Should NHS organisations set up charities to help them run PFI projects? Ted Powell examines the legal issues involved

A recent issue of HSJ opened an important debate on the future of health sector private finance initiative projects.

The Treasury's decision to adopt new international accounting standards next April is expected put up to£16bn of PFI debt onto trusts' balance sheets, and HSJ's editorial draws attention to the proposal that trusts may seek to respond by hiving off the "residual" of their PFI deals to charities. It raises concerns that, because charities are required to be independent bodies, this may lead to a loss of control over publicly funded assets.

But before we dismiss the idea out of hand, it is worth taking a closer look at the charity option for PFI.

The law on charities

Over the last 10 years, the government has increasingly looked to the charitable sector for help with providing health and social services. The Charities Act 2006 provided a much-needed overhaul of charity law, and one of the act's key principles is a renewed emphasis on charities delivering public benefit. This has always been a requirement of charitable activity, but from now on all charities must actively demonstrate that they operate for the public benefit.

The public benefit requirement is having a galvanising effect on the charity sector, and it is a welcome reminder that although charitable assets are privately owned, they must be made available for the benefit of all who are capable of benefiting from them.

Charities have been providing public services for many centuries. Long before government got involved, charities were providing hospitals, schools and almshouses, as well as funding major infrastructure works such as roads and bridges. Many of our great hospitals began as charitable foundations. Nor is the charity model obsolete. The Bridge House charity, which was founded in the 12th century, still maintains and supports London Bridge, Tower Bridge and other London bridges, and does so without government funding.

There is no reason why a charity could not own the "residual" of a PFI deal or even operate a hospital: indeed, a charitable company would be a very good vehicle for the ownership of a hospital and the procurement of services for operating it.

Key advantages

Charities are integral to the day-to-day operation of many trusts - from the home-knitted stalls and shops in hospital foyers to the multi-million pound professional fundraising charitable trusts working in parallel with NHS budgeting.

Charities have a number of advantages that make them very well suited for PFI projects. Most importantly, they are by definition not-for-profit bodies: any surpluses they make must be ploughed back into charitable activity. As a result, they enjoy a number of tax exemptions that enable them to maximise the use of their financial resources. Charity law defines rigorously what charities may and may not do, and a charity must operate strictly within the scope of its charitable objects, as set out in its governing documents.

The regulatory and legal framework of charities is important in the PFI context because it provides the means whereby a charity can be specifically designed under its governing documents to serve particular charitable purposes. While the trustees must be independent, they can only operate in fulfilment of the charitable purposes of the charity and for the public benefit.

We do not have to look far to find PFI projects that use charitable structures. In the higher education sector, a number of universities have recently procured student residential accommodation through the PFI route using a charitable special purpose company. As charities themselves, many universities find this a very attractive option since it means a greater proportion of the project surplus can be captured in the charitable company, and could be used for the university's ultimate benefit depending on the charity's objects.

Viable option

Many of the technical and legal issues involved in using charities for PFI have thus already been resolved, so health trusts would not be venturing into totally uncharted territory.

Clearly, trusts should not resort to charitable structures merely as a way out of balance sheet problems created by the new accounting standards. Nevertheless, the charity model offers a genuine option for providing healthcare, and the time may have come for us to take a fresh look at it.

Who knows, in time this model could be developed even further to relieve local authorities as well as trusts from the responsibility of estate ownership and management, which would leave public service bodies free to concentrate on commissioning and providing public services.