Hospital PFI deals hit by cash shortages at trusts

The Government's Private Finance Initiative has received yet another blow with an official admission that many of the planned schemes for building NHS hospitals with private money will not work.

Many PFI lawyers blame the Government for rushing the initiative. The problem, said Andrew Neill, head of the NHS private finance unit, was that many hospital trusts would not be able to afford the proposed annual payments to private contractors. There are 24 proposed hospitals already with preferred bidders, but no contracts have so far been signed.

One project finance lawyer involved in hospital PFIs said: "There is the machinery in the NHS to work out the true costs of these schemes, but with some of them there is doubt as to how well this machinery has been used."

He said trusts engaged on PFI contracts would have to increase charges to their purchasers, but many had not checked if their main purchasers within the NHS could afford to pay the higher prices.

Banks financing potential contractors were also worried about the lack of creditworthiness of hospital trusts, he said.

Last year the Government passed the Residual Liability Act, which removes some of the doubt over liability when a trust has to be wound up. "Banks see it as a step in the right direction, but they still have worries about it," he said.

Another project finance lawyer involved in hospital PFI work said: "Maybe central government would have been wise not to have insisted on all these deals being set in PFI and chosen fewer good schemes to act as pilots instead."

Neill singled out the £170 million Norfolk and Norwich district general hospital scheme and the £30 million South Buckinghamshire scheme as ones near to being signed.

Mike Matheou, of Lovell White Durrant, acting for the bank financing the Norfolk and Norwich scheme, said this was because they were relatively simple deals. The Norwich hospital would be built on a greenfield site outside the city, replacing an existing hospital in the city centre, rather than being a conversion or extension of an existing building.

Kenneth MacRitchie, of Milbank Tweed Hadley & McCloy, whose London office specialises in infrastructure PFI projects, said: "We've deliberately steered clear of hospital PFI work. The deals are incredibly complex and many of the projects are not big enough to warrant the amount of due diligence required. Unlike some firms, we admitted that we didn't have the expertise."

Marisa Broadhurst, of Beachcroft Stanleys, who is acting for the South Buckinghamshire trust, agreed specialist expertise was needed. "In hospital PFI schemes, the bidding consortium isn't just undertaking to build and maintain the infrastructure, it is also providing all the non-clinical services."

But hospital PFI lawyers said the problems are surmountable. "Hospitals have to be built and the NHS can no longer afford to do it alone," said Matheou.

"As we gain more experience of these deals, they will become easier. The second tranche of PFI deals will move more smoothly."