Comment / NAO critical of PFI oversight and financial management

A foundation trust, the Department of Health and Monitor have been criticised by the National Audit Office (NAO) over the procurement of the trust’s private finance initiative.

The NAO said the board of Peterborough and Stamford Hospitals NHS Foundation Trust  had failed to recognise in 2007 that a proposed PFI scheme to build a new hospital would place considerable strain on its finances. It added that the board then compounded the decision to proceed with the scheme, which it could not afford, with a failure to monitor other changes affecting income and costs.

Amyas Morse, head of the NAO, described the business case as unrealistic and based on over-optimistic financial projections. ‘The trust board’s poor financial management and procurement of an unaffordable PFI scheme have left the trust in a critical financial position,’ he said.

The NAO also called for other stakeholders to learn lessons. The Department was not sufficiently sceptical about the affordability of the scheme, which had a capital cost of £300m. At 142% of the trust’s annual turnover, the capital cost is the highest in the NHS.

And while Monitor did raise ‘well-founded concerns’ that the trust could not afford the deal before business case approval, the Department or trust did not act on these concerns.

The NAO recommended that where an oversight body raises concerns, the Department should not authorise a PFI until they have been addressed. It added Monitor should strengthen its oversight of the sector and quickly implement the recommendations of a review of the scheme it has commissioned.

A key criterion in the Department’s assessment of PFI schemes at the time was that annual payments to the contractor should not exceed 15% of turnover. The trust’s calculations showed it only just achieved this, but was reliant on an assumption that payments to the contractor would be offset by proceeds from a land sale, which subsequently fell through. The Department has since lowered the threshold to 12.5%.

Both the trust’s board and Monitor failed to scrutinise the future impact of the scheme on the trust. The NAO added that Monitor had a number of opportunities to intervene before placing the trust in breach of its terms of authorisation in October 2011, but the regulator concluded that an intervention would not necessarily improve or change the outcome positively.

In 2011/12, the trust’s in-year deficit was £46m and the trust is predicting an in-year deficit of £54m in 2012/13. The PFI cost the trust £41.6m in 2011/12. In addition, the trust has been penalised by its main commissioner for failing to achieve national and local performance indicators.

The NAO estimated that failure to achieve efficiencies had contributed between £11m and £14m to the deficit, cost pressures from the new building between £11m and £26m and commissioner withheld payments £9m. Peterborough is one of seven trusts with unaffordable PFIs that will be given additional financial support from the Department.

The trust plans to make £64m in cumulative efficiency savings by 2016/17, leaving an underlying deficit of £49m.

Mr Morse said the trust was in a critical financial position and the trust, the Department, commissioners and Monitor must work together to stabilise its finances without affecting patient care.

The trust’s interim chief executive, Peter Reading, accepted there were shortcomings in the way it handled its finances between 2007 and 2011. It was improving its financial forecasting and was on track to deliver £13.2m of cost savings in 2012/13.

Monitor chief executive David Bennett said the regulator queried the affordability of the scheme from the start. ‘The Department only approved it on condition our concerns were addressed by the trust. The trust went ahead with the PFI anyway,’ he said. ‘Once the financial situation at Peterborough became clear, Monitor took regulatory action, and we continue to work closely with the trust, along with commissioners and the Department of Health, to turn around its financial performance.’