Comment / Fixing the capital regime

What has been clear from the 2022/23 planning guidance is that the coming year will be a momentous year for the restoration and recovery of NHS services. But is the current provider capital regime fit for purpose? And will it help or hinder the drive to tackle the significant backlog?

Capital spending on assets such as buildings, equipment and digital falls within the Department of Health and Social Care’s (DHSC) capital departmental expenditure limit (CDEL). All NHS trusts’ or foundation trusts’ capital spending (whether funded by internal cash sources or directly from the DHSC), scores against the CDEL that year.

Up to 2019/20, CDEL was managed at a national level. Trusts were given capital resource limits (CRLs), but foundation trusts were free to determine their own investment affordability and spend accordingly. However, overall the NHS system still needed to hit the CDEL.

There was also a system of loans and emergency financing, which was complex to navigate. This ultimately led to a two-tier system, depending on an organisation’s level of cash reserves, and it was incredibly difficult to manage nationally.

The NHS long-term plan committed to reforming the NHS capital regime and from 2020/21 the regime has been amended to include system-level operational capital envelopes.  Essentially there are three blocks of funding. 

1. System-level allocation (about £4bn) – to cover day-to-day operational investments. Typically self-financed by providers or financed by system capital support PDC (previously known as emergency capital PDC).
2. Nationally allocated funds (£1.1bn) – to cover nationally strategic projects already announced and in development or construction, such as hospital upgrades (sustainability and transformation (STP) partnership wave 1 to 4b schemes) and the ‘new hospitals’ programme.
3. Other national capital investment (about £3bn) – including national programmes such as elective recovery, diagnostics and national technology funding and the mental health dormitory programme.

These changes have brought structure and a simplification of some of the processes. But there are still real challenges with accessing sufficient capital. The recent King’s Fund capital review found that the current methodology for allocating operational capital funding to systems was ‘fundamentally sound’. However, it broadly works – with a strong link to depreciation and existing assets – while the funds are only sufficient to cover the maintenance of the existing estate. If more funds were made available, funding would need to be weighted increasingly to reflect future needs.

And it added that allocating operational capital could not be viewed completely independently from wider capital funding.

There remain considerable capital constraints and devolving some of the capital budget to the system was also effectively devolving some of the problem of managing the capital at a national level.  

However, the problems are not all at the centre. Despite providers having plans that significantly exceed these allocations, there has historically been a significant underspend against this block of funding.  

So, there is work to do on both sides. Poor planning, a lack of prioritisation and poor governance can lead to unrealistic plans being submitted to systems. In addition, there is a lack of accurate capital forecasting. It is unclear whether this is due to over-optimism, lack of focus, or uncertainty over the consequences of forecasting less than the plan – or all of these.  The three-year capital allocation will help with this, but a greater focus on capital planning and forecasting by providers is required. After all, no one is going to increase this allocation if there is no confidence in the accuracy of planning, reporting and delivery.  

System capital support, where providers do not have sufficient resources of their own, also remains difficult to access and this is partly due to a lack of understanding on behalf of providers and systems. Capital support is intended for use on urgent and critical spend in providers that have insufficient cash. Too often applications are received by the centre for schemes that do not meet these criteria.  

It is also an interesting twist that, despite this element being within the system allocation, approvals for cash to support the spending are issued nationally by the central bodies and the Department.

For STP and mental health dormitory schemes, accessing capital is also becoming increasing burdensome.  Some providers have been told to ‘pause’ schemes with no indication as to when they can restart.  No one would dispute the need for compliance with the Treasury’s Greenbook or the need for scrutiny and review. However, combined with an approval process of at least 14 weeks, this adds significant time. It can take over a year to get approval to start and that is time the service does not have.

In addition, being held rigidly to cash flow profiles that were made at a point in time, either pre-Covid or at an early stage of the process, gives trusts real challenges in terms of delivery. This is particularly difficult in periods of high inflation. Inevitably this further increases pressure on the only flexible pot of funding, the system allocation.

Accessing capital from the other national pots has also been difficult historically.  There has at times been a lack of transparency over the existence of different funds. And short, unrealistic and unclear criteria, bidding and delivery expectations have made it more potluck than prioritised capital. 

In 2022/23, there is a little more clarity on elective recovery funding and the Targeted Investment Fund (TIF) allocations across three years are welcome, but this approach needs to be rolled out across all funding.

In 2022/23 there needs to be a greater focus from both providers and nationally on capital spend. The move to three-year allocations gives providers an opportunity to plan and deliver across multiple years. And a greater focus on in-year reporting and forecasting would help to maximise the impact across the NHS.

However, to rise to the challenge providers need autonomy and support rather than central control and micro-management. Only a collective endeavour will enable the NHS to start to address the challenges it faces.