A local authority is in negotiations to lend up to £100m to a foundation trust seeking to buy out its private finance initiative contracts, HSJ has learned.

The prospective loan – to Northumbria Healthcare Foundation Trust – is one of several potentially cheaper alternatives to PFI being pursued by NHS hospitals. Other options include securing funding from private equity, pension funds and the bond markets.

Trust chief executive Jim Mackey is leading a Foundation Trust Network drive to find other sources of finance. He told HSJ the network was “close to” opening up “three or four” new options for foundation trusts seeking funding for major capital projects or the refinancing of PFI schemes.

The need for alternatives has intensified since the financial crisis, which sharply increased the cost of PFI deals over government borrowing, even as it placed unprecedented pressure on NHS finances.

The Treasury has rejected calls to increase public borrowing to pay for projects like hospital rebuilds, saying this could interfere with its plan for cutting the UK deficit.

However, councils can access public funding through their powers to borrow large sums from the Public Works Loan Board. Northumberland County Council is due today (Wednesday) to make a decision in principle on lending Northumbria Healthcare up to £100m.

Mr Mackey said the loan was “part of a partnership between the trust and the county council, from which both parties will derive benefits”. He added: “Part of that deal will involve buying out our PFIs.”

A report to the council today says reducing the foundation trust’s PFI costs would prevent “potential reductions in both the range and quantity of healthcare provision” in Northumberland.

County council finance director Steven Mason said Northumbria Healthcare had to make “quite significant” efficiency savings in the coming years. He told HSJ: “If we can facilitate the trust securing savings then that protects healthcare within Northumberland, and obviously the council wants to protect healthcare for its residents.”

The deal would have to involve “clear commitments” from the trust to protect existing services and invest in new ones. He added: “We’re doing it [to promote the] welfare of people in Northumberland. The trust would need to demonstrate that that was the case, and that position would be monitored by the council.”

According to Treasury data, Northumbria Healthcare has two PFI schemes, at its Hexham and Wansbeck hospitals, with a total capital value of £71m. The trust’s projected payments on the schemes, not adjusted for inflation, total £324.5m between 2002 and 2033.

Tony Travers, director of British government at the London School of Economics, said the plan was a “creative scheme” but if used systemically it would lead to a big increase in public sector borrowing.

If that happened, the government would have to decide “whether higher borrowing costs and higher borrowing generally was a price worth paying to get it off the hook of a number of hospitals having to devote significant proportions of their income to servicing PFI contracts”, he added.

Mr Mackey said the FTN was also exploring new private sector sources of funding.

“PFI was the only show in town a few years ago,” he said. “But the world has moved on, and there are alternative financing vehicles now. The FTN has been very active in trying to open that up.”

When the work is complete Mr Mackey believes the network will have “three or four other sources for FTs raising funding for capital investment”.

He added: “There are private equity options, bond options, pension fund options. We’re also starting to see some commercial lenders starting to get more interested in the NHS market.”

Foundation trusts have historically been cut off from most sources of private finance because lenders were unwilling to take hospital assets as security. Hospital PFI deals are backed by government “deeds of safeguard” that guarantee the trust’s debt.

But Mr Mackey said some lenders would now lend “without a deed of safeguard, or without the [kind of] security that was previously seen as acceptable”. In the private sector, there were options available to well run organisations that “look more like unsecured loans”.

“There are some [financial] instruments used in the commercial sector that are starting to look more acceptable in the public sector,” he added.