Monitor has found Sherwood Forest Hospitals Foundation Trust in Nottinghamshire to be in significant breach of its terms of authorisation, due to mounting PFI debts.

The economic regulator said the trust had “failed to deliver recurrent savings of £10m in the last financial year and made a £5.9m loss in quarter one this year”.

Sherwood Forest Hospitals currently spends 17% of its income on PFI costs, which are escalating at £1.5m per year.

Monitor Chief Executive David Bennett said Sherwood Forest is one of two foundation trusts whose “underlying” financial problems are due to PFI contracts.

The trust spent £42.5m on PFI costs last year.

Monitor commented: “The trust’s PFI unitary charge is rising annually as a percentage of income, and when combined with falling revenue this threatens the long-term financial sustainability of the trust.”

The trust plans £14m saving for 2012–13, but this will be “challenging” given that last year it saved £9.8m less than it had planned, Monitor said.

According to the regulator, Sherwood Forest has breached Condition 2 (the general duty to exercise its functions effectively, efficiently and economically) and Condition 5 (the governance duty) of its authorisation terms.

Monitor’s Board has not yet decided what action to take.

The recently declared bankruptcy of South London Healthcare NHS Trust has been linked to Barclays Bank’s manipulation of the interbank lending rate (Libor).

Health finance experts have called for a public investigation into the impact of the Libor fraud on hospital PFI debts.

Writing in the British Medical Journal, Allyson M. Pollock and David Price said the conflict between the trust’s falling income and its escalating PFI debts was partly due to the dependence of PFI repayment rates on financial derivatives.

Barclays Capital has been convicted of fraudulently inflating the value of derivatives in order to distort the cost of bank borrowing.

Derivatives play a key role in PFI projects: investment banks such as Barclays Capital use them to secure loans against a hospital’s future revenues.

The PFI scheme for the Princess Royal University Hospital PFI in Bromley, a major factor in the South London Healthcare NHS Trust debt, relied on interest rate ‘swaps’ that created an artificially high interest rate for the deal.

Profits from derivatives are tied to Libor, and so manipulating Libor enabled Barclays Capital to defraud the trust by indirect means, the authors claim.

They argue that “a major public inquiry” is needed “to determine the full extent to which the high interest rates, swap mechanisms and swap margins fuelling the latest round of hospital and service closures are products of Libor manipulation and fraud.”

Government criticism of Private Finance Initiative (PFI) schemes has highlighted concerns about the economic burden faced by hospital trusts.

The financial crisis faced by the South London Healthcare trust has led Health Secretary Andrew Lansley to condemn PFI as a New Labour mistake.

A total of 21 health trusts have declared themselves financially unsustainable, and the Government is looking to review the terms of PFI contracts.

PFI schemes to fund hospital construction were devised by John Major’s government, but realised by a New Labour administration keen to build hospitals without exceeding health budgets.

They represent a form of borrowing from the private sector at high interest rates, harming the long-term financial health of hospital trusts.

South London Healthcare is now spending 14% of its income on PFI repayments, having been formed by the amalgamation of three hospitals of which two had been built through PFI schemes.

A review of PFI schemes by a Treasury select committee in 2011 declared its supposed advantages to the taxpayer to be “illusory”, and concluded that the DH had become “addicted” to it as a practice.

Shadow Chancellor Ed Balls defended the schemes: “Up till 1997 we had no new hospitals being built at all, and in constituencies across the country people were crying out for decent healthcare.”

South London Healthcare may become the first NHS hospital trust to be declared bankrupt after accumulating debts of £69m.

Health Secretary Andrew Lansley has warned the trust that an administrator may be brought in to sort out its finances. The trust could also be dissolved and certain services closed as a result.

Mr Lansley said in a letter that he realises not all of the debts are the trust’s fault. However, he added that problems must be “tackled” and that “we are almost at this point”.

The trust merged three London hospitals in 2009: Princess Royal University Hospital in Orpington, Queen Mary’s Hospital in Sidcup, and the Queen Elizabeth Hospital in Woolwich.

When the three joined to form one organisation, the trust inherited a large debt through a private finance initiative (PFI) that had been used for the buildings at Orpington and Woolwich.

If the Health Secretary decides to disband the trust, it would not necessarily mean that all services would close as another NHS organisation or a private provider could take over responsibilities.

Government ministers are thought to be considering a deal which would see taxpayers taking over responsibility for the £2.5bn PFI contract.

But the option of emergency funding to reduce the deficit is not being considered in a move which ministers believe would allow other trusts to assume similar bailouts.

Mike Farrar, Chief Executive at the NHS Confederation, welcomed the move by the Health Secretary. “The NHS can’t go on with short-term fixes to financial problems,” he said. “That might mean some tough decisions, but hopefully will deliver financial sustainability in the long term.”

Chris Streather, Chief Executive of South London Healthcare, said talks were now ongoing with the Department of Health and NHS London to decide the “best future” for the trust.

“The most important thing is that the health needs of the local population are sorted out,” he said. “Over the last three and a half years since we have merged we have made an enormous amount of progress on quality of care.

“There is a huge gap in our financial plan in order for us to become viable in the long term and this intervention if it solves that problem which it is designed to do is absolutely welcome and will be helpful.”

A decision is expected on the future of South London Healthcare in the middle of July.