The UK’s Health and Social Care Bill has proved to be both politically divisive and socially controversial. It has faced widespread opposition. Critics level two charges at the Bill. The first is that the reforms will result in greater private sector involvement in the National Health Service (NHS) – effectively ‘privatisation by stealth’. The second is that the upheaval and cost of implementation impose an unnecessary burden on the NHS at a time when it is required to make significant savings.
The first argument is typically shrouded in political and unionised anti-private sector dogma, when the real question should be how to achieve best value for the £125 billion (€149 billion; $198 billion) spent annually on the NHS. If private sector input allows more or better care to be provided free at the point of delivery, it should be embraced not vilified. The second argument has more substance, but is not a justification for the status quo. If restructuring will release long-term value, then it cannot be implemented soon enough, even if there will be short-term costs in doing so.
But for the infrastructure industry, there are other aspects of the reforms that are closer to home. One of the key features of the Bill is the proposed abolition of Primary Care Trusts (PCTs) and the transfer of commissioning functions to general practitioner (GP) consortia. The media spotlight (perhaps rightly) has fallen on the future consequences of this fundamental change to the structure of the NHS. But there has been little focus on how the Bill might impact on existing aspects of the PCT estate, specifically the long-term commitments of PCTs under existing Local Improvement Finance Trust (LIFT) and Private Finance Initiative (PFI) projects.
The LIFT programme was established to improve the primary care estate and to address the legacy of under-investment, often as a result of limited investment funds being channelled into larger hospitals rather than smaller community facilities. As with any privately financed programme, LIFT is not without its critics. However, the general consensus is that it has achieved its objectives, delivering over £1.5 billion of investment in over 225 new facilities over the course of a decade.
Following months of uncertainty, we have answers to some of the longstanding questions around the future of the PCT estate. Last August, the Department of Health announced that aspirant Community Foundation Trusts, NHS Trusts and Foundation Trusts would be given the opportunity to acquire parts of the PCT estate deemed to be ‘service critical infrastructure’. In January, the Secretary of State announced that the remaining parts of the PCT estate would transfer to NHS Property Services Ltd (or PropCo) – a private company wholly owned by the Secretary of State.
However, as yet, there is no clarity on what will happen to the PCT’s obligations under LIFT and PFI projects. If the rumour mill is to be believed, the LIFT and PFI properties will transfer to the NHS Commissioning Board (or NCB). As the Bill allows for a statutory transfer of PCT property to the NCB, this theory would seem plausible.
What are the implications of such a transfer for the LIFT and PFI projects concerned and their equity and debt investors? To answer this question, we need to revisit the two main legal issues that dogged the first wave of hospital PFI deals.
The first related to the constitutional power (or vires) of the NHS to enter into PFI arrangements: put simply, it was not clear that NHS Trusts could do PFI at all. Primary legislation (the National Health Service (Private Finance) Act 1997) was required to put this issue beyond doubt, but for some time it prevented the first wave of PFI projects from closing.
The second related to the covenant strength of NHS Trusts and the associated solvency risk of lending into a PFI deal: again put simply, it was far from clear what happened if an NHS Trust couldn’t pay its debts. This issue also required primary legislation – the National Health Service (Residual Liabilities) Act 1996. This Act provided that that if a PCT or NHS Trust ceased to exist, the Secretary of State would have to ensure that its liabilities (including PFI commitments) were “dealt with”.
Any transfer of the PCT-sponsored LIFT and PFI projects will prompt investors to revisit both of these points. A transfer to the NCB is potentially troubling on both counts. Picking through the Bill, the NCB seems to be little more than a quasi-autonomous non-governmental organisation (quango). There is some detail as to how the NCB will be funded and how the NCB should budget, but there is no detail as to what would happen should the NCB fail. Nor is there express authority for the NCB to assume the obligations of a PCT under a LIFT or PFI project.
If the rumour mill proves to be wrong and projects are transferred to PropCo, the vires issue should not be relevant. However, unless the government provides some form of guarantee, it seems unlikely that investors would welcome a transfer to a private company without some form of public sector support.
Overall, either route would seem to be a worse deal for both debt and equity. The reforms effectively remove government support for PCT-procured LIFT and PFI projects – one of the key principles which underpin such projects and the basis upon which investment decisions were originally taken.
What can equity and debt do to protect their position? It may be that clarity on these issues emerges in the final legislation. If not, it will be necessary to look to rights each may have under existing documentation. In some cases, it may be possible to claim an Adverse Law event of default. However, the analysis is by no means clear-cut and calling a default might not be an attractive option, particularly where a project is otherwise performing well.
There may be some form of public law remedy (in the form of judicial review), although this is rarely a straightforward enterprise. Most likely, the focal point will fall on the senior funding community, whose consent is likely to be required to any fundamental change in underlying project architecture.
In an ideal world, the Department of Health would look to engage with investors in the relevant LIFT and PFI projects to ensure that their concerns are adequately addressed before the text of the Bill is settled. Recent experience of structural change in the PFI schools sector (where funders sought to achieve legislative change to protect their position in the context of the new Academies legislation) would support this approach.
It is unclear whether there is any political will to focus on these issues. To date, the Secretary of State has had his hands full steering a difficult and unpopular bill through Parliament. Consideration of the impact of the proposed reforms on the PCT estate seems to be something of an after-thought. It seems to us that having finally won the major battle on NHS reform, the government would well do to avoid forcing it though without proper engagement on what is a material issue for a significant industry group.
After over a decade of sustained investment, many are now querying the future of infrastructure development within the NHS. From what we have seen, it seems unlikely that the NCB or PropCo will be the vehicle for significant new developments. The answer may lie in the shape of Foundation Trusts, which will benefit from greater financial freedom as a result of the Bill. The prospect of financially robust Foundation Trusts freed from central control can only be a positive development for the infrastructure industry.
In the meantime, the PFI industry will be watching closely to see what impact the Bill will have on its existing projects at the same time as keeping its eye on the future infrastructure investment in the NHS.