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Debt-laden NHS trusts unlikely to rush to copy Hexham PFI 'buy-back', says expert

Out-Law News | 06 Oct 2014 | 9:55 am | 2 min. read

Debt-laden NHS trusts considering buying out historical liabilities under a private finance initiative (PFI) contract will have to consider their next steps carefully, an expert has said.

This week, Northumbria Healthcare Foundation Trust became the first to pay off the private contractors who built and ran one of its hospitals, Hexham General Hospital, under a PFI contract, according to the Financial Times. Although the terms of the arrangement have not been disclosed, the paper said that the trust borrowed £114 million from the local council to buy its way out of the contract, which would otherwise have expired in 2033.

Health sector expert Barry Francis of Pinsent Masons, the law firm behind Out-Law.com, said that although the news was "certainly exciting interest in the market", "there is a feeling that it has worked because of its own special facts".

"The buy-out option may well be attractive, especially where there is to be a significant reconfiguration of services, but it is not likely to be an easy fix and will require a lot of careful thinking and constructive engagement with a number of actors," he said.

Any trust contemplating a similar deal would need to consider questions ranging from the termination cost under the PFI contract, to how they planned to provide and pay for the maintenance and facilities services previously provided by the private sector partner under the contract, he said.

PFI was introduced in the 1990s as a way of using private funding to pay for major infrastructure projects such as new hospitals, roads and schools. In a PFI agreement, the private sector obtains finance to design, build and operate a facility for the benefit of the public. In return, the public sector will grant its private sector partner a long-term contract to run the facility and will pay a monthly fee over the life of the project from which the loan is repaid.

Francis said that the termination cost under the PFI contract would be based on the market "as it then was", and that the cost of funding may well have been higher when the deal was made in real terms. Trusts would also have to consider their "real savings over the life of the contract in net present value terms", and to factor in the likely costs of the risks that it was taking on. Depending on the terms for the new money for the refinancing, trusts could be getting better longer term value for money from their existing arrangements, he said.

Trusts would also have to consider the treatment of employees if service provision was to be brought 'in house', as the Transfer of Undertakings (Protection of Employment) Regulations (TUPE) would act to transfer them and any liabilities associated with them to the trust automatically, he said. Trusts could also struggle to "maintain the discipline of maintaining the facilities", resulting in funds being diverted to immediate needs, he said.