By Marcus Leach
A new Unison report, delving into the running and funding of the care industry, reveals that the collapse of Southern Cross may not be a one-off, as a number of other social care companies are also on the brink.
Private equity takeovers of public services that use similar high risk business models, could leave taxpayers picking up the bill for more company failures. The in-depth study of privatisation shows that the second largest care provider, Four Season, is also in severe financial difficulties and others may follow.
If both Southern Cross and Four Seasons were to collapse, around 1,150 nursing and residential care homes would be at risk of closure, affecting nearly 50,000 vulnerable people and their families and hitting over 60,000 staff.
Another of the top four largest residential care home operators is Barchester Healthcare - a sister company to Castlebeck, the operators of the Bristol care home exposed by a Panorama documentary last week for patient abuse. The home owners have admitted that serious wrongdoing took place at Bristol.
The report shows that Barchester and other operators of care homes, have repeatedly changed ownership, often through private equity firms buying, consolidating and selling companies. The UK’s largest union is warning that the Government must tackle the crisis in the care industry.
The research shows that the privatisation of the care industry is an experiment that has gone seriously wrong. In 1990, nearly 200,000 of the 500,000 people in residential care were cared for in homes owned and run by local authorities and the NHS. Now just 31,000 people are in the public care sector. Trends suggest that there will be no local authority-employed homecare staff left by 2020.
Councils have lost much of their grant funding from central Government, leading to further cut backs in social care services. The growing elderly population is fuelling demand for services but, unless drastic steps are taken to tackle the problem, vulnerable people could be left without essential care.
The quality and continuity of care has fallen dramatically since privatisation, as inexperienced companies bid to run these services. The cost and risk has also risen, as companies borrow too heavily, with their financial performance too weak to repay borrowings on agreed terms. Local authorities may be forced to take over failing companies to protect residents, but at a huge and unplanned cost to the taxpayer.
“We have already seen the huge impact of the Southern Cross collapse, but the care crisis is far from over," Dave Prentis, UNISON’s General Secretary, said.
“Our report exposes the risk of other care homes collapsing because of the behaviour of wheeler-dealer private equity firms.
“The home and day care market is worth about £4bn a year, making it attractive to private companies eager to make profits. But the looming catastrophe in the sector shows that gambling with people’s care is irresponsible and too risky.
“We are seriously concerned that plans to push through the NHS reforms will lead to a similar crisis in the health service. Private equity and other private sector operators are hovering over the NHS, eager to make a quick profit - at the long term cost of care quality and continuity of service.
“Typically these private equity firms buy companies cheaply, merge with rivals and then sell them on as quickly as possible. Short-term asset holding means that people and services are passed from pillar to post, with no continuity of care. Our list of disasters documents a history of privatisation dogged by problems - companies putting profits before people, funds being lost and inexperienced providers delivering poor quality care.
“Taxpayers have already had to bail out banks that loaned too much to private equity speculators to privatise public sector assets that were over-valued. Now taxpayers will have to pay the price again, as they will be forced to pick up the bill for collapsing companies. We need to halt the privatisation of any more public services, before more people are made to suffer in the name of profits.”
Findings from UNISON report - ‘The rise of the public services industry’:
The UK’s second largest care home provider has, like Southern Cross, severe financial problems. It operates over 400 nursing and residential care homes and specialist care centres in the UK, Jersey and Isle of Man. The company accommodates 17,500 people and employs 21,000 staff. It was majority-owned by the Qatar Investment Authority, a sovereign wealth fund. Four Seasons has repeatedly hit serious financial trouble and had to renegotiate debt with bondholders, when unable to make repayments.
Four Seasons avoided closure or change of ownership by renegotiating £600m of debt in August 2010, giving it another two years to arrange a longer-term debt restructuring. The Government-owned Royal Bank of Scotland became the largest shareholder in Four Seasons, taking a 40% ownership stake, in exchange for writing off £300m debt owed to RBS.
Other major care providers:
Barchester Healthcare - The fourth largest operator runs more than 200 homes with 10,000 residents and employs 14,000 staff. It acquired Westminster Healthcare in 2004 and is privately owned by a consortium of entrepreneurs, who took a dividend of £363.5m in 2008. The owners had to pay back some of the money after an interest rate swap went against them. The business uses a high risk business model and the company is rumoured to be for sale. Its sister company is Castlebeck: Last week, Panorama revealed serious abuse problems at the company's care home in Bristol.
BUPA - has 29,000 residents in more than 430 care homes across UK, Spain, Australia and New Zealand. BUPA recently sold its protection and risk insurance division to insurance consolidation operation Resolution for £165m.
The Priory - has 50 care homes and 6,000 employees. In 2000, The Priory was acquired by Westminster Healthcare group. In 2002 it was bought by its own management, with the support of Doughty Hanson private equity. In 2005 it was acquired by the ABN AMRO bank and when ABN was acquired by RBS in 2007 it became wholly owned by RBS. In January 20011, RBS sold the business to private equity firm Advent International for £925m.
Causes at the heart of the care crisis:
* Some companies borrowed too heavily, despite their financial performance being too weak to repay debts on agreed terms.
* As people live longer, the demand for care in their own homes has gone up, in preference to residential care.
* Local authorities lost much of heir grant funding form central government and have cut spending on social care services. * The fall in the value of elderly people's own homes means that many don’t have enough funds to pay for residential care.
* The collapse of the property sector means that, in many cases, care home owners borrowed more than the reduced value of their properties, breaching banking covenants. * The collapse of the banking sector meant it became impossible for some providers to renew borrowing facilities on affordable terms.
The care sector and the private equity ‘merry-go-round’
· Southern Cross was floated on the stock market by Blackstone, which obtained a 400% return in two years on its acquisition. Southern Cross is now at risk of collapse.
· Allianz Capital Partners made a return of 100% by acquiring Four Seasons in 2004 for £775 million, selling it four years later for £1.4bn — the business then collapsed in value.
· 3i private equity fund brought a 38% stake in Care Principles for £1.5m in 1997, the remaining amount in 2005 and sold to to Three Delta in 2007 for £270m — a return of 390%.
· Tunstall was acquired by Bridgepoint Capital in 2005 for £225m, merged with Birdgepoint Investment and sold on after three years for £514m.
· Sovereign Capital achieved a growth in value of around 100% after buying Tracscare for £26m in 2004 and then another four care businesses for £20m and selling the enlarged group for £200m. It owns City & County Healthcare who are currently undertaking a programme of acquisitions of other businesses in the domiciliary care sector.
Top privatisation disasters
Sedgemoor ran 45 care homes for sexually abused and autistic children. It was bought by ECI partners for £13m in 2000, but collapsed in 2007, leaving many vulnerable children potentially homeless. Local authorities had to intervene to find the children homes.
Connaught was involved in the social housing sector, but went bust in late 2010, putting nearly 10,000 jobs in jeopardy. It was £220m in debt after cuts left its business no longer profitable. Connaught Partnerships won a major £125m contract for waste and recycling services, street cleaning and council house repairs with Norwich Council, which it was unable to fulfil — the council said they feared the Connaught bid had been unrealistic but it was the cheapest.
Mouchel specialises in maintenance and infrastructure consultancy and entered a period of crisis in early 2011. This involved a series of profit warnings a loss of £1.53m for the 2010 trading period and negotiations with Costain over a possible takeover rescue. Interserve had also approached Mouchel, but the takeovers were abandoned and the future is still unclear.
Ballast PLC was a subsidiary of Ballast Nedam and was the prime contractor on a £120m PFI project with the London Borough of Tower Hamlets for the refurbishment of schools. The contract was awarded to subsidiary Wilshier, and was meant to run to 2007 but Ballast ceased trading in 2003 after a series of multi-million pound losses. Schools suffered severe disruption and Tower Hamlets was left with the cost of beginning a new tendering process.
After the Carter and Carter founder died in a helicopter accident, the company went into administration with debts of £130million and allegations of false accounting. It had signed a memorandum of understanding with Castle College in Nottingham to provide training. The services were only safeguarded because the operation was transferred to the college and public money used to rescue the failed private venture.
Terra Firma bought up various public service contractors. It owned stakes in Waste Management Contractors and water company Hyder. William Hague was a member of it advisory political council before he became Foreign Secretary. Terra Firma was damaged by the acquisition of EMI, which led to an unsuccessful courtroom conflict with Citigroup.
Jarvis was involved in school construction and railway maintenance and part owner of the Tube Lines contractor, which holds one of the massive contracts for the upgrading of London Underground. Jarvis was on the verge of bankruptcy in 2004 after it accepted liability (with network rail) for the Potters Bar train accident. Jarvis was already in difficulty because of compliance problems on contracts and compensation for delays to building projects. At the time of crisis in 2004, Jarvis held 10% of all PFI construction contracts, with an investment value of £35.5bn and was still winning PFI bids while on the verge of bankruptcy. Several thousand staff lost their jobs.
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