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Local authority proposes £100m loan to buy health trust out of PFI contracts

Northumberland County Council has proposed entering into a loan arrangement with a local NHS Foundation Trust in order to "secure savings" from existing private finance initiative (PFI) contracts.24 Feb 2012

The Council has been asked to approve the loan, to Northumbria Healthcare NHS Foundation Trust, "in principle" before receiving full legal and accountancy advice. According to industry publication InfraNews (registration required) the loan, for £100 million, will cover two outstanding PFI contracts for Hexham and Wansbeck hospitals which run until 2033.

The proposal was made as part of the Council's medium term financial plan (9-page / 145KB PDF), which outlines its spending commitments and priorities up until March 2016.

Northumbria Healthcare NHS Foundation Trust has a budget of over £400m and is investing £200m over the next ten years in infrastructure projects. These include building a state of the art specialist emergency care hospital near Cramlington, improving services and facilities at Wansbeck and North Tyneside general hospitals and rebuilding Berwick and Haltwhistle community hospitals. Earlier this month it was announced as the preferred bidder for North Cumbria University Hospitals NHS Trust, which is too small to remain independently financially viable, due to its "strong financial management" and excellent clinical care.

"The Corporate Director of Finance has been involved in extensive discussions with Northumbria Healthcare NHS Foundation Trust regarding the provision of possible financial support. The position has been discussed at the Risk Appraisal Panel and it is proposed that a further Panel is held to consider the final legal advice and the opinion of the Council's external auditor," the Council said in its report.

"The provision of financial support would benefit the residents of Northumberland by enabling the Foundation Trust to secure savings from its existing PFI contracts which would prevent potential reductions in both the range and quantity of healthcare provision offered across Northumberland... The arrangement would facilitate an ambitious ten-year strategy to invest in both capital infrastructure and a range of revenue developments," it said.

Under the Local Government Act, local authorities can "do anything which they consider is likely to achieve... the promotion or improvement of the economic wellbeing of their area".

In its report, the Council said that any financial support would be based on an "agreed business plan" provided by the Trust. It warned that any "significant deviation" from the agreed plan, which would clearly show the link between the loan and the wellbeing of local residents, could potentially lead to a default on the loan.

The PFI model is a method of utilising private sector capital as a way of funding major public infrastructure projects, but critics have suggested that higher borrowing costs as a result of the recent economic downturn have resulted in the long-term expense of the model becoming much higher than for other, more conventional, forms of borrowing. A Government report last year identified 22 healthcare trusts as facing difficulties because payments under PFI schemes were amounting to up to a fifth of their budgets.

Earlier this month the Department of Health announced that seven NHS trusts struggling to repay their debts under PFI arrangements could receive financial support from the Government, providing they meet certain criteria. The trusts, which have each already demonstrated that they face "serious structural financial issues", will be able to take advantage of a grant worth up to £1.5 billion over a 25 year period if they can demonstrate that the problems are historical and that they are meeting certain performance measures.

At the time Michael Boyd, an expert in health and infrastructure law with Pinsent Masons, the law firm behind, questioned whether other trusts in difficulty would be given similar help or if "their financial misery would be prolonged". "Without central help, it is almost impossible to see how some struggling NHS trusts with PFI arrangements, and their patients, can avoid a dangerous and self-defeating spiral of financial decline – with everything that goes with it," he said.