P3 hospitals go poof -- Should P3 lenders take a haircut too?

The mother country of public private partnerships (P3s) is now preparing to take over a nearly bankrupt health care trust that runs three hospitals. Like other British hospitals, the South London hospital trust was devastated by its P3 deals.

The mother country in question -- Britain -- will take over the hospitals and run them under a trusteeship, probably within weeks.

A Department of Health official reports the hospital trust is spending £61 million per year on two P3 deals, forking over 14% of its income. The hospital trust is losing £1 million a week. The trust has accumulated a deficit of £150m (about $240 million).

The P3 fiasco has led some Conservatives to question whether the P3 deals transfer risk to the private sector.

With the announcement, a senior Conservative British MP, Stephen Dorrell (the former health secretary who now chairs the Commons health select committee), suggests that P3 lenders should, like lenders to Greece, bear their share of risk and take "a haircut" when things go wrong.

The Conservative MP adds that private finance initiative "as originally conceived 20 years ago was to achieve some risk transfer, to engage the private sector in making this kind of judgment and to carry some of the risk."

Dorrell regrets that "agreements were signed which effectively paid private sector cost when the public sector took the risk. That is indefensible."

The alleged risk transfer to the private sector is the main way the P3 industry justifies the extra costs associated with P3s.

Mike Farrar, the chief executive of the NHS Confederation noted "To recover the kind of sums you are facing in south London you really do need wholesale redesign of services in order to get something sustainable for the future".

Earlier this year the government announced that 22 trusts were suffering financial problems due to their P3 deals, providing some with extra funding to prevent disaster.

The Department of Health has set goals for twenty trusts overseeing 60 hospitals -- but they may ultimately face special measures similar to the South London hospital trust.

The Telegraph reports there are fears that services such as accident and emergency departments will be cut or downgraded to save money, or that some hospitals could close. Sources close to the health secretary report that the South London's hospital trust’s deficit last year was equal to the salaries of 1,200 nurses or 200 hip replacements a week.

The British P3 model has been exported to other countries, including Canada and Ontario.

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