Attempts to refinance the Midland Metropolitan PFI scheme

2.7 Between January and April 2018, the Sandwell Trust, the PFI company and its lenders worked with the IPA and the Department of Health & Social Care to develop options to complete the hospital (Figure 5 on page 25). The three options were to:

• refinance the existing PFI scheme, including additional upfront public funding as well as extra private finance (which the Trust would need to later repay);

• set up a new PFI scheme; or

• terminate the PFI scheme and provide direct funding to complete the hospital.

2.8 The Sandwell Trust favoured refinancing the existing PF2 scheme, as it believed this would be the quickest way of completing the hospital, some 18 months faster than re-tendering the project. The Trust worked with the lenders and presented its proposal (Option A) to the government in April 2018. This included:

• an agreement in principle with construction contractor Skanska to take on the work; and

• a proposal for the public sector to put in an additional £35 million to £43 million upfront and extend the Trust's £19.6 million annual unitary charge payments by five years at the end of the contract at a cost of approximately £100 million.

2.9 The European Investment Bank (EIB) also approached the Chancellor of the Exchequer directly with a request for further funding for the lenders. The Chancellor wrote to the Chair of the EIB to refuse additional government funds.

2.10 The Department of Health & Social Care and the IPA assessed the costs and benefits of Option A to refinance the PFI scheme and concluded that it offered poorer value for money than the other options under consideration. They and HM Treasury also wanted to avoid any 'bailout' of the PFI company as this was contrary to government policy on PFI; could set an unhelpful precedent; and would likely lead to the Office for National Statistics deciding to reclassify all PFI debt as part of Public Sector Net Debt because it saw the risks of PFI projects reverting to the public sector.8

2.11 In early May 2018 the Department of Health & Social Care wrote to the Trust, following approval from the Chief Secretary to the Treasury, to formally reject the refinancing proposal. While further options were being considered the Trust expressed concerns to the Department of Health and Social Care about the need to work better together to find a solution. The Department set up a 'recovery group' led by a civil servant director to coordinate the rescue of the Midland Metropolitan project and ensure that all the central government bodies involved in approving the proposals were involved in their development, including the Department, NHS Improvement, the IPA and HM Treasury.9 Officials from these bodies who had been involved in the earlier work to assess Option A, now became members of the recovery group.

2.12 The Departments' rejection of the refinancing option led the lenders to formally withdraw their support and further funding from the project. The remaining contractors working on the site were made redundant by the Official Receiver by early June. The Departments approved the funding for 'early works' to manage the site and prevent further dilapidation until a contractor to complete the new hospital could be re-procured. In July the Trust formally terminated its contract with the PFI company and took direct control. The Trust appointed Balfour Beatty as its 'early works' contractor in early October.

______________________________________________________________________________

8 In December 2018 the Office for National Statistics estimated that if Public-Private Partnerships (such as PFI and PF2) that were classified as off-balance sheet for statistical purposes at the end of March 2018 were instead recorded on the government balance sheet, this would add approximately £28 billion to measures of public sector debt. Available at: www.ons.gov.uk/economy/governmentpublicsectorandtaxes/publicsectorfinance/articles/widermeasuresofpublicsectornetdebt/december2018/pdf

9 A senior civil servant in pay band 2.