Comment / The history man

Positive or indeed negative arbitrage is my topic this month. For any non-accountant readers, arbitrage is the interest rate difference between what you can borrow money at and what you can invest it at. Borrowing low and lending high would give you positive arbitrage. My interest is how it applies to the foundation trust freedom to invest surplus cash in the money markets.

Those with long memories will recall that NHS trusts began life with this commercial freedom. But as balances built up, the real cost to the Treasury became an issue, the freedom was withdrawn and trusts were required to use government deposit facilities.

According to Monitor’s quarter two report for 2007/08, 73 foundation trusts held an aggregate cash balance of £1.53bn – an average 38 days of operating costs per trust. This highlights a fundamental difference between foundation trusts and trusts– the need to ensure sufficient resources are available within each organisation to sustain it through a run on cash.

This was driven from the experience at Bradford in the early days of foundation trusts and payment by results. Now, while foundations can ensure they maximise the return on surplus cash, it begs the question of the real cost to the total health economy.

As Texas oilman T. Boone Pickens says: ‘Money is a way of keeping score in life, but that is just for those who like playing the game. The real goal is to live with grace.’

The Treasury must be wondering what added value or, indeed, value for money foundation trust investment freedom really generates. To quote Karl Marx: ‘History repeats itself, first as tragedy, second as farce.’ So what are the options for maintaining freedom and ensuring the taxpayer has value for money?

The NHS Financing Facility issued a draft consultation paper to some foundation trusts proposing that, as well as providing long-term finance for capital investment, it could act as a deposit-taker. This could be expanded to include providing a committed working capital facility as part of the package.

Some trusts were suspicious that this could signal the ‘thin end of the wedge’, that some foundation trust balances would be spirited away or that the rate of return would be less than the current favourable market returns on offer. Foundation trusts can, clearly, play the game – but in terms of benefits to the taxpayer, is this ‘living with grace’?

There is a larger debate relating to foundation trust freedoms, with reports of a turf war between regulator Monitor and the Department of Health. The issue is, who has the ability to interact with foundation trusts on issues as diverse as MRSA targets and modern matrons?

The debate on financial freedom, then, comes at the wrong time. Any move to work with the Department may be misinterpreted as giving further ground. However, my plea would be for some common sense to be applied so that foundation trusts can agree the terms of a cost-effective investment scheme. If not, as we found in the past, the Treasury will have the last word.

Let me end with a quote from George Bernard Shaw: ‘We learn from history that we learn nothing from history.’ I hope we do not prove him right.

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