Hartlepool shows how pension funds could save NHS hospitals from PFI

A new NHS hospital typically costs hundreds of millions of pounds to build. Trusts do what anyone buying a new home does: they take out a mortgage. The problem has been that most trusts (in England, anyway) have had only one, weird type of mortgage available: a private finance initiative (PFI).

Imagine that your bank insisted that you bought your house from its business partner, which would also maintain it for the next 30 years – and charge you a high price for anything not in the original plan. And you might end up paying six times the original price. If you see a trust in financial problems, a PFI deal is often the cause, such as South London Healthcare which has been spending 14% of its income on its PFI repayments and in July was put into ‘special administration’ by the Department of Health.

A better alternative would be for national governments to pay, then if necessary borrow at the unbeatably low rates they can get, but governments rarely like big capital projects. (As last week announcement of the go-ahead for Edinburgh’s new Royal Hospital for Sick Children showed, Scotland appears to be an exception.) And what other type of investor is interested in a low interest rate with stable returns from a reliable state-sector organisation?

The answer is pension funds. The whole point of a pension is to stick money away for decades, making it ideal for long-term investments. So well done to North Tees and Hartlepool NHS foundation trust, which is seeking pension funding for its new £298m superhospital. It is moving cautiously (and is facing local opposition over the entire scheme), and only plans to confirm its use of pension money at the end of the procurement process in 18 months’ time. But if all goes to plan, Hartlepool will have a pension-funded superhospital by 2017. The trust has told my former colleague Sade Laja, now at Pensions Week, that repayments will be lower than those to a PFI, and that the inflation-linked increases which are normal under PFI will be capped.

The trust’s chairman Paul Garvin reckons the funding route is “unique”. It shouldn’t be.  NHS hospitals are infrastructure – a type of asset the government is encouraging British pension funds to back through a new pension infrastructure platform, following the example of other countries. They cost a lot to build, but are useful and therefore financially valuable for decades.

And there’s an elegance to the Hartlepool plan as well. Pension funds use the times when you’re stronger to help you when you’re weaker. So do hospitals. Financially but also socially, North Tees and Hartlepool is on to something.

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