Trust access to PFI funding could be constrained by Treasury rule change

The revelation comes after a Treasury select committee report last week criticised PFI for not being “relied upon to provide good value for money without substantial reform”.

A letter from Mr Alexander to health minister Simon Burns, obtained by HSJ, reveals the Treasury has asked the DH to consider raising the £70m threshold over which schemes can be considered for PFI funding.

Applicant trusts will also face an initial “strategic outline case” being added to the existing two stage approval process.

Finally, the Treasury has asked for a guarantee the DH will carry out a review of all potential capital schemes.

The Treasury gained the concessions in return for agreeing to issue further “deeds of safeguard” – documents guaranteeing the government will pay off loans in the event of trusts collapsing, without which commercial lenders refuse to enter deals.

In a letter to the chief secretary dated 30 June, Mr Burns said a DH review had found the private sector unwilling to lend to trusts without deeds of safeguard, with six trusts unable “to obtain funding from the market without government underwriting”. These included the Royal National Orthopaedic Hospital in north west London.

In reply Mr Alexander wrote: “I am grateful for your reassurances that guarantees will only be provided where there are checks in place to ensure the schemes are affordable and compliant with government policy.”

He added: “I would be grateful if you would ask your officials to undertake an assessment of the potential costs and benefits for increasing the threshold for providing NHS PFI guarantees, ahead of the start of each financial year.”

He also asked the DH to carry out a “horizon scanning and prioritisation exercise for capital schemes, including PFI”.

Foundation Trust Network chief executive Sue Slipman welcomed the continued use of deeds of safeguard, given the lack of publicly available investment and uncertainty about the failure regime, which discouraged private investment.

She said: “In the current economic circumstances, however, foundation trusts think it is unlikely that such deeds will be granted often and may not resolve the potential future demand.

“Hence, in the longer term, FTs are seeking the development of a capital market that will appreciate risk properly and price capital at rates that are affordable.”

One law firm said the new arrangements could endanger organisations requiring capital investment to remain viable.

Sharon Renouf, partner in the commercial and infrastructure department at Bevan Brittan, agreed that uncertainty over the insolvency regime for foundation trusts was preventing the development of other models of private funding.

She added: “Trusts without access to public capital or third party funding will find it increasingly difficult to fund service change which is often critical to their future viability”.

Audit Commission managing director for health Andy McKeon  acknowledged the impact of a potential increase in tariff was uncertain but argued that “there has been no fundamental change in the rules”.

He added that the DH already conducted regular “horizon scans” on capital projects.

Andrew Haldenby, a director at pro-market think tank Reform, said the relative lack of change to the PFI system was politically motivated, adding: “This government is extremely nervous about changes to hospital structure, and that goes right to the top.”

But he added that the model itself was not the problem, just the “uncompetitive” deals struck in the early days of PFI.

Graham Beal, a partner at Ernst & Young and expert on health sector PFI, said it had often proved difficult to properly assess the benefits of a deal.

He told HSJ: “For some trusts with existing PFI schemes, it is becoming increasingly clear that while the schemes passed the affordability test ‘on paper’, subsequently there haves been issues with the realisation of the productivity improvement benefits identified in the business case on which the case for affordability was predicated.

“The question is how will the assessment of identified benefits be strengthened in the new affordability test? This will be difficult for trusts to address as it is as much about organisational governance as the inherent potential to deliver the productivity improvements.”