The last decade in the UK has seen many hospital redevelopments procured through the Private Finance Initiative (PFI). Deeds of Safeguard have played a vital part in the funding of many of these projects. But, as Dominic Spacie and Peter Shaw report, the Department of Health has now withdrawn the offer of Deeds of Safeguard on healthcare projects, just as proposed changes in healthcare organisation would make them even more important.

Background

PFI hospital projects began to proliferate from the late '90s, when the National Health Service (Private Finance) Act 1997 and the National Health Service (Residual Liabilities) Act 1996 (1996 Act) (together the Protective Legislation) addressed, respectively, concerns about:

(a) whether NHS Trusts have powers (or vires) to enter into PFI arrangements; and

(b) whether the state would take on the liabilities of a dissolved NHS Trust.

Foundation Trusts

Since the National Health Service Act 2006 (2006 Act), many NHS Trusts have become Foundation Trusts—a status which allows Trusts to borrow money without the express agreement of the Department of Health. An independent regulator, MONITOR, monitors the performance of the Foundation Trusts.

However, one consequence of an NHS Trust achieving Foundation Trust status is that investors in projects under PFI lose the protection given under the 1996 Act. This is the case if the NHS Trust is a Foundation Trust at the time of entering into the project, or if it subsequently becomes one.

To address this problem, and with the specific aim of ensuring investors in health PFI projects were no worse off, the Secretary of State for Health entered into a Deed of Safeguard for each PFI hospital project with a capital value of over £10 million.

Deeds of Safeguard

Deeds of Safeguard are stand-alone agreements between the relevant Trust, the Secretary of State and the funders.

Under these deeds the Secretary of State agrees with the project company and the scheme’s funders to accept a primary obligation for the Trust’s financial responsibilities and liabilities in respect of the project. The Secretary of State has generally provided a Deed of Safeguard whether the relevant NHS Trust is a Foundation Trust when entering the project or not. In the latter case, the Deed of Safeguard protects the other project parties if the Trust later becomes a Foundation Trust and then subsequently encounters financial difficulties and breaches its payment obligations under the PFI Project Agreement.

The existence of Deeds of Safeguard for PFI hospital schemes has helped de-risk these projects for funders and other project parties. If the Protective Legislation does not apply, the Secretary of State will stand in for an insolvent Trust under the Deed of Safeguard.

A New Regime: A New Obstacle

But with a change of UK government came a proposed change in healthcare organization. The coalition government is promoting the Health and Social Care Bill (2011 Bill) and one of the proposals in it is that all NHS Trusts achieve Foundation Trust status.

In itself this would cause no problem. However, as these proposals are put forward, the Department of Health has also withdrawn the offer of Deeds of Safeguard for future health PFI projects. On one project, where the firm is advising a potential investor, there is still no news from the Department of Health as to whether Deeds of Safeguard will become available again. This is causing, unsurprisingly, much anxiety (and disbelief) in the sponsor and funding community. Until this is resolved the only consequences are delay and uncertainty. This has a wider impact on the UK economy: the health sector is one of the few infrastructure sectors in the UK with a good pipeline of work (e.g. Alder Hey, Papworth, Sandwell and Royal Liverpool).

What Now?

Interestingly, despite the recent approach of the Department of Health, the 2011 Bill does not amend section 40(3) of the 2006 Act, which states:

"The Secretary of State may guarantee the payment of any amount payable by an NHS Foundation Trust under an externally financed development agreement."

(This would include project agreements and direct agreements.)

Those involved in funding hospital projects can only hope the Secretary of State begins to use this discretion again in future—the alternative may be a long list of projects with no funding. Maybe, just maybe, it would have been simpler to leave a tried and tested process untouched!