Steve Mason: Borrowing power

A loan of £114m was agreed earlier this year from Northumberland County Council to Northumbria NHS Trust. Steve Mason, the council’s lead executive director, explains how it came about. This article was originally published in Room151 Quarterly magazine. 

Trust, stability and a positive working relationship built up over a number of years – if you’re asking me what the cornerstones of the council proceeding with this loan were, these traits would be high on my checklist. And we may be a long way from what some people perceive as the business hub of the UK, but we pride ourselves in Northumberland on taking some bold and innovative financial decisions.
The idea to buy out the loan actually started around two years ago. The council and Northumbria Healthcare have a well-established working relationship and currently share a director who covers public health, children’s services and adult care for the council, and also manages the community health service within Northumbria Healthcare. As a result of these close working relationships, there have always been meetings between senior management teams to explore how the two organisations can further work together in a mutually beneficial way.
The trust had done a lot of work to demonstrate they could secure significant efficiency savings if they could terminate their PFI contract and this led to discussions with us around how they could raise the necessary finance to achieve this.
I suggested we, as the council, could use prudential borrowing powers to provide the funding. We therefore embarked on a scoping exercise to explore the feasibility of these proposals. Little did I know at that time how long the process would take – I hadn’t envisaged two years.
One of the first steps was to seek joint counsel opinion on whether the trust and the council actually had the legal powers to progress this.  Once it was confirmed to us we could go ahead, we engaged our own legal representatives to produce a detailed loan agreement and agree  heads of terms.
I took it through the council and obtained approval from councillors to grant the loan – but that’s a very condensed way of telling things. As you would expect some probing questions were asked along the way – it would be naïve to think a loan of this scale wouldn’t attract a good deal of scrutiny.
One of the main concerns of members was the question of security and what would happen if the trust got into financial difficulties.  Members weighed up the risks but felt protecting healthcare services and jobs within Northumberland was vital and it was a risk worth taking.
From our perspective the process was reasonably straightforward but the NHS had to go through a much more complex process. They had to obtain clearance from the Treasury, the Department of Health and Monitor, the sector regulator for health services in England, whose job it is to protect and promote the interests of patients by ensuring that the whole sector works for their benefit. The NHS also had to prove the loan represented value for money overall to the public sector. This process took longer than originally envisaged, hence the time taken to conclude the loan agreement.
Although this is the biggest deal of this kind we’ve done, we already have a good track record of working with local public sector organisations to enhance services within the county by using our prudential borrowing powers. For example the council has in recent years made two loans to Northumberland College to help it reconfigure services and improve the quality of its buildings.
Certainly the scale of the loan to the trust is  what’s caught people’s eye – it is a large loan  but we were reassured that should the trust run  into problems we could sit down with Monitor to  work out how the trust could manage its way out  of its difficulties.
We also obtained security over assets within the trust but I recognise the value of assets is based on their existing use as hospital sites. I’m reassured though as I do believe there is a long-term requirement for hospital provision in Northumberland.
In terms of whether we’re likely to proceed with something like this again, there is no reason why we shouldn’t, but it is very dependent on the rules and regulations which govern both the health service and local government.
The bottom line is if the trust had prudential  borrowing powers, and could access PWLB  borrowing directly, it would have done so rather  than use us as an intermediary, although it would  need to prove it provided value for money overall  to the public sector.
What also made it easier for us is the fact the NHS has healthcare facilities across Northumberland and there is a direct  geographical correlation between us and  the trust. As an example, if you look at a large city centre hospital, the patients they treat may come from a number of different council areas. This could lead to more complex discussions about whether a number of local authorities should provide the finance, rather than just one organisation.
Given austerity and the continuing need for funding cuts across the public sector, the amalgamation of public services at a local level provides a more obvious approach to reduce cash input and protect service levels. The more we can work together at a local level across all public services the more we can reduce costs.
Thinking about whether I’d recommend this approach to others, I think you’d need to look at it on a case-by-case basis. I’d say it is important to have a strong working relationship with the trust, and one which has an effective and stable management team.  This loan is essentially the result of years of good joint working. On the flip-side I was talking to someone in the NHS whose trust had had five chief executives in just five years.  Clearly if there was that level of instability within an organisation we would regard it as too much of a risk to be dealing with. It probably means the organisation is unstable.
Thankfully we were working with one of the best performing trusts in the country. If it wasn’t classified as that I would have been much more reticent in proceeding with any loan.
One final issue, which is a wider question but not one I have an answer for, is whether it is sensible or practical for the government to buy out a number of PFIs contracts, but that’s a national debate for the future.