The NHS PFI Millstone is not insoluble

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The NHS PFI Millstone is not insoluble

 Half of NHS Trusts are financed via PFI Contracts and many so called experts consider that Transformation of the NHS is made impossible because of them.  The writer considers that PFI contracts make the problem difficult but not intractable.   Firstly, it is crucial to understand that the primary challenge is not "dismantling" the NHS Trust itself (which is a straightforward, though significant, administrative process), but rather extricating the Trust from its long-term, legally binding PFI contracts without crippling financial penalties or losing essential services.

The PFI is a method used to finance the infrastructure (the hospital building, sometimes including non-clinical services like cleaning or catering) that the Trust operates from. Therefore, the goal is to terminate the PFI arrangement, not necessarily to dissolve the Trust.

The Core Problem

PFI contracts are typically for 25-35 years. They are legally robust, "project finance" agreements designed to protect private investors (the lenders and the SPV - Special Purpose Vehicle). They contain:

  • Steep termination clauses: Exiting early would trigger a compensation payment to the provider, often calculated to repay the project's entire outstanding debt plus lost future profits. This can run into hundreds of millions of pounds for a single hospital.
  • Unbundled services: The building, maintenance, catering, and portering might be separate contracts under the main PFI agreement, making it difficult to take over one service without the others.
  • "Fundamental Basis of the Bargain": The contract is priced on the assumption it will run its full term. Early exit destroys its financial model.

The Process of Exiting a PFI and Dismantling/Reconfiguring the Trust

There is no single, simple process. Instead, there are several potential pathways, often used in combination.

Pathway 1: Buy-Out

This is the most common and practical method, though it requires significant upfront capital.

  1. Internal Review & Business Case:
    • The NHS Trust, with support from NHS England/Improvement (NHSE/I) and the Department of Health and Social Care (DHSC), conducts a detailed review of the PFI contract.
    • They model the costs of continuing the contract versus the cost of buying it out. This involves calculating the "net present value" of future payments.
    • A strong business case must be made that demonstrates value for money for the taxpayer, often based on the high cost of the existing PFI.
  2. Securing Treasury Approval:
    • Any buy-out requires approval from HM Treasury, as it involves a significant upfront public expenditure to save money long-term. The Treasury will rigorously scrutinise the business case.
  3. Negotiation with the PFI Contractor:
    • The government (often via a central body like the Cabinet Office's PFI Unit) or the Trust negotiates with the Special Purpose Vehicle (SPV) and its lenders.
    • The government offers a lump sum to buy out the contract. The SPV has a fiduciary duty to its shareholders to accept a reasonable offer, as a lump sum now is often preferable to riskier future income streams.
  4. Payment and Contract Termination:
    • Once a price is agreed, the government pays the lump sum. A Deed of Termination is signed, legally ending all obligations under the PFI contract.
  5. Re-procurement or Insourcing:
    • The Trust now owns the hospital asset outright or is free from its obligations.
    • It must then either:
      • Insource: Directly employ staff and manage maintenance itself.
      • Re-tender: Procure new, shorter, and more competitive contracts for facilities management.

Example: In 2020, the government announced a £1.5bn programme to buy out a number of PFI contracts across the public sector, including in the NHS, arguing it would save £2.3bn over the long term.

Pathway 2: Reconfiguration

This process deals with the NHS Trust itself, but the PFI contract remains the central complication.

  1. Trigger for Reconfiguration: A decision is made that the Trust is no longer fit for purpose. This is usually part of a broader NHS restructuring (e.g., creating Integrated Care Systems) due to financial distress, performance issues, or a strategic review of local healthcare.
  2. The Legal Mechanism:
    • The power to dissolve, create, or merge NHS Trusts lies with the Secretary of State for Health under the National Health Service Act 2006.
    • This is done via a Statutory Instrument (a type of secondary legislation) laid before Parliament.
  3. The Transfer of Undertaking (Protection of Employment) Regulations 2006 (TUPE):
    • When a Trust is dissolved or merged, its staff, property, and most importantly, its liabilities (including the PFI contract) must transfer to a new organisation.
    • The legal order will specify which new or existing NHS entity (e.g., another NHS Trust, an NHS Foundation Trust) inherits the PFI obligations. The PFI contract does not just disappear.
  4. The PFI Problem in a Merger: A PFI liability can make a Trust "un-mergable". A healthy Trust may be reluctant to take on a struggling Trust's massive PFI debt. The government may need to offer a financial package (e.g., a write-off of historic debt, or a buy-out as in Pathway 1) to facilitate the merger.

Pathway 3: Insolvency

This is a theoretical and highly undesirable last resort.

  1. Trust Failure: A Trust becomes financially insolvent and cannot meet its obligations, including its PFI payments.
  2. The Provider Licence Regime: NHS Foundation Trusts are authorised by NHS Monitor (now part of NHSE/I). If they fail, the regulator can place them into "unsustainable provider regime".
  3. Administration: An administrator could be appointed. Their duty would be to rescue the Trust or achieve the best result for its creditors.
  4. The Outcome: The administrator could try to renegotiate the PFI contract from a position of weakness. However, the political and public outcry over a hospital closing due to insolvency makes this pathway extremely unlikely. The government would almost certainly intervene with a bailout or orchestrate a managed merger (Pathway 2) long before this point.

How Many NHS Trusts Have PFI Contracts?

It's important to distinguish between the number of PFI contracts and the number of NHS Trusts affected by them, as one Trust can have multiple PFI contracts (e.g., one for a hospital, another for a community health centre).

As of the most recent comprehensive data:

  • Total Number of NHS PFI Contracts: There are 125 active PFI contracts across the NHS in England. This is the figure consistently used by the Department of Health and Social Care (DHSC) and National Audit Office (NAO).
  • Number of NHS Trusts Involved: A large proportion of NHS Trusts are tied to these contracts. While the exact number fluctuates due to NHS reorganisations (mergers, dissolutions, etc.), it is estimated that over 100 individual NHS Trusts are responsible for making PFI payments. This means roughly half of all NHS hospital and mental health trusts in England are locked into at least one PFI agreement.

Key Point: The 125 contracts are heavily concentrated in the acute hospital sector, which means a significant number of the country's major hospitals were built or refurbished under PFI.

 

How Long Do They Have to Run?

The remaining length varies significantly from contract to contract, as they were signed over a period of more than a decade. However, we can provide a clear picture based on the typical contract length and known signing dates.

  1. Typical Contract Length: NHS PFI contracts are typically long-term, ranging from 25 to 40 years, with the most common term being around 30 years (e.g., 5 years construction + 25-30 years of service payment).
  2. Signing Dates: The UK government's PFI programme peaked between 1997 and 2010. The majority of NHS PFI deals were signed during this period.
  3. Calculating the Remaining Time:
    • A contract signed in 2000 with a 30-year term would be due to expire around 2030. As of 2024, it would have roughly 6 years left to run.
    • A contract signed later, say in 2008, with a 35-year term would expire around 2043, leaving about 19 years remaining.
  4. Overall Portfolio Outlook: Based on this:
    • The earliest PFI contracts are now beginning to expire. A very small number have already reached their end date.
    • The bulk of contracts are still in their operational phase. As of 2024, the average remaining length for all NHS PFI contracts is estimated to be well over a decade.
    • A significant number of contracts will run into the 2030s.
    • The very last NHS PFI contracts are not due to expire until the 2040s.

The Financial Burden

The critical issue isn't just the length of time remaining, but the cost. Even with years left to run, the annual cost is immense.

  • Annual Unitary Charge: The NHS pays an annual "unitary charge" to its PFI providers. This is a single payment covering the mortgage on the building, maintenance, and life-cycle costs, as well as services like cleaning or portering (if included).
  • Total Annual Cost: The total annual cost of all NHS PFI contracts is approximately £2 billion.
  • For Context: This £2bn is money that comes directly out of NHS Trusts' operational budgets. For some trusts, the PFI payment can consume 10% or more of their entire annual turnover, creating a significant financial strain that impacts other services.

In conclusion, while the end is in sight for some, a large portion of the NHS is still managing the significant financial and operational constraints of PFI contracts that will remain for many years to come. The government's policy of buying out the most expensive contracts (as mentioned in the previous answer) is an attempt to alleviate this long-term burden sooner.

 

Summary of Key Challenges

  • Cost: The huge upfront cost of buying out contracts is a major barrier, even if it saves money in the long run.
  • Legal Complexity: PFI contracts are deliberately iron-clad. Untangling them requires expert legal and financial advice.
  • Operational Risk: Taking over a complex estate management function in-house requires skills the Trust may not possess.
  • Political Will: It requires significant political capital to spend billions "bailing out" PFI hospitals, even if it's the fisc prudent thing to do.

Conclusion

Legally dismantling an NHS Trust set up under a PFI is a two-stage process:

  1. Neutralise the PFI Liability: This is the critical first step, almost always achieved through a central government-funded negotiated buy-out, which terminates the contract legally via a Deed of Termination.
  2. Reconfigure the Trust: Once the liability is removed, the Trust itself can be dissolved, merged, or reconfigured using the powers of the Secretary of State under the NHS Act 2006, ensuring staff and assets are transferred under TUPE regulations to a new entity that provides continuous patient care.

The process is less about a dramatic "dismantling" and more about a complex financial negotiation and careful legal restructuring to free the NHS from what are often considered burdensome and expensive contractual obligations.


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