capital cost of the hospital.
- Purchase of fixed assets has been increased by £8.16m. This represents the cost of constructing an additional 108 beds as quoted by Laing Eastern. This has been phased in the same way as the original programme and has been indexed by the same MIPS index assumptions as used in the original PSC.
- Capital renewals have been increased by 5.7%, again reflecting the increase in floor areas and larger size of the hospital.
"It is the people's national health service and we should never forget that."
(Alan Milburn MP, Minister of State for Health, Hansard 15th May 1997)
"City centres are the places for hospitals."
(John Gummer, recently Minister for the Environment, Bristol 22nd March 1996)