Threat of Southern Cross collapse gives Government a headache

The financial crisis at Southern Cross poses some awkward questions about the private sector's ability to take on public services.

by James Taylor
Last Updated: 19 Aug 2013
Southern Cross, the UK's largest care home provider, has had to take drastic action to stave off financial collapse: it has unilaterally decided to slash its rent payments by 30% for the next four months. The trouble is that its landlords might not consider this a deal worth taking - and if they don't, Southern Cross would be in serious trouble, with potentially horrible consequences for its 31,000 residents. This is clearly a business that has been badly-run - but if it does go down, it will make it harder for the Government to justify outsourcing key services like this to the private sector...

Since Southern Cross is operating in a growing market (the provision of care to the elderly) with a big property element, this made it an attractive target for private equity. But although its aggressive debt-fuelled expansion strategy made it the biggest player in the sector, it also left it horribly exposed when the debt markets caved in during the financial crisis. Recently, its problems have worsened thanks to all the public spending cutbacks, which have hammered its revenues.

The end result is that it's run out of cash to pay the bills - and since it's not the easiest business from which to strip costs, it's having to try and find savings on its rent bill. The argument it will make to its landlords is that 70% is better than nothing. But it wouldn't be a complete surprise if they begged to differ, and started reclaiming their properties.

So the big question is: what would happen then? The Government insists it has no intention of bailing out Southern Cross, on the perfectly reasonable principle that it shouldn’t be compensating the company's shareholders for a failed strategy. But equally, it can't really afford to have 31,000 pensioners turfed out on the streets.

The good news is that this seems unlikely, from a financial point of view; the care homes are worth more as individual operating businesses than as empty properties. But the issue is: who would run them? Even if the operation was passed to local authorities, they've outsourced so much of this provision in recent years that most just won't have the expertise.

Either way, though, it begs the question: should the private sector really be running services which de facto require a state safety net? Since the Coalition has made great play of its desire to promote private sector participation in the NHS, this is just the kind of headache it doesn't need.

 

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