NHS Trust borrows from council to get out of PFI deal

Wednesday 18 June 2014   Category: Local Authorities

A recent transaction involving a private-finance initiative (PFI) deal has sparked debate after an NHS trust was able to terminate a hospital PFI contract early, saving some £67 million in the process.

Northumbria Healthcare NHS Foundation paid off private contractors for the construction and running of Hexham General Hospital, after borrowing £114 million from the local council.

The deal has meant that the trust stands to save an estimated £3.5 million every year over the course of a 19 year period.

PFI has come under much scrutiny in the UK due to the fact that many believe initial agreements did not provide value for money. There is a growing demand for existing contracts to be refinanced, with relatively expensive private sector debt replaced with cheaper local or central government funding.

What does it mean for local councils?

This type of deal could lead to more local councils wanting to either refinance or buyout PFI contracts in order to reduce on-going costs.

And why not? With many UK bodies currently facing austerity measures and cuts, the substantial savings on offer would ease pressure on local authority budgets.

PFI Refinancing – the good, the bad and the ugly

Controversially, many initial PFI investors have already made a significant profit on PFI deals by breaking the contract earlier than agreed or through refinancing. Previously, investors have been able to double their profits by selling on or ‘flipping’ contracts to other investors early, even if the agreement is set to span for 25 to 30 years. However, there is now a code of practice in place detailing how PFI savings and efficiencies should be encouraged and shared equitably between private and public sector partners.

In the case of Northumbria Healthcare NHS Foundation Trust, the money is being borrowed by Northumberland County Council. The council is actually borrowing the money from the Treasury’s Public Works Loan Board. Recent changes in accounting practice have already brought PFI liabilities on to local authorities balance sheets, so this form of borrowing already features in the UK’s national debt figures. As such refinancing does not create additional debt but replaces private sector funding with more efficient centrally sourced government funding.

This does entail some transfer of risk, as the Council is now responsible for servicing and repaying the PWLB debt and has a credit exposure to the NHS trust. But as the riskier “design and build” stages have passed and the hospital project is in the lower risk operational stage, there is reduced potential for unexpected costs. The Council has also taken a charge over the NHS Trust’s assets to provide security on the loan.

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