Capital clamour

(The Department of Health and Social Care has subsequently published its health infrastructure plan - See Plan promises five-year rolling programme of capital investment for full report)

The government spending round at the beginning of September confirmed an increase in capital spending for the NHS this year. But most in the service believe this can only be seen as a downpayment – with bigger increases needed in future years alongside fundamental changes to the way capital funds are allocated.

Chancellor Sajid Javid was simply confirming an earlier announcement in August by prime minister Boris Johnson of an extra £1.85bn. Some £850m of this will be spread over five years to upgrade 20 specific hospitals, while £1bn was to boost capital spending in the current year 2019/20. In fact, Mr Javid talked about increasing capital funding by more than £2bn, with ‘£250m for ground-breaking new artificial intelligence technologies’, giving an overall capital departmental expenditure limit of £7bn (see box, New spending limit)

The increase to the 2019/20 capital spending limit was better news for trusts. Previous trust plans for capital spending had significantly exceeded the available spending limit and there was concern that cash build-up in some trusts, courtesy of the Provider Sustainability Fund, might enable providers to deliver these plans (See Increased spending limit reduces capital concerns, but better forecasting needed, September 2019, p23). Trusts had been asked to reduce these initial capital plans by 20% and the increased funding means this is no longer necessary.

NHS Confederation chief executive Niall Dickson welcomed the increase in capital funding but said that it was ‘substantially short’ of the £6bn needed to clear the massive maintenance backlog that has built up in recent years – a figure that has increased from £4.3bn in 2013/14.

‘The government must increase capital funding to ensure that all NHS organisations can access capital investment to address crumbling buildings, failing equipment and outdated IT,’ said Mr Dickson.

He is not alone in seeing the spending round funds as insufficient. Centre-left thinktank the IPPR last month called for a massive £5.6bn increase in the capital departmental expenditure limit (CDEL), with this rising further over five years (see box, Solving the crisis). And NHS Providers has also launched a capital campaign under the banner ‘Rebuild our NHS’.

This calls for action in three areas. First, it wants a multi-year capital settlement that at least covers the five years of the existing revenue settlement and ideally the 10 years of the long-term plan period. Second, the current level of capital spend should be ‘at least doubled’ and then sustained for the foreseeable future.
Third, it wants changes to the mechanism for prioritising, accessing and spending NHS capital with NHS organisations.

In reality, calls for capital reform have been growing over recent years. The Health Foundation earlier this year highlighted that the capital budget in 2017/18 was just 4.2% of total NHS spending, compared with 5% in 2010/11 – largely the result of capital-to-revenue transfers.

The HFMA has also prioritised the issue. Its 2018 briefing NHS capital – a system in distress? underlined the current gap between available resource and need for investment and called for the system to be simplified.

NHS Providers has a particular concern about the current system of loans that sees trusts paying interest. ‘Some providers are never realistically going to pay these back,’ said Adam Wright, a policy adviser with the representative body. ‘The trusts in need of loans are likely to be the ones with the biggest and most entrenched deficits – it doesn’t make sense to be slicing further money off their income.’

There is also an issue with fairness, with those trusts in most need of capital investment not necessarily having access to funding. Trusts with the worst deficits will often be unable to self-fund capital programmes through surpluses or, in recent years, PSF receipts. They either have to go without the capital investment or are forced to use a loan system that will exacerbate their financial position – widening the gap between the haves and have nots.

‘We should have a financial system where a well-run trust can make a surplus each year and then has the ability to invest that surplus into its capital programme,’ said Mr Wright. Separate mechanisms would be needed for larger system-scale investments and new hospital builds.

However, such a system – effectively the original system envisaged for foundation trusts – could not be turned on overnight and would need a health service with greater financial headroom than it currently has. Mr Wright said NHS Providers would continue to explore options with members and is planning a more detailed report as part of its campaign.

The current loan-based system builds on the idea that there should be consequences to decisions around the management of estate – capital should not be seen as a free good. The previous system – with capital allocated by issuing new public dividend capital (PDC) – also had costs attached. Trusts had to pay a dividend payment set at 3.5% of net relevant assets. (Some PDC continues to be issued.)

Although this dividend rate is higher than the 1.5% interest rate at which capital loans start, PDC comes at a distinct advantage. First, trusts in special measures can pay up to 6% on loans. Second, PDC was largely viewed as not repayable – or certainly not over the short term.

A glance at the section 40 financial assistance report published alongside each year’s Department of Health and Social Care accounts shows that for most trusts, loan repayments dwarf interest payments. In 2017/18, trusts made loan repayments of more than £204m, compared with interest of just over £90m, according to figures from former health minister Stephen Hammond at the end of last year.

Last year’s HFMA briefing discussed a range of measures that might address aspects of the current system. In terms of moving to a simpler, more transparent mechanism, it suggested system allocations could be explored as an alternative to repayable loans.

As a further refinement, it said allocations could be made to organisations to cover backlog maintenance, with additional system allocations accessed based on business case submissions, judged on clear criteria.

However, even with a clearer system, it said that this would not resolve the historic deficit positions for some providers.

It appears there is growing recognition that the low level of capital funding in recent years cannot be allowed to continue. The consensus is that this year’s spending round has made a step in the right direction. Now it must be backed up by a long-term settlement that increases funding levels and certainty. And the underpinning system for allocating and prioritising capital spend also needs rapid reform.