Why the wheels fell off Circle's hospital job

The Hinchingbrooke Hospital contact has cost its private backers money and reputation

There isn’t a vast number of NHS types on Circle’s board. Chaired by a banker, it boasts a pensions and property tycoon, an oil and engineering businessman, and a former finance director of Lastminute.com. Not to mention an ex-Labour defence and business secretary.

But with all those financial and political brains, you’d have thought they would have been able to see that the contract to run Hinchingbrooke hospital was always going to be impossible.

As the director of a rival private medical company says: “Even from the start, this one just didn’t look right.”

The tender was for only 10 years – a short period for such a major, never-before-tried project. There was a mass of debt – £39m – which had to be reduced, and the future NHS tariff, which fell soon after the contract began – was dicey at best.

Yet Circle still went for it.

Even before the first year was up, it had sought a cash advance from the Government as it fought a losing battle to get the hospital near Huntingdon into profitability. Now, less than three years into the contract, it has all fallen apart. Circle is pulling out.

Critics say this proves the private sector should not be allowed into the NHS. That is a matter for the politicians to fight out.

But what the contract’s failure has proved more than anything is that not every public sector tender involves hapless civil servants letting the taxpayer get taken to the cleaners by the sharp-toothed private sector.

Refreshingly, after so many PFI rip-offs, in some cases the sharks get bitten themselves.

In Circle’s case, this has been in the form of £5m of support payments it has been forced to make into the hospital – plus up to £2m more to break the contract.

It has also meant the destruction of Circle’s corporate reputation and an accompanying collapse in its share price that will see the very doctors who make up much of its shareholder base thousands of pounds out of pocket. Not to mention the hedge funds – Lansdowne, Odey and Bluecrest – which own much of the business not held by the doctors.

What has the taxpayer got from the Hinchingbrooke fiasco? Those £5m Circle support payments, plus – if you believe the company line – a reduction in the hospital’s debts from £39m to a forecast £10m for this financial year. Oh yes, and – if the Care Quality Commission’s latest report is to be believed – a level of care for patients that has left a lot to be desired.

Circle is right in saying that Hinchingbrooke was a “basket case” before it took the hospital on: in massive debt, performing poorly for patients and needing investment. The government (Labour at the time) was tempted by the argument that enterprising companies can tap the financial markets for investment in public services and keep that extra expenditure off the taxpayer’s balance sheet.

But the kinds of investors who put up the money – those hedge funds, in this case – don’t mess around. If they see a portfolio business is doing badly, they will pull the plug, and fast. This is especially the case for those in what the City refers to as “turnaround situations”. That goes as well for a private company like the parcel delivery firm City Link or a hospital caring for the sick and injured like Hinchingbrooke.

These kinds of investors have a big appetite for risky investments because, if they work well, they can lead to spectacular profits.

So it is that another Circle investor is Balderton Capital, an offshoot of a multi-billion dollar Silicon Valley venture capitalist that is also known for its investment in that other high-risk venture, Wonga.

The big problem with the privatisation model is, as the unions rushed to point out yesterday, if the deal goes sour, the taxpayer gets the keys back. If it goes well, the hedge funds and private equity firms pocket the profit.

Derailed: Other outsourcing failures

Serco

The scandal-struck outsourcer Serco is still trying to turn itself round after admitting in the summer of 2013 that it had charged the Government for tagging thousands of criminals who were actually dead, imprisoned or non-existent.

It also misled the Ministry of Justice by recording prisoners as ready for court – one of the measures by which the outsourcer was paid – when they were not.

Along with G4S, which also overbilled for tagging, Serco handed over the contracts to Capita while the work was put out to a full tender. Capita went on to win the tender for a six-year stint.

National Express

Hinchingbrooke’s closest parallel is the National Express fiasco over running the East Coast Mainline.

National Express won the franchise from GNER in 2007. It agreed to pay the Government £1.4bn to run the Edinburgh to London route until 2015 but rapidly realised it had paid too much as passenger numbers declined. The company tried to renegotiate terms in 2009 but the Labour transport secretary Lord Adonis refused, saying this would be “bailing out” a private company.

National Express handed back the contract to the taxpayer.

Atos

The French outsourcing company Atos reached an agreement to terminate its £500m contract to carry out “fitness to work” assessments for the Department of Health almost a year ago, even though the deal was slated to run to this August.

The company had come under repeated fire , with the Labour MP Dennis Skinner describing Atos as a “cruel, heartless monster”, amid claims that vulnerable people had been wrongly recommended for work or been repeatedly put through stressful interviews.

The Government admitted that as many as 158,300 of Atos’s assessments had wrongly branded people fit for work, with 42 per cent of appeals being upheld.

The disabilities minister Mike Penning said last March that Atos would not receive “a single penny of compensation”. Atos declared that the settlement ending the contract early “was in the best interests of all parties”.