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Top Private Health Player in BC Slammed for 'Windfall' Profits

John Laing firm rebuked in parliament of UK, where it is based.

By Tom Sandborn 12 Nov 2008 | TheTyee.ca

Tyee contributing editor Tom Sandborn has a special focus on health and labour issues.

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Laing project: Abbotsford Regional Hospital and Cancer Centre.

The multinational company chosen to operate B.C.'s first two major private-public partnerships (P3s) in health care has been slammed in its home country for refinancing projects to create windfall profits and, as a result, endangering patient services.

But a provincial government spokesperson says there is nothing in any of this offshore trouble to worry the B.C. taxpayer or health service user.

John Laing PLC, the international company behind B.C.'s first P3 medical facilities in Vancouver and Abbotsford, has been sharply criticized in the United Kingdom, where Tory Member of Parliament Edward Leigh, who chairs the House Public Accounts Committee, said John Laing PLC and its consortium partners represented "the unacceptable face of capitalism."

This strong language came after Leigh's parliamentary committee reviewed John Laing's involvement in the construction and operation of the Norfolk and Norwich Hospital (N&N).

Refinancing said to produce 'windfall' and risks

Leigh was responding to the decision taken by John Laing and its partners in the public private partnership at N&N to refinance the deal in 2003, just two years after opening the new hospital. The refinancing extended the term of the contract by five years and borrowed an additional 116 million pounds sterling (about $200 million Canadian).

But most of the new money didn't go toward improving hospital service in Norwich. It went, said critics, to create "windfall" profits for investors.

The new financing allowed the business partners in the Octagon consortium to accelerate their rate of return dramatically. The 53 per cent increase in borrowing was used by John Laing and its partners in Octagon (Barclays, Serco and Innisfree) to flow through most of the new money immediately to member companies, driving the return on investment up over 60 per cent. The consortium has estimated its rate of return at 19 per cent when originally bidding on the contract for the hospital.

The public part of this public-private partnership, the hospital trust, will receive 29 per cent of the money borrowed over the multi-decade lifespan of the deal, at least in theory. However, the House Public Accounts Committee was sharply critical of this deal, which it says leaves the trust "exposed to significantly increased risks."

Contracts safeguard public: Partnerships BC

Tera Nelson, who speaks for Partnerships B.C., told The Tyee by e-mail that the B.C. government had build protections into its contracts with the two John Laing controlled companies operating P3s in the province that should protect against a repeat of the unfortunate U.K. experience with refinancing, quoting the agreement with Access Health Abbotsford:

"Access Health Abbotsford shall obtain the consent of Abbotsford Regional Hospital and Cancer Centre Inc. before carrying out refinancing activities. The public sector is entitled to receive 50 per cent share of any refinancing gain."

Allyson Pollock, a health policy researcher at the University of Edinburgh, is a critic of the wave of private for-profit projects seen in recent years in the United Kingdom health-care system. She said that in her country, the use of private finance initiatives or PFIs (the same funding structure called P3s in Canada) has resulted in cuts to health-care services and employment in order to support private profit.

"With PFIs, you pay for three hospitals and get one," she said. "The only way that the companies can get their profits is by cutting services and hospital staff. The refinancing at Norfolk and Norwich Hospital is a good example."

Another example of cost overruns arguably caused by P3-type funding occurs at the Queen Elizabeth Hospital in London (also linked to John Laing management) where Pollock's research shows that charges related to the public-private structure created "capital costs that are not wholly funded in the tariffs," charges that put the hospital into deficit while other neighbouring hospitals not lumbered with the PFI costs operated with a budget surplus.

In 2006, following the refinancing deal at Norfolk and Norwich Hospital, British media reports suggested that the loan restructuring would result in up to 450 staff cuts at the hospital and reduced service for cardiac patients.

Rise of a P3 powerhouse

John Laing started out as a family-owned construction company in 1848. The firm has morphed recently into a specialist in P3 delivery of public services. Since December of 2006, Laing has been a totally owned subsidiary of the Henderson Group, a private equity company that manages over $100 billion in investments worldwide. Laing has operations in the U.K., Norway, Finland, Canada and Poland.

In Canada, Laing has become part of privatization history, purchasing in 2007 the company that had built B.C.'s first major P3 medical facility at Vancouver General's Leslie and Gordon Diamond Health Centre.

Speaking at the opening ceremonies for the Diamond Centre, Premier Campbell was enthusiastic about this first product of his cherished P3 strategy in health-care delivery.

"This public-private partnership has provided best value for taxpayers' dollars, while supporting innovation and quality in the creation of the centre," said Campbell. "The integrated range of health services will make it much easier for patients to receive co-ordinated health care. By working with a private-sector partner with expertise in health-facility building, design, finance and property management, we are saving approximately $17 million. Vancouver Coastal Health can move ahead on what they do best -- provide expert health-care delivery," Campbell told the crowd.

Controversial push for P3 approaches

Premier Campbell's travels in the U.K. and across Europe in search of private-sector options for B.C. health care, as well as some of the cautionary stories he apparently did not hear while on the whirlwind tour, were chronicled by The Tyee in 2006. The next year, Premier Campbell sat through presentations at a Vancouver Board of Trade event from experts who surprised the assembled free-market fans in attendance by expressing skepticism about the desirability of introducing for-profit elements into Canadian health care.

That same year, Tyee readers learned that top leadership within the Fraser Health Authority had expressed doubts about the desirability of the P3 model for new health facilities in their regions.

At the same time it purchased Access Health Vancouver, the company responsible for the pioneering P3 at VGH, John Laing also bought a related company, Access Health Abbotsford. Through the Abbotsford subsidiary, Laing opened the Abbotsford Regional Hospital and Cancer Centre this September.

The Abbotsford P3 was named deal of the year in 2005 by Project Finance magazine. The Vancouver and Abbotsford projects have both been built and are operated under 30-year contracts.

Three owners in three years

Laing is now the third international company to own these two P3 operators in B.C. in as many years. Laing purchased them from the Australian investment bank Macquarie in 2007, while Macquarie had only owned the companies since 2005, having acquired them from the Dutch bank ABN Amro in that year.

This fast shuffle of ownership even before the construction work is done on the medical P3s might appear to run counter to the claim often made for P3 developments that they lead to long-term partnerships between government and business in health-care delivery. But the "history of the project" section on the website for the Abbotsford hospital mentions Access Health Abbotsford (AHA) as the operator of the hospital but does not include any background on the firm's primary owner, John Laing PLC, or the multiple ownerships that have marked AHA's recent history.

Partnership B.C. is untroubled by the shifts in company ownership, Tera Nelson told The Tyee.

"With respect to change of control, we have provisions in our current project agreements that a change of control cannot happen for one year following service commencement. Our understanding is that John Laing has expressed its interest and desire to be a long-term operator and in fact, that is their record in the U.K."

Nelson added: "The change of control that occurred on ARHCC had no impact on the scope, schedule or budget of that project. Our partnership relationship with the concessionaire under the agreement is a long-term one."

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