ospital saves £14m by getting out of PFI deal
A hospital trust will save £14million after becoming the first in the country to buy its way out of a Private Finance Initiative deal.
7:00AM GMT 02 Feb 2011
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The NHS body was due to pay £2m a year for the next two decades to the private firm that built West Park Hospital in Darlington, County Durham.
But after reviewing the costs, Tees, Esk and Wear Valleys Mental Health Foundation Trust decided to take advantage of a break clause in the deal.
It paid £18m upfront to get out of the PFI contract 23 years early, but it now owns the hospital outright and expects to save £14m over the course of the deal once maintenance and inflation is taken into account.
The move, disclosed in the Health Service Journal, comes after The Daily Telegraph uncovered evidence that hospitals are closing accident and emergency departments in order to pay the interest on PFI deals for new buildings. Some PFI hospitals – built and run by private firms and effectively rented back to the state – will end up costing taxpayers more than 10 times their capital value.
“We concluded that the best option was to exercise what exists in the PFI projects, which is a clause called ‘voluntary termination’,” said Colin Martin, Director of Finance at the Tees, Esk and Wear Valleys trust.
“It effectively means we pay off the mortgage early.”
However he added that the trust - which runs mental health services in County Durham, the Tees Valley and along the North Yorkshire coast – did not regret the original deal and was committed to two other PFI deals.
“We wouldn’t have had the hospital if we’d waited for the traditional financing route,” Mr Martin said.
PFI deals became the preferred way of paying for public sector infrastructure projects under Labour, as they allowed new buildings to be constructed while avoiding large initial outlays of money.
Under the complex deals, private contractors carry out the building work then own the structure for up to 35 years, while the public sector body gives them annual interest and repays the capital sum as well as paying for maintenance.
However because of the length of the deals and the amount of interest involved, taxpayers end up paying several times the original value of the project.
In the first known example of an NHS hospital buying its way out of a PFI deal, the North-East mental health trust decided to purchase West Park Hospital outright.
It had agreed a 32-year deal with Norwich Union Public Private Partnership Fund to build the 116-bed facility, which opened its doors in 2004.
The hospital – which is also home to the trust’s headquarters - cost £16m to build but under the deal, the trust was paying the contractors £1.4m a year in interest payments and a further £600,000 in maintenance and paying back the principal.
In 2009, the trust reviewed its PFI deals and decided it had enough cash in the bank to pay the £18m break clause and so buy West Park outright. It gave the project company the required statutory notice and after the legal process was completed, the deal ended in December.
Treasury figures suggest it would have the remainder of the deal would have cost a further £32m, so it has saved £14m by getting out of it.
However it is unlikely the pioneering move will be copied by many other trusts, as most PFI deals are so large as to make early repayment impractical.
Aviva, the company that now runs the PFI firm that built West Park, was unavailable for cort of torture', families say 27 Jan 2014
