How can an NHS Trust go bankrupt?

In May 1997, back in those lovely days where we were sure we’d got rid of the Tories and now had a Labour government, Tony Blair put Alan Milburn in charge of the Department of Health, where he stayed for about 18 months until Peter Mandelson first got caught in a dodgy money deal, whereupon Milburn was reshuffled to the Treasury and in 2003 resigned from government to “spend more time with his family” and with Bridgepoint Capital, a venture capital firm with clients including Alliance Medical, Match Group, and Medica.

Between the Treasury and the NHS, Alan Milburn – an enthusiastic supporter of Blairite policies – set in train everything needed to make an NHS Trust go bankrupt.

George Monbiot, on The Biggest, Weirdest Rip-Off Yet:

When Labour took power in 1997, it told public servants that there would be no alternative to PFI. “When there is a limited amount of public-sector capital available, as there is,” the health secretary Alan Milburn announced, “it’s PFI or bust”. After 12 years, the policy hasn’t changed. A leaked email summarising a meeting with the current health secretary, Alan Johnson, in January this year [2009] revealed that “PFIs have always been the NHS’s ‘plan A’ for building new hospitals … There was never a ‘plan B’.” If you apply for public funds, you won’t get them: to build a new hospital or school or prison, you must PFI it.

South London Healthcare runs three hospitals in Orpington, Sidcup, and Woolwich. The Princess Royal University Hospital in Orpington and the Queen Elizabeth Hospital in Woolwich were both built using Blair’s darling and Milburn’s favourite: Private Finance Initiative. Queen Mary’s Hospital in Sidcup was built in 1974.

The hospital in Orpington opened in April 2003, replacing two hospitals at Bromley and Farnborough: it was financed by selling off NHS land in Bromley, and by an early private finance initiative: the Queen Elizabeth Hospital in Woolwich is even worse off, it was opened in March 2001 and was financed exclusively by a PFI deal signed in John Major’s era. [Update: I originally thought they were both Labour deals, but it seems Woolwich was a late Tory deal.]

From MoneyWeek, 2007:

In the early days of PFI, many investors made huge, one-off profits from refinancing their debts on more favourable terms once the most risky stage of the project – putting up the building itself – was done. The recent PAC report cites the Norfolk & Norwich Hospital, where debt refinancing boosted returns for its builders from 16% to 60% – private investors got a windfall of £80m. As a result of this and many similar cases, in 2002 the Government agreed a voluntary code with the industry under which investors handed back a percentage of refinancing profits; initially 30% and now 50%.

However, while that sounded like a good way to try to redress the balance, it hasn’t worked. The gains for government have been much lower than anticipated – £93m by the end of 2006, instead of the £175m-£200m predicted. For this, the PAC blames the fact that renegotiation is often undertaken by civil servants “painfully lacking in commercial experience”. Worse, the code doesn’t cover the onward sale of equity stakes to third parties, an area where PFI investors are now making even bigger profits.

George Monbiot has been pointing out for over a decade that the PFI deals, suggested by the Tories, put into place by New Labour, were effectively legalised fraud. Because Alan Milburn would not allow any public financing for new hospitals, no matter how badly needed after 20 years of neglect by the Tories, public service managers had to somehow make a bid by a private company look like the most cost-effective bid.

Exactly ten years ago, in June 2002, Monbiot published a column Public Fraud Initiative, in which he cited Jeremy Colman, the auditor-general at the national audit office, who had just admitted that

some of the comparators being used are “utter rubbish” and “utterly irrelevant”. Public service managers know that they must show the government that their plans are cost-effective. “If the answer comes out wrong you don’t get your project. So the answer doesn’t come out wrong very often.”

They are rigging the comparators because the government has presented them with irreconcilable objectives. On the one hand it has told them, in the words of Alan Milburn, the secretary of state for health, that “it’s PFI or bust”: the only money the government will allow them to receive is money provided by the private sector. On the other hand it has insisted that private finance can be obtained only if it offers better value for money than public funding. Public servants are forced, in other words, to prove that private finance works.

They were helped to do this by the Labour government relaxing rules for the private sector consortia in a way that inevitably led to corrupt practices. Risk costs were padded: the consortia did not need to develop a detailed bid for the projects but were allowed to present a low-cost outline for the hospital they planned to build and add in costs after their bid was accepted.

NHS Trusts were set up to be enterprises with “turnover”, another New Labour idea, so when they have a huge PFI debt, they also run at a deficit. The South London Healthcare NHS Trust inherited a big debt from the PFI initiatives used to build at Woolwich and Orpington, and “in recent years, the deficit has got worse – it reached 2012 with £69m of debt on a turnover of just over £424m.”

Andrew Lansley’s sympathy is limited:

“A central objective for all providers is to ensure they deliver high-quality services to patients that are clinically and financially sustainable for the long term.

“I recognise that South London Healthcare NHS Trust faces deep and long-standing challenges, some of which are not of its own making.

“Nonetheless, there must be a point when these problems, however they have arisen, are tackled. I believe we are almost at this point.”

By this he means that the receivers will be called in. The South London Healthcare NHS Trust will become the first victim of New Labour’s PFI. There are 20 other Trusts, the BBC’s Health correspondent estimates, that are “struggling”. Even some Tory MPs are seeing a problem here: Jesse Norman, from Hereford and South Herefordshire

reckons Labour were so eager (desperate, even) to have their new hospitals that the terms written into the deals were unduly advantageous to the private consortiums who will continue to maintain and own these precious assets for years to come. Critics say, “it’s like mortgaging the future of the NHS”.

(Mr Norman quotes an example from his own PFI hospital in Hereford, where he says the replacement of a television aerial by an approved contractor cost more than £900. In the days of the old NHS trust they’d have found a local handyman for £50!).

So now Mr Norman is proposing that the PFI companies should pay what amounts to a rebate to the Government. This, he says, would compensate the hard-pressed taxpayer for those excessively generous PFI contracts negotiatiable under Labour when the economy appeared to be in so much better shape than it is now.

That’s a very kind way of putting it. But one of the biggest PFI projects in the NHS was the Royal Infirmary of Edinburgh – financed by selling off land to developers, so that the city centre hospitals we used to have are gone forever, and by a private finance initiative that was thoroughly messed up. As reported in 2006:

But if we take a look at the biggest PFI project so far in the health sector – Edinburgh’s Royal Infirmary – it cost £184m to build.

However, Lothian Health Board is committed to repayments of £40m every year.

It will have repaid more than £1bn by the time the contract ends in 30 years.

In fact, the final bill will be three times the cost of the parliament at Holyrood.

For a hospital that the staff hate and that’s expensive just to get to. When my dad was in the Infirmary for weeks recovering from a broken hip, my mum visited him every afternoon and I every evening: I left work at five, got to the hospital sometime after six depending how the buses were running (I soon found that it was usually faster to change buses three times than get the direct route) and then would get home sometime after nine pm. I love my dad and didn’t begrudge him the time or the weeks of eating a packed evening meal on the bus: but years ago he would have been at the old Royal Infirmary in the centre of the city or at Astley Ainslie, a short bus ride away.

In summer 2010, as George Monbiot noted:

Edinburgh Royal Infirmary, thanks to the extortionate terms of its PFI contract, found itself with a shortfall of £70m. Under other circumstances it would suspend maintenance work and cut ancillary services until the crisis had passed. But its contract demands that it does the opposite: it must protect non-clinical services by cutting doctors, nurses and beds.

If a hospital no longer requires the services it contracted to buy, tough. If clinical needs or local demographics change, tough. Where hospitals can’t pay the massive penalty clauses said to lurk in the agreements, the NHS must be re-shaped around contractual, not clinical, needs.

Worst of all, are we going to get any kind of opposition from Labour? [Update: Or from the SNP?]

No, apparently not, because this would entail Labour now looking at their right-wing governance of the NHS when they were in power and acknowledging that they were wrong then and the Tories are wrong now.

Labour spokesman, unnamed:

“After many years of neglect by the Tories, Labour used PFI to deliver the biggest hospital-building programme in the history of the NHS, benefiting millions of patients. In contrast, this government has lost its grip on NHS finances and is wasting billions of pounds on a NHS reorganisation which is opposed by patients and health professionals.”

Whereas New Labour wasted billions on PFI initiatives that are now blowing up in our faces. Hospital refurbishment schemes were rejected because they weren’t costly enough (Monbiot, 2001) – what was actively preferred was selling off the valuable land on which hospitals had been built, demolishing the old buildings, and building shiny new places on much cheaper building sites away out on the edges. Like Little France.

Monbiot warned us in 2001:

When a consortium has been chosen by the government to build a privately financed hospital, it borrows money from the banks. The interest rates the banks charge depend partly on how risky they believe the project to be. Once the hospital has been built, however, most of the risk disappears. And PFI schemes now turn out to be considerably less risky than the banks first assumed, not least because the government has guaranteed to the private companies that their profits come first. If the NHS is faced with a choice of leaving patients to die in hospital corridors or paying the money it owes to the consortia, it is now legally and contractually bound to honour its financial commitments.

This means that when the corporations complete their hospital, they can borrow against their future earnings at a significantly lower rate than before, and extend the period over which they must repay the money. So they reborrow the same money more cheaply, pay off their original creditors and pocket the difference. The potential gains are enormous. Octagon Healthcare’s five shareholders – Barclays Bank, the construction company John Laing, the financiers Innisfree and 3i and the service providers Serco – invested some £30m of their own money. The figures I have seen show that they could walk away with £70m even before they start charging the NHS for their services.

BBC Today reports this morning that Downing Street is quick to reassure the private sector: taxpayers will take over the £2.5 billion PFI debt for the South London Hospital Trust. All the profit, none of the risks. Last Saturday, members of the paediatric team at South London Healthcare helped shoppers at Sainsbury’s in Orpington pack their bags in order to raise money for the children’s ward at the Princess Royal University Hospital.

What has happened to the political opposition in the UK? In the US, this month, for the first time, Wall Street financiers guilty of a complicated bid-rigging scam that rooked billions from the taxpayers have been convicted, despite the complexity of the evidence. In the PFI scams the rigging happened with the complicity of NHS managers who knew they would not get permission from a Labour government to build a new hospital unless they awarded the bid to a private finance initiative. Whether we can prosecute anyone for doing this is doubtful: but can Labour not at least acknowledge that it was a scam and New Labour were wrong?

—-
Update, 8pm

Two years ago, following A Picture of Health review of services in the Trust, (July 2010) Dr Chris Streather, the chief executive of the South London Healthcare Trust, said that the changes proposed by the APOH review were essential and had to be done quickly. “any significant delay could result in premature deaths, the forced sale of one of the hospital sites, escalating financial problems and an exodus of staff”.

Unison regional organiser, Carol Shorter

said staff in South London Healthcare Trust were being expected to apply for jobs without having any job description. She said she had written to Dr Streather twice asking why the trust was not consulting staff in a meaningful way and had yet to receive a reply.

She said: “The trust seems to feel it doesn’t need to listen to the unions. They are treating the staff in an abysmally shoddy way.”

Two years on: Dr Chris Streather left the Trust on 14th June. He sent a memo to all staff announcing his departure:

“We have started to deliver consistently on access to treatment, and I am confident we have the team in place to make this sustainable.

“There are obviously considerable financial challenges still to be met, much of that is within our own gift to deliver, and we have well thought through and publicised plans for this.”

Reactions from MPs & unions from ThisIsLocalLondon:

Jo Johnson, Labour MP for Orpington:

“It has been abundantly clear for some time that the trust structure is failing. Saddled with dud PFI contracts, SLHT has significant financial challenges, adding to a historic debt of £150 million at the rate of £1.3m each week. This is money straight out of the pockets of patients. History shows that trusts with weak finances eventually also underperform clinically and Health Secretary Andrew Lansley is right to head that off now before it happens with SLHT.”

He added: “I had an urgent meeting with the health secretary and sought assurances that there would be no asset-stripping or any rushed attempt to balance the books.”

James Brokenshire, Conservative MP for Old Bexley and Sidcup, said

the announcement was “more of a sad inevitability than a surprise”.

“It’s been clear for some time that the South London Healthcare Trust simply isn’t sustainable and remains burdened with debts it can’t repay. At its creation SLHT was saddled with onerous PFI contracts and a historic debt mountain inherited from its predecessor organisations.”

David Evennett, Conservative MP for Bexleyheath and Crayford said:

“I welcome the action taken by the Secretary of State as this situation has gone on for far too long.”

He added: “I think we now have a real opportunity to ensure that Queen Mary’s Hospital has a viable and sustainable future, providing important services and treatments for Bexley patients. In order to achieve all this, the Trust has to be broken up.”

Bob Neill, Conservative MP for Bromley and Chislehurst, said:

“This is yet another example of how taxpayers and patients continue to suffer from the mess bequeathed by the last Labour Government. It saddled South London Healthcare Trust with two botched PFI contacts, and the Trust has since faced an uphill battle trying to return a degree of financial stability to the local health economy. With standards of care still well below par, and debts continuing to rack up by over £1m every single week, the health secretary is absolutely right to intervene and find a long-term fix to these inherent problems.”

Rob Macey, GMB, said

hundreds of members have already called in with concerns about the possibility of staff cuts, the closure of services and facilities being hived off to the public sector.

He said: “The decision to call in administrators is nothing short of disgraceful. If the Trust is dissolved there will be devastating consequences for both patients and staff. It cannot be right that we have a Government that is prepared to bail out the banks but not our NHS.”

Carol Shorter, UNISON, said

“Since it’s formation in 2009, this Trust has had a PFI millstone about its neck. Today, that millstone has finally weighed it down. Poor management of the 3 legacy Trusts prior to the merger has also played a part in today’s picture.”

She added: “PFI is no longer relevant or effective, and South London Healthcare Trust is proof that there should now be an end to the scheme. There needs to be a return to conventional procurement, which will ensure a more efficient, flexible and cost effective way of building public assets, such as hospitals. The staff at the Trust have worked tirelessly to turn things around, despite facing numerous reorganisations, which are still ongoing. They have woken today to startling news, but despite this, they will be at work caring for their patients and doing the jobs that they love; for them, it’s business as usual.”

John Hemming-Clark, from Independents to Save Queen Mary’s Hospital, said:

“A hospital going bust is the sort of announcement we expect from a third-world country where some crackpot dictator has siphoned off all the foreign aid relief for his and his cohorts’ personal gain, not what we expect to happen in this country where the dictator (i.e. South London Healthcare Trust) that is siphoning off a billion pounds of taxpayer’s money, via a Private Finance Initiative contract, to the bankers and their cohorts over a 30 year period.”