Insight: Cashflow crisis that led to Sick Kids fiasco

The vacant Royal Edinburgh Hospital for Children and Young People. Picture: Scott Louden
The vacant Royal Edinburgh Hospital for Children and Young People. Picture: Scott Louden
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It was 2010 when Susan Goldsmith, NHS Lothian’s director of finance, issued a grim warning to a meeting of health board officials.

“The financial position is one of concern,” she told them. “A system of funding will be found for legally committed projects. [But] what we need to be clear about is, until a scheme is legally committed, there is no guarantee of cash flow.”

This was five years before ground was finally broken on the proposed new Royal Hospital for Children and Young People in Edinburgh – a flagship 233-bed facility to replace the existing Victorian Sick Kids hospital building in the Sciennes area of the city.

Fast-forward to today and, already six years behind the original schedule, that hospital is now lying empty at a public cost – it is claimed – of £1.4 million a month after problems with ventilation and drainage forced its imminent opening to be delayed indefinitely last month.

What Goldsmith – who still holds the same position at NHS Lothian – was referring to was the Scottish Government’s decision to pull public funding for the project, as well as a new East Lothian hospital, as part of major budget cuts announced in the wake of the recession of the late 2000s.

The original plan had been to pay for the new children’s hospital – to be constructed beside the Edinburgh Royal Infirmary at Little France – directly out of the public purse, at a cost of around £250m.

Instead, the health board was told, it now needed to source funding through a new public corporation, the Scottish Futures Trust (SFT), which, it was claimed, would help spread the risk and guarantee the flow of money to make the projects possible.

The only infrastructure projects which already had committed funding in NHS Lothian at that time were far smaller investments: Musselburgh Primary Care Centre, the new Royal Victoria Hospital at the Western General and the refurbished Chalmers Hospital.

Unlike these developments, the new Sick Kids hospital and any other future projects would need to apply for cash through the SFT’s £2.58 billion Non-Profit Distributing (NPD) system: the Scottish Government’s version of controversial private financing models such as PFI.

An agreement under the NPD scheme was finalised in February 2015.

Ditching the PFI scheme had been a flagship policy for the SNP minority government at the time. The administration had been highly critical of the model, used to immediately fund the building of public infrastructure such as schools, colleges and roads without waiting for public funds to become available. PFI deals, brought in by a Tory UK government and utilised widely by Tony Blair’s Labour administration, had historically been favoured strongly south of the border.

Unlike PFI, under NPD, contractors invest solely in the debt of a project, not putting in any equity and not receiving any dividend returns on their capital investment. It essentially eliminates uncapped equity returns associated with the traditional PFI model, which has come under fire on both sides of the border after a number of funded projects ended up costing considerably more than originally anticipated – or left the state paying off instalments on buildings long after they had fallen out of use.

Instead, investors’ returns are capped at the point at which contracts are signed, ensuring that a “normal” level of investment return is made by the private sector and that these returns are transparent. Although the project aims to turn a profit, any surpluses flow into a charitable body for community use or back into the public sector. The SFT says that average profits under NPD were 12 per cent, compared with 16 per cent under PFI.

But critics claim there remains still little difference between the schemes.

“When the SNP came into office, they were very negative about PFI, then PPP and other concepts of private financing of public infrastructure,” explains Murdo Fraser, finance spokesman for the Scottish Conservatives. “They quickly found that without pulling in private funding, it was extremely difficult, if not impossible, to deliver on the programme of public works that people expected.”

He adds: “What they had to do was spin the NPD model as not being a private finance model, when in fact, that is exactly what it is.”

Mark Hellowell, director of the Global Policy Health Unit at the University of Edinburgh, agrees. In an academic paper he wrote on the model in 2011, he warned that while the scheme provides the government with “an important political benefit”, by being seen to safeguard the public interest while working within budgetary constraints, it warned that continuing with private finance “carries a high economic cost”.

In fact, his report described the NPD model as a “close relative” of PFI.

He explained: “The political advantage of NPD – that is, its ability to give the SNP government the appearance of doing ‘something different’ to its more business-oriented southern neighbour, while in reality responding to the same budgetary incentives that gave rise to private finance in Scotland in the first place – also looks set to be eroded.”

Further questions over the transparency of the funding model were raised two years later in 2012, when Scotland on Sunday’s sister paper, the Edinburgh Evening News, submitted a Freedom of Information request to NHS Lothian, asking for the business details of the Sick Kids project. The business case document was duly sent back – but with all of the key figures redacted. Politicians at the time warned that the redacted documents meant the public was being kept in the dark on whether the SNP’s chosen funding method for the hospital – the NPD scheme – was best value for money.

The Labour party has long insisted that private finance should be “booted out” of the NHS as a priority. Leader Richard Leonard has said that he wants to bring existing PFI and NPD deals back “in house” while developing alternative public-sector funding models to save money, which could be put back into under-invested areas such as mental health services.

“Scottish Labour has already committed to signing no more private finance deals, and we’re clear that the profit-motive has no place in our NHS,” says Scottish Labour health spokeswoman Monica Lennon. “The scandal at the new children’s hospital in Edinburgh is further evidence that the SNP’s private finance programme needs urgent scrutiny, and any public inquiry that takes place should consider the role that NPD has played. Under the SNP, private spend in the NHS has sky-rocketed – not just on capital projects, but also on agency staff.”

She adds: “We cannot go on using taxpayers’ money to line the pockets of shareholders while workers are being exploited, jobs are being put at risk and public projects are falling into jeopardy.”

Lennon will be granted her wish – in terms of scrapping the current scheme, at least. Following a European ruling four years ago, the NPD model was quietly abandoned – and no further infrastructure projects commissioned using the financing scheme.

In its place, the Scottish Government has recently approved the idea of a Mutual Investment Model (Mim) as pioneered by the Welsh Assembly, which would require the government to take a stake in the project alongside private investors. However, the delay has meant that no new major infrastructure projects have been funded through any private financing models since 2016.

A spokesman for the Scottish Government confirmed: “NPDs are no longer used by the Scottish Government.”

There have been questions raised as to whether problems at the Royal Hospital for Children and Young People in Edinburgh should have been anticipated.

The new hospital shares some of the same design as the Queen Elizabeth University hospital in Glasgow, which has also experienced problems with ventilation systems that have been linked to infection outbreaks.

A similar idea of replicating designs previously caused problems in public-private partnership (PPP) projects. Two years ago, dozens of schools Scotland-wide faced closure for repairs to be carried out after a wall blew down during a storm at Oxgangs Primary School in Edinburgh – exposing defects in the build and that of many other schools constructed under the same scheme.

Who is responsible for the problems,which have left NHS Lothian’s children’s services in limbo in a crumbling hospital which needs to be vacated in just a few months, will be a matter of debate for the coming weeks.

A full safety review into the hospital was ordered by the Scottish Government last month and will focus on whether the ventilation problem is down to the original design, or the implementation of the agreed design. Private consultants KPMG have also been hired to establish the factors that led to the last-minute delay. Under the terms of the NPD contract, the design of the hospital had to be signed off by NHS Lothian before construction by consortium Integrated Health Solutions (IHS) Lothian got under way.

SFT says that under the terms of the 25-year agreement, no payments are made until the building is complete, and deductions can be made if the building is not maintained properly.

Health secretary Jeanne Freeman insisted earlier this week that the figure of an extra £90m that had been quoted to resolve the problems was “misleading” and “not accurate”, insisting that the only additional payment since the full business case was approved was a £11.6m settlement agreement relating to drainage.

Meanwhile, an Audit Scotland report has already stated that £80m has been spent on “enabling and equipment works” at the site outwith the £150m deal with consortium IHSL, which Freeman has insisted is “not a new or unexpected cost for the site” – while the further £11.6m payment demonstrated that drainage problems which are causing part of the hold-up had initially come to light 15 months ago.

On Thursday, NHS Lothian finance director Goldsmith admitted that there would “obviously [be] a cost of running both sites” – referring to a possible phased opening of the new hospital, while retaining some facilities at the Sciennes site – which is due to be occupied by a developer in January to be turned into student flats.

Some believe that private financing models are inextricably linked to problems which have plagued Scotland’s infrastructure projects in recent years.

Independent research carried out by the Scottish Parliament Information Centre (SPICe) last year found that more than 30 major infrastructure projects across Scotland – many of them funded through private financing schemes, such as the Aberdeen Western Peripheral Route – have faced delays or spiralling budgets.

At a time when public sector budgets are increasingly squeezed, it seems unlikely that similar schemes will not be used in the future. SFT says the Scottish Government continues to consider “innovative models” to enable additional investment over and above the capital budgets available.

A spokesman said: “Investment in infrastructure is vital for our economy and the NPD programme was established to deliver additionality of investment whilst capping returns to the private sector.”