Milburn wins fight against Brown over top hospitals

Tony Blair brokered a peace deal yesterday in the bitter battle between Gordon Brown and Alan Milburn over the plans of the Secretary of State for Health to free high-performing hospitals from Whitehall control.

Mr Milburn won his fight to allow hospitals that win foundation status to borrow on the financial markets. But the compromise also met Treasury demands to prevent the new-wave hospitals ratcheting up public spending. Their borrowing limits will be fixed by a new independent regulator.

An ally of Mr Milburn claimed last night: "We have secured all our objectives." But the Brown camp insisted it had achieved its main aim of ensuring that the hospitals' borrowing would count as public spending. The Chancellor's allies dismissed as "rubbish" claims by the Milburn camp that the borrowing would come from an open-ended rather than a cash-limited fund. They said the money would be found within the Department of Health budget approved by the Treasury.

Some cabinet ministers said Mr Milburn had won a narrow points victory over the Treasury. He appears to have convinced Mr Blair that the new hospitals will need maximum freedom to achieve the "bold" public service reforms promised in the Prime Minister's speech to the Labour conference last week.

The Health minister John Hutton said the deal should not be seen in terms of victory or defeat for anybody. "What is important today is that we have set out a new direction of travel for how public services should be delivered," he said.

Despite Mr Blair's attempts to halt the public feud, the skirmishing will continue today with a Treasury warning that Labour's reforms to hospitals and schools must not create "two-tier" services. Ed Balls, the Treasury's chief economic adviser, says in a pamphlet published by the New Local Government Network: "In today's complex world, it is simply not possible to run economic policy or deliver strong public services using the old, top-down, one-size-fits-all solutions.

"But we have to be careful to strike a balance, particularly in public services such as health and education, between encouraging local flexibility and rewarding success on the one hand and our commitment to tackling inequalities in provision and preventing two-tierism in public service delivery."

Legislation in the Queen's Speech next month will spell out how the new-style hospitals will become "public interest companies" run by a stakeholder council including representatives elected by local people. A separate Bill will pave the way for other not-for- profit companies to run schools, public housing and social services.

The two warring cabinet ministers met Mr Blair in Downing Street yesterday, along with the Deputy Prime Minister, John Prescott, in an attempt to resolve their dispute.

Downing Street announced that the hospitals "will be free to borrow from either public or private lenders at their own discretion, not that of the Government". A spokesman said: "This represents the Government's determination to free the best hospitals from Whitehall control and to do so in a way which delivers both organisational independence, protects the public purse and continues to stimulate efficiency."

Foundation hospitals will be given an operating licence which says their primary purpose is to service the needs of NHS patients, but will also include an unspecified "wider public benefit duty" and a clause relating to their assets. Their performance against that licence will be assessed by the independent regulator. The first foundation hospitals are expected in April 2004.