Health department attacked over £12m deal with private firm

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The Independent Online

The Department of Health has been heavily criticised by Parliament's spending watchdog over a deal in which £12m of taxpayers' money was used to form a joint venture with a private company to collect and distribute medical information.

In a report published today the National Audit Office says the department was not able to show that the deal represented value for money because it ignored Treasury guidelines by failing to seek competitive tenders from other private companies.

The NAO also criticises the department for paying far more than its own financial advisers thought was justified for its half share in Dr Foster Intelligence, a joint venture with the private company Dr Foster.

The department's advisers, KPMG, valued Dr Foster at £10m to £15m, but the deal agreed with the department put a valuation of £24m on the company. Of the £12m paid to Dr Foster, £7.6m went directly to its shareholders, including Tim Kelsey, a former newspaper journalist who co-founded the company in 2000 and is now its chairman. The remaining £4.4m is being used by the joint venture company as working capital.

The NAO decided to investigate the deal in October 2005 after receiving a letter from an anonymous whistleblower questioning the legality of the transaction and the lack of an open tender. The NAO then wrote to the department voicing its own concerns, but failed to get a reply.

The £12m paid by the department included a "strategic premium" of between £2.5m and £4m, even though it did not end up with a controlling interest in the joint venture, as is normal practice in commercial deals when one side pays a premium.

In addition to the cash payment, the department spent £1.7m on professional fees, of which £50,000 went to Dr Foster itself for advice about forming a partnership with the private sector.

Sir John Bourn, head of the NAO, said the department "cannot demonstrate that the joint venture was the best structure to meet its needs or that it represents good value for money".