UK Government look to Pension Funds and Overseas Investment to stimulate the Economy

The government have announced several plans to stimulate the economic recovery in the UK. Despite widespread cuts in government spending, the reduction in the Budget Deficit has fallen short of plan. With limited scope for an increase in spending, the government are looking to Pension Funds and overseas investment to fund UK infrastructure projects.

The idea has merit as UK pension funds are finding it difficult to earn sufficient returns on their investments under the current economic climate. The government propose to set up infrastructure bonds offering a safe return on investment.

Overseas investment has also been sought to finance large infrastructure projects. The government will be looking to China and the Far East, who have already been investing heavily in property and utilities in the UK as these industries are recognised for generating a safe return. China have already stated their intention to invest in infrastructure in big economies.

The news that the George Osborne is proposing to spend billions of pounds on new infrastructure is a refreshing note in light of the dismal growth forecasts announced last week. The proposals include investment in new roads, railways and housing as this offers a quickfire solution for generating jobs and offering a safe return to investors.

Economic update

David Cameron finally announced in his pre budget statement that the economy has not recovered as anticipated. The UK economy has been hampered by tough austerity measures combined with an increase in VAT and fuel prices. This has been further exacerbated by economic depression in the Eurozone and a general slowdown in the global economy.  The UK growth forecast for 2012 has been slashed to a meagre 0.9% and youth unemployment continues to rise. This compares to growth forecast in the US of only 2%. Germany has not fared much better, having failed to raise more than two thirds of its targeted bond sale. Investors and Banks effectively signalled their concerns over the future of the Euro. Even China is beginning to feel the effects of the global recession having reported a slowdown in manufacturing orders in November 2011.

The economic uncertainty over the Eurozone has had a knock on effect on the banks who do not have sufficient liquidity to lend to businesses. Small businesses are now braced for a double dip in the first half of 2012 and have therefore cut back further on their spending.

The Organisation for Economic Development (“OECD”) predicts that the recession will continue for the first 3 quarters of 2012. Given that the OECD have been found to be optimistic in the past, we can assume the recession is likely to continue to the end of 2012 with the possibility of a minor boost during the Olympics in the summer. Fuel and transportation costs are set to rise further in 2012 whilst earnings are unlikely to increase in line with the expected inflation of 5%. Unless something is done, this is likely to result in a greater reduction in consumer spending than the OECD are predicting.

In a recent statement, the Federal Reserve have announced plans to introduce further quantitative easing in the US in a bid to tackle the worldwide economic slowdown. Whether the effects will be noticed in the UK remains to be seen.

Britain’s first Public Private Partnership Announced

Growing healthcare company Circle Health was awarded a landmark £1 billion contract to run the NHS Hospital in Hinchingbrooke. This will form the first Public Private Partnership agreement in the UK in a bid to turn around the failing hospital in Cambridgeshire. The announcement was met with huge applause by the staff at Hinchingbrooke hospital who relish the prospect of managing the hospital as co-owners under the Circle Partnership scheme.

Circle are proposing to turn around the Hinchingbrooke hospital which has been making significant losses to date and faces mounting debt and the risk of closure. Any profits made from running the hospital will be returned to the NHS under a profit share agreement with Circle after servicing the debt. The government stress that this is not a privatisation and that the taxpayer will not be forced to bail out Hinchingbrooke. The NHS will continue to employ the hospital’s staff and own its land and assets. Circle will be liable for the first £5m of any further losses at the hospital and the government has the right to terminate the contract at any point. Circle would be required to pay an additional £2m on exit, capping their exposure to £7m.

Circle will take over the running of the NHS hospital on 1 June 2011 under a 10 year contract. The 369-bed Hinchingbooke hospital currently generates revenues of approximately £100m per annum but has accumulated historic debts of £40m. The efficiency gains proposed by Circle will be used to repay the debt over the 10 year term of the contract. The district general hospital serves 130,000 patients a year and provides a range of clinical services including an accident & emergency department, cancer treatment and a maternity ward. No private operator has previously run an A&E department.

This represents the first NHS acute hospital in the UK that will be run by a private company and is a huge success for Circle who were awarded the contract ahead of larger rivals Serco and Ramsay. Iranian born chief executive Ali Parsa hailed the agreement as vital for the future of healthcare in the UK and “is convinced that highly-geared rivals are going to struggle over the next couple of years leaving opportunities for more nimble firms like Circle” who have a greater proportion of equity funding.

Ali Parsa was a former investment banker at Goldman Sachs prior to becoming a founder of Circle. He was inspired by a surgeon friend who complained that he was fed up with the poor management of healthcare institutions and the idea led to the development of Circle who now build and run their own group of hospitals.

Circle’s investment vehicle, Circle Holdings was floated on the London Stock Exchange on 17 June 2011 following a £95.4m equity raise. Circle’s innovative model is based on the John Lewis partnership where staff are issued shares in the company and have a 49.9 percent stake in the running of the business. The concept has been received well by the market as evidenced through significant financial backing by Circle’s financial and institutional investors. Circle’s initiative is to include doctors, nurses and clinical staff in the decision making and running of the business, thereby increasing their capacity to deliver a greater standard of care for patients. The philosophy of forming small teams of doctors and nurses in clinic units has worked well in the past. Circle already have a track record of turning around loss making hospitals at their sites in Nottingham and Burton and this is likely to have been a contributing factor to the award of the Hinchingbrooke contract.

The deal is seen as an example of David Cameron’s “big society” solution to turn around the NHS. Earlier in the year, the government announced the “any willing provider” scheme whereby private companies are able to bid to provide NHS services in order to improve efficiency and choice for patients. However, the idea of allowing private companies to provide specialist services to the NHS actually originated under Tony Blair’s Labour government.

The future of healthcare continues to evolve in the UK.  Under the health and social bill released by Health Secretary Andrew Lansley, Primary Care Trusts and strategic health authorities are set to be dismantled in 2012 and their powers handed over to a regulatory group of GP’s. It is intended that all of the larger hospitals in the UK will become NHS foundation trusts. This will provide significant opportunities for innovative companies such as Circle and is expected to generate significant savings for the NHS.