The funding timebomb that crippled an NHS healthcare trust

Both of my children were born on the site now occupied by the financial disaster that is the Princess Royal University Hospital in Bromley. The six-year gap between them encapsulates the way in which an attempt to provide the NHS with modern facilities in south-east London has crippled it with debt and come back to haunt its users.

In December 2002, my daughter was one of the last babies to be born in the Farnborough Hospital maternity unit, a clean but creaking relic of early 20th century healthcare with windows that did not shut and radiators turned up to maximum to compensate for the draught.

The care was excellent but behind plywood barriers carrying a contractor's corporate logo that winter, a glimpse of a shiny future could be seen – rising out of the suburban Kent mud was a £118m state-of-the-art hospital with bright corridors and terracotta cladding that fully opened in April 2003.

When we returned to the new Princess Royal in 2008 for the birth of my son, all seemed well. The maternity ward came complete with aromatherapy kits and high-end CD players. After the baby contracted an infection and had to return to hospital, my wife was provided with a bed and meals for the duration of their stay. The care, again, was faultless.

But lurking in the background was the funding timebomb that has now exploded spectacularly, and yesterday morning left the one million people who live within the ambit of the South London Healthcare NHS Trust (SLHT) feeling a bit like the Greeks – the sparkling edifice of our healthcare eco-system has been revealed to be built on a pestilential marshland of debt into which vital public services are threatening to sink under the burden of payments to the private sector.

The Princess Royal hospital was one of the first hospitals to be born from the Private Finance Initiative (PFI) – the wheeze invented by John Major's government to refurbish Britain's dilapidated hospitals and schools while keeping the outlay off the Treasury's current account in return for phased repayments to private investors over a period of several decades.

After the tender was put out in 1995 it was awarded by Tony Blair's first government, which embraced PFI with gusto, in 1998. The winner was a consortium trading under the name of United Healthcare (Farnborough Hospital Ltd) consisting of Barclays Private Equity, developer Taylor Woodrow and Innisfree, a City investment fund with about 20 staff which has quietly become one of the country's largest PFI players by backing projects to build 269 schools and 28 hospitals costing a total of £6.4bn.

David Metter, the 59-year-old founder and chief executive of Innisfree, is estimated to have made a personal fortune of about £60m from overseeing PFI investments on behalf of pension local authority pension funds.

There is nothing illegal in anything that these companies have done. But the rates of return on their investment are of an order that would make a pay-day loan company blush.

In return for their initial £118m outlay and the provision of services ranging from power to medical equipment, the consortia will receive payments of £1.2bn over 35 years. According the National Audit Office, the rate of return for the contractors is a handsome 70.6 per cent.

The problems with this arrangement, which locks NHS trusts into fixed payments over the life of the PFI contract, contributed to a deficit at the hospital which NHS chiefs attempted to tackle in 2009 by merging the Princess Royal with two other south-east London hospital trusts, including the PFI-funded Queen Elizabeth in Woolwich, which is also part of Innisfree's portfolio.

By the time of the merger, the hospitals were running an annual deficit of £21m. This year the cost to SLHT of servicing its debts will be £61m – nearly 15 per cent of its income – and its total debt mountain exceeds £2bn.

As Dr John Lister, of NHS campaign group London Health Emergency, put it yesterday: "The way to deal with this situation was not to put together trusts with debts to make a single trust with even bigger debts. There is now no way for this trust to balance its books."

The result is a period of uncertainty for SLHT's staff and the public who rely on their services while an administrator decides if and how to carve up this mess to save the institutional patient's healthiest limbs.

Jo Johnson, the Conservative MP for Orpington (and brother of the London mayor), insisted it was better for the trust to take its bitter medicine now rather than allow the problem, which already includes a failure to consistently hit the national 18-week waiting times target for referral to treatment, to fester.

He said: "By acting decisively and making this the first trust to be brought into effectively special measures, [health secretary] Andrew Lansley is short-circuiting the process that could otherwise have these hospitals left to rot on the vine. The issue is to put them back on a sustainable footing as soon as possible."

But with even the most battle-hardened NHS centres of excellence struggling to balance their books, it is not immediately clear where salvation might lie for the Princess Royal and its SLHT stablemates.

During the process to form SLHT a consultation document landed on my doormat laying out a blueprint for ever-improving healthcare provision in this corner of the capital. It was entitled A Picture of Health.

Hardly.

Cause of the malaise? Private finance

Initiated by the Conservatives but expanded and championed by Gordon Brown when he was Chancellor, the Private Finance Initiative was designed as a way to build new hospitals – without the capital costs ending up on the Government's books.

Under the scheme private companies financed and built new hospitals and leased them back to the NHS over a period of up to 30 years.

But PFI has been roundly criticised for providing poor value for money and leaving hospitals with unsustainable annual rents and costs for providing services such as cleaning and maintenance. The Government has now promised to try and renegotiate some PFI contracts but ministers have a poor negotiating hand.

In order to get banks and private companies to lend the money in the first place, the Treasury had to underwrite all the risk of the projects. So even if a PFI hospital closes the tax payer is still responsible for keeping up the payments.

Oliver Wright