Pension funds to bankroll £298m hospital in finance first

North Tees and Hartlepool Foundation Trust revealed to HSJ it has had two separate offers from funds interested in financing its new £298m hospital. It is believed this would be the first time this source of finance has been used at scale in the health sector.

The trust said the funds had offered to put up the money without a “deed of safeguard” from the government guaranteeing it would underwrite the loan.

The deal could offer a solution for organisations needing to renew or rebuild their estate, but which are unable to get capital funding from the state.

HSJ’s revelation of the prospective deal comes two years after chancellor George Osborne’s 2010 comprehensive spending review cancelled the previous government’s commitment to fund an earlier £460m scheme planned by the trust.

Mr Osborne said last November he hoped pension funds would step in to pay for capital projects.

The trust’s new borrowing proposal must be approved by Monitor before a tender can be issued for the construction work and a “funding competition” held to select the lender.

If this all goes to plan, Monitor must sign off the final package before building work can begin in spring 2014.

The regulator confirmed to HSJ it was carrying out a “preliminary affordability review” of the project, which it expected to conclude this month.

North Tees and Hartlepool told HSJ the pension funds had indicated their willingness to provide the funding from 2014. The trust would not be expected to start making its unitary payments - covering the repayment of the loan and the operating costs of the outsourced maintenance contracts - until the facility opens in March 2017.

Trust commercial director Kevin Oxley told HSJ the lifetime of the contract would be 30-50 years, with the loan secured on the land and buildings. The trust would sell the land to the fund and then lease it back over this period.

Conditions would stipulate the estate could only be used for the purposes of healthcare and by the trust or a successor organisation.

The organisation would then buy the hospital and grounds back for £1 at the end of the contract.

Mr Oxley said the unitary payments would be smaller than those in regular private finance initiative deals. The effect of inflation on the unitary payment would be capped.

The attraction of a deal covering services as well as construction is that it avoids the VAT payable on a construction-only project.

Under the latest proposals the trust would retain responsibility for “hotel services”, such as cleaning and catering, as well as internal repairs and maintenance. A contractor appointed by the pension fund and trust would arrange any major engineering work.

This contractor, set up as a “special purpose vehicle”, would bear the risk of any delays or overspends in the construction phase along with the main construction contractor.

Sharon Renouf, major projects partner at law firm Bevan Brittan, said: “Pension funds don’t like construction risk but there are a number of models being talked about in the market to address that.

She said it would be “unique” if North Tees and Hartlepool got a pension fund loan without the fund bearing construction risk.

Ms Renouf added: “If they find a way to pull this off they will be a step ahead of the game.”

Mr Oxley said the trust would use a “deed of safeguard” guarantee from the government to negotiate a lower interest rate if one was offered, but it was not waiting for it.

The news comes as the Treasury is expected to issue advice to Monitor shortly on the first ever attempt by a foundation trust to use local authority borrowing to refinance its PFI contracts.

The FT regulator’s compliance board committee last month considered a request by Northumbria Healthcare Foundation Trust for an extension of its borrowing limit, to allow it to borrow £120m from Northumberland County Council for a capital project.

HSJ understands another large hospital trust is considering going down a local authority partnership route for its new hospital.

• See leader