An NHS foundation trust has been given conditional approval for a “novel and contentious” plan to buy out its private finance initiative contracts with a £120m loan from a local authority.

Northumbria Healthcare FT told HSJ that it had received in-principle approval from regulator Monitor at the end of last week.

The refinancing has come under close scrutiny in recent months from the Department of Health and the Treasury, with Monitor basing its decision in part on Treasury advice about the scheme’s value-for-money.

But Northumbria Healthcare chief executive Jim Mackey said the trust had now received “in-principle approval to proceed to the point where we have a deal” with the trust’s PFI providers.

Once a deal had been reached, he added, Northumbria would have to prove to Monitor that “the final numbers still demonstrate value for money, not just for us but for the broader public sector” in order to gain final approval to proceed.

The trust estimates it will save it around £4.7m a year on the combined cost of its two PFI schemes, which each have more than 18 years left to run, according to Treasury data.

However, it has had to allay various Treasury concerns about the project. Mr Mackey said these initially focussed on whether the deal would increase the UK’s level of public borrowing – Northumberland County Council plans to raise money for the loan by borrowing itself, from the Public Works Loan Board. He believed that worry was “basically a misunderstanding”, because the deal was “exchanging some borrowing for other borrowing” and not significantly increasing net public debt.

Then concern shifted to the possibility the deal could set a trend that would “kill PFI”, by scaring institutional investors and making existing projects in the PFI pipeline more difficult or expensive to get off the ground. But Mr Mackey argued that there were only “a small number of organisations that might want to do this type of refinancing”.  Any trust following Northumbria would need to be a strong borrower with a local authority willing and able to raise the loan, and its PFI would need to be of “a certain gestation” to make buyout worthwhile.

He added: “A few months ago the Treasury became more confident that this was not going to open the floodgates or kill PFI, and since then it’s been more focussed on value-for-money.”

According to Monitor, the scheme was considered “novel, contentious and repercussive” under Treasury guidance, meaning the Treasury needed to be assured the scheme represented value for money for taxpayers, as well as for the trust.

The regulator’s conditional approval means Northumbria can now go back to its PFI providers to try to negotiate the terms of the buyouts, a process Mr Mackey says is “going to happen in the next couple of months”.

It aims to have a deal approved and completed before the start of the next financial year.