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had withdrawn from a project to build a new acute hospital in Fermanagh.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– the HSBC – has now withdrawn from the project.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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