Boss says turning round failing institution with £40m debts is all a question of cutting waste

The chief executive of the first private company to take over a failing NHS trust announced a "massive war on waste" yesterday to eliminate its debts and secure its future.

Ali Parsa, head of Circle Partnership, which took over Hinchingbrooke Hospital in Huntingdon, Cambridgeshire, on Wednesday, said there was "no reason" why the 223-bed trust with a £100m annual revenue – small by NHS standards – should not be successful.

Undeterred by the failure of successive NHS managements and government intervention to reduce the organisation's annual £2.5m-£3m deficit, Mr Parsa saidCircle would boost efficiency and eliminate the hospital's £40m debt by introducing staff incentive schemes and devolving power to clinical units that would manage their own budgets.

"We made an 18 per cent productivity gain in Nottingham [where Circle runs an NHS treatment centre] last year. We need to do the same here," he said.

Under the terms of the deal, if Circle can turn the annual deficit into a surplus it will keep the first £2m of any balance earned. Above that figure, 25 per cent will go to Circle and 75 per cent to the NHS. If it fails, Circle must pay £2m on termination of the contract plus up to £5m towards any debt increase.

The 1,700 staff will not receive a dividend but Mr Parsi plans to issue shares to every worker, proportionate to their salary, which may become tradeable if the company is successful.

Three large hospitals with A&E departments lie within 25 miles of Hinchingbrooke, but Mr Parsi said: " It is wrong to suggest that a hospital with a £100m turnover is too small to survive. We heard exactly the same nonsense with the railways, and now we are the only country in Europe where small towns are without a railway. I believe district general hospitals serving their local communities are the jewels in the crown of the NHS."

Circle cannot cut pay for staff or raise prices above the NHS tariff, limiting its room for manoeuvre. But Mr Parsa said that was the same for the whole NHS.

Unions fear job cuts but Circle has said it has no plans to make staff redundant, although some may be redeployed.

Stephen Dunn, director of policy at NHS Midlands and East, said it was a "bold and pioneering" deal which could provide the model for other struggling district hospitals.

Health plan: First steps for Hinchingbrooke

1 Identify and deal with services thought to be unsafe

2 Inform managers following a life-threatening incident

3 Eliminate errors and infections

4 Increase nurse contact time with patients to two thirds

5 Minimise number of patient visits to hospital

6 Survey patient views

7 Improve hospital food – fewer dishes, higher standard

8 Install new entertainment system

9 Accelerate the hospital's war on waste

10 Boost buying power

11 Promote the hospital to local patients

12 Introduce a "fairer" car parking system

13 Create clinical units to decide nature and cost of care

14 Reduce management

15 Improve staff performance reviews

16 Train staff to run clinical units