Amid signs of a general crisis with the NHS' finances, the Department of Health has launched an emergency review of PFI hospitals, and put most of the major schemes on hold while it does. George Hay investigates the schemes are affected and asks: what's to become of healthcare PFIs?

A little before Christmas, the usual quarterly meeting was held between the Department of Health and the NHS. Present were Peter Coates, the head of the private finance unit at the DoH, and managers from every trust in the UK. The administrators were expecting the Whitehall man to reaffirm his resolute backing for the 18 PFI hospitals schemes that were nearing financial close, and clear up the confusion over the 23 other schemes that had been delayed going to tender.

What they got was a bombshell: the department was slamming the brakes on every PFI scheme, at least until the end of the financial year in March. The force applied to the pedal would be harder if the scheme was nearing a milestone, such as a listing in the European Union's Official Journal, financial close or the nomination of a preferred bidder.

The principal casualty of the decision has been the Barts and the Royal London scheme (price: £1.2bn and rising). Despite the fact that it was hours away from financial close, the government asked the North-east London Strategic Health Authority to think again about whether the Barts element should be part of the scheme. Others facing difficulties include University Hospital Birmingham (£696m), University Hospitals of Leicester (£761m) and Peterborough Hospital (£381m).

All three trusts deny that they have been put on hold because of the review, but project directors around the country have confirmed to Building that their schemes have been suspended, and some fear the worst. Syd Jamieson, project director of the £600m Vanguard project in Plymouth, says his scheme, one of 23 that has already been delayed going to tender, is on hold because all trusts approaching a milestone have been told to wait. And Jan China, who is running a scheme for Southend NHS Trust, admits that she is looking at whether the PFI "is still the best option".

Eric Fehily, the project director at a £144m facility for the Royal National Orthopaedic Hospital NHS Trust in north London, says: "There'll be no new approvals while the NHS is in deficit. Basically, the whole issue is of PFIs not placing additional pressure on NHS trusts. By the end of March they're aiming at all trusts being in financial balance. They'll be testing strategic value for money."

As Fehily says, the reason for the spending freeze is simple: the DoH is running out of money. On the one hand, it is engaged on a programme, financed by the PFI, to upgrade the NHS' physical assets. On the other, it is trying to push through Blairite reforms to extend consumer choice - and, as a side effect, making trusts' revenues harder to predict. Finally, it is emerging that the unprecedented growth in NHS funding over the past six years, from £52bn to £96bn, is to slow to 3% from 7-8% after 2008.

This time the cash crisis is different. Usually you can move cash around; this time there is just no cash in the system

NHS trust chairman

The central thrust of government policy is to install market discipline into the NHS by making each trust compete for funds, and push the idea of independent "foundation" status. This should reduce waste and increase accountability - as well as weakening the NHS' corporate structure. The immediate problem is that one in four NHS trusts is forecasting a deficit by the end of the year; the combined total is £948m. The risk is that NHS trusts become insolvent, as has happened already at the Queen Elizabeth Hospital in Woolwich, south-east London, which last month revealed it could not pay its monthly PFI charge.

Fehily says: "The attempt to bed-in payment by results in the middle of a huge NHS building programme makes it difficult to balance the books. In many ways they run in conflict to each other."

The confusing task for the construction industry is to try to work out what is going on. Does the funding crisis and the review signal a few months' delay, or the end of PFI?

One NHS trust chairman says the department has been scared into the review by recent PFI stories in the media. "The NHS is clearly alarmed by the spiralling costs of PFI," he says.

According to the chairman, the DoH is partly responsible for its own troubles. He argues that it puts the trusts in an impossible position by telling them that the PFI was "the only game in town", but that they could only use it if they produced business cases that predicted optimistic cost savings. "Some of the deals would have been signed off on the basis that the trust would have made cost savings, but these are failing to materialise. It's easy to dodge these issues before the hospital becomes operational; it's when the cash starts to get used that it starts to bite."

The department failed to think through the consequences of trying to introduce such wide reforms all at once. The Treasury is going absolutely spare

Senior PFI source

When trusts have got into trouble in the past, it has usually been a case of individual failure. This time the crisis is general and systemic. He says: "This time the cash crisis is different. Usually you can move cash around; this time there is just no cash in the system."

One senior PFI source from the private sector is even less charitable. He suggests that the DoH failed to think through the consequences of trying to introduce such wide reforms all at once. He says: "The Treasury is going absolutely spare. It's an awful mess."

Many senior PFI players agree with this analysis. They say any kind of hospital programme, PFI or otherwise, locks the NHS into spending huge sums of money over the long term. If the government is about to embark on a new funding mechanism, then it needs to sort out what it wants right now. "There are systemic issues at play here," says one. "It's nice to make PFI the whipping boy, but this is absolutely not a PFI issue. They've been told that they've got no more money. At what point did some genius not point out that if they wanted radical change in healthcare they needed to have their existing asset base sorted out?"

The same sources say that the Treasury has, until recently, not been party to the DoH's review. "The Treasury wasn't involved; it was a DoH thing - very cloak and dagger. It's unjoined-up government at its best."

At present, contractors seem confident that the PFI will survive. John Spanswick, chairman of Bovis Lend Lease, says he still expects the schemes to move forward. He said: "PFI is still a very efficient form of delivery and we've been pushing for schemes to have an affordability test before they come to the market. Obviously the hold on schemes is not good news. But what they're doing is making sure trusts really do test affordability. My own personal take on it is that hospitals coming to the market will slow up. I don't think PFI will disappear."

The big question, though, is whether there will be any major new PFI health projects coming to the market by the end of 2006. On the evidence so far this year, don't bet on it.

Extraordinarily embarrassing: The Barts and the Royal London

The highest-profile victim of the review is the Barts and Royal London scheme. Health minister Patricia Hewitt commissioned it after fears that the NHS trust, which has to pay a monthly charge to Skanska, would not be able to bear the cost of revamping the Royal London in Whitechapel and Barts in Farringdon.

The review has suggested removing the £400m Barts segment, a suggestion that has not been well received by the project team. One source says: “This has gone way beyond bid costs; it’s gone through preferred bidder stage. All we know is we’ve complied with the requirements, all for it to be pulled within hours [of financial close]. It’s extraordinarily embarrassing.”

Sources close to the project say that the intricate financing model for the biggest PFI hospital to date cannot be changed without derailing the whole project. One says: “The whole thing’s about two hospital sites carefully put together and this would affect the mix on the rest of the project. The Royal London and Barts were together – if you scrap one then you affect the other, too.”

Facing the cut: Plymouth Vanguard

Syd Jamieson, project director for the £600m Vanguard project in Plymouth, says his scheme is being held back because of the review. He says: “We’re effectively on hold for the minute. From what I understand, all trusts approaching a milestone such as an Official Journal listing, financial close or preferred bidder have been told that we’ve basically been put on hold.”

There is a general understanding that in future PFI schemes will not be much bigger than £300m, leaving trust managers looking nervously at whether their project comes in under or over the cut-off point. One insider says: “If the cut-off point is £400m then we’ll be all right; if it’s more like £300m then we’ll have a problem. Some people are going to be happy and some are going to lose out. It’s very difficult, really. There’s been nothing on the websites at the Treasury or the DoH and we’ve been forced to wait for what the Treasury review says.”

A problem with foundations: Leicester Pathways

The £761m Leicester Pathways project has a different problem to most other NHS facilities: it has been put on hold because the government wants to run over the financial case for the scheme before it allows it to have foundation status. Foundation hospitals have boards wholly independent of government and so the Department of Health needs to be sure it is going to work before it signs it off.

The hospital says the review was prompted by Monitor, the government’s regulator for Foundation Hospitals. “Sir Bill Moyes, chairman of Monitor, wants to be assured that the Pathway scheme is affordable – he wants trusts to be able to act as if they’re plcs. We now have to wait for the next round of foundation hospitals while Monitor looks at the PFI status.”

This is understood to be similar to the reasons why the £696m Birmingham PFI hospital scheme is on hold.