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Financial crisis hits plans for Fermanagh hospital 

21 January 2009

There is a general assumption that the public sector is to a degree insulated from the impact of the financial crisis.  However, the growing role of private finance in the delivery of public services means that such assumptions no longer hold true.  This was brought home this week with the revelation that a major funder had withdrawn from a project to build a new acute hospital in Fermanagh.  The HSBC bank was one of the main investors in the consortium that had won the contract to build a  £260 million hospital outside Enniskillen through a Private Finance Initiative (PFI).  Its departure may have left a funding gap of around £70m, which is unlikely to be filled by the other investors in the consortium such as the ailing Allied Irish Bank.  This has put the future of acute services in the area in doubt. It is also an indictor of the problems that could hit other public sector projects dependent on private finance schemes so favoured by the Executive as credit institutions become more reluctant to lend money and the costs of lending increase. 

On the day the story broke Radio Ulster conducted an interview with Professor Allyson Pollock, a leading authority on the use of private finance in the health service, in which the reasons behind HSBC’s withdrawal and its possible implications are examined.  Below we carry a transcript of that interview.  Click here to listen to the audio version. 
 

Presenter:
The bank helping to fund Enniskillen’s new hospital has pulled out of the project.  The two hundred and sixty seven million pound hospital was to be built using money from the Northern Ireland Health Group, a private consortium, but one of the group’s backers – the HSBC – has now withdrawn from the project.  The idea of using private money to build public buildings is known of course as PFI, and to explain all we are joined now by Allyson Pollock, who is a professor in the School of Public Policy at University College London.   Professor Pollock, evening to you. 

Professor Allyson Pollock:
Good evening.

Presenter:
Thank very much for joining us on the programme tonight.  Just let me ask you first of all – are you surprised at this development?

Professor Allyson Pollock:
Well in some ways it is surprising.  I think the important thing to realise is that whereas the formerly the Government used to provide the money itself for capital projects, it is now borrowing the money from venture capitalists and banks.  But of course, as you know, in the last year or so the banks are able unwilling or unable to provide the credit to the Government except at very high interest rates.  So I suppose there are a number of questions.  First, why have the banks actually, why has HSBC withdrawn from this deal?  Is it because they can’t get the high rates of interest, or they don’t have enough money?  Or is it because they don’t trust the PFI policy anymore and the Government’s ability to repay the debt?   So I think there are all sorts of questions to ask.  And I think the second question is - if the Government is now going into a funding competition because the banks are now lending as cartels or as a club, then what is the rate of interest?  We know that the interest rates have doubled in the last year, the credit margins.  So there is a real issue as to what the public will be getting, and what it will be paying for.  Because if the cost of borrowing rises, and interest rates are of course very low just now, but if interest rates are very much higher then this of course will create a real problem in terms of the affordability.  Because the hospital has to repay the PFI scheme, it is a debt, and it has got to be repaid every year over thirty years.  So if the Government is borrowing at a very high interest rate, and you have also got a problem with public expenditure, then there will be a real affordability problem where the hospital will be struggling to repay the debt.  All of this raises lots and lots of questions.

Presenter:
It is your view than at this stage that certainly it is possible that this could make the project more expensive to the public purse.

Professor Allyson Pollock:
It is quite possible that it could.  And I suppose the real question is – why has HSBC withdraw; what were the interest rates it was charging; what was the return to the equity, the venture capitalists; and what is the new deal that is being drawn up – what will the interest rates be?  But as important as the interest rate is what is called the equity stake – the return to the shareholders.  We really need to see that.  And of course that has a knock on affect, because if you are borrowing at very high levels, you are servicing that debt, and that then will have a knock on affect on the hospital and the volume of services that you can provide because the service budget is raided to pay for the PFI charge.

Presenter:
If HSBC has pulled out, and we understand that is the case, we gather that the Northern Ireland Health Group is confirming alternative funding arrangements are being put in place now, with a contribution, a fifty per cent contribution, from the European Investment Bank.  Does that make sense to you?

Professor Allyson Pollock:
Well the European Investment Bank has certainly stepped into quite a lot of schemes in the UK.  But again, the European Investment Bank will be charging an interest rate. So it will be very very important to know what actually the interest rate is.  They are at an all time low, but in fact we do know that inter bank lending has raised, and we do know from a PriceWaterhouseCoopers report that the interest rates are at least one and a half to two per cent above bank lending rates. So this could have an enormous impact. 

Presenter:
Well it is intriguing to hear your thoughts at this early stage.  Obviously there is going to be a great deal more discussion about this between now and the hospital construction actually getting underway.  In the meantime Allyson Pollock thank you very much indeed for joining us, professor there in the School of Public Policy at University College London. 

The above interview was broadcast on Radio Ulster Evening Extra on 21 January 2009. 
 

 


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