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Operation culture shock

Conflicts of interest are almost inevitable within consortia set up to build, finance and operate major projects under the Private Finance Initiative. Often these groups are formed by contractors, facilities managers and investors, each with a slightly different agenda.

Shareholders in PFI groupings can supply their own senior managers, often on secondment, to see the project through. Although widely adopted, this practice has the potential to cause problems if the shareholders fall out. Secondees tend to be identified with their parent companies, making it hard for them to act in the interests of the project company.

Octagon Healthcare, which was set up to design, build, finance and operate the £180M Norfolk & Norwich hospital, has decided to avoid this. Soon after signing the concession in January its shareholders agreed to develop an independent corporate culture within Octagon.

The project is the largest PFI hospital to date and involves construction of an 809 bed facility on the outskirts of Norwich, with a 64 year concession. Octagon has awarded two of its five shareholders, Laing and Serco, the respective construction and facilities management contracts.

When the concession was won, the group decided that appointing an independent chairman would accelerate the development of Octagon's own corporate culture. Richard Jewson was appointed in June. The idea had been promoted by Laing which had successfully worked with an independent chairman as a member of the Severn River Crossing consortium, builder of the Second Severn Crossing.

Jewson is a former chairman and chief executive of Meyer International and now holds a portfolio of senior management jobs, including the chairmanships of property company Savills, Ideal Hardware and Eastern Counties Newspapers. He is also deputy chairman of Anglian Water and a non-executive director of Grafton Group and Queens Moat Houses. Jewson is employed by Octagon but has no direct connections with shareholders John Laing, Barclays Private Equity, Innisfree, 3i and Serco.

'The interests of the shareholders in Octagon are not identical and they felt it would be useful to have an independent chairman to hold the ring between them,' he says. Jewson is there to act as an independent arbiter should disputes arise.

Aside from his independence, Octagon chose Jewson because he can put a local face to a London centric organisation. 'Having someone who knew the local scene was quite important,' says Barclays Private Equity managing director Chris Elliott.

'You can't get more political locally than building a hospital,' says Jewson. He has the job of lobbying local politicians and planning officials where necessary and local knowledge and contacts can only help. Among his concerns will be the need for better bus links to the town centre and better road links to the A11 and Newmarket.

Elliott says the aim has been to establish a corporate culture within Octagon as soon as possible. Octagon only became a fully fledged company in January, following the completion of its deal with Norfolk & Norwich NHS Trust.

Jewson is also backed up by project manager Bill Mequitta, again recruited from outside the group's shareholder base. Mequitta, a civil engineer, previously worked on the construction and commissioning of a new wing for Leicester Royal Infirmary. He will oversee the construction and facilities management contracts for the hospital which opens in January 2002.

'His job is to make sure that signed contracts are adhered to,' says Elliott. This involves acting as the interface between the Trust and the construction and facilities management contractors.

Octagon's roots date back to the early days of the Private Finance Initiative when Laing and General Healthcare formed the company as a bid vehicle for some of the first hospitals to be promoted under the PFI. General Healthcare chose to link up with Laing because of its financial strength and its experience of working in the health sector.

General Healthcare pulled out last year during the tortuous two year negotiation process. Its parent company, Gnrale des Eaux, wanted to sell its health care businesses, and feared potential buyers could be put off by its involvement in the untried PFI sector.

Despite the decision to withdraw, General Healthcare held on until Laing found another partner in facilities management firm Serco. Serco stepped into the project on virtually the same terms.

As the deal with Norfolk & Norwich NHS Trust approached financial close the financial investors in the group - Barclays Private Equity, Innisfree and 3i - have become increasingly important. These three now control Octagon, sharing equally 75% of its £30M equity.

The financial investors' main interest is in earning a return on the money they put in to Octagon, in contrast to Laing and Serco, which hope to make a profit on their construction and facilities management contracts.

As a result, the financial investors will use their influence and combined majority shareholding to ensure there are no damaging disputes between Laing and Serco should they disagree on issues relating to construction and facilities management. This is especially important given that Serco inherited a 5% stake - and consequently has less voting power than Laing which has 20%.

'One of the objectives of the investors is to ensure the seamless transition from construction to operation. If it doesn't work then it's our pocket that's been hit,' says Elliott.

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