News analysis: Capital questions

The Budget at the end of October contained few surprises for the NHS. There was confirmation of the five-year settlement of £20.5bn extra in real terms by 2023/24 and welcome provision for NHS pension costs over the same period, although there are some questions over the latter. But one area where an announcement was expected was given little attention by the chancellor – NHS capital spending.

The Budget set out capital spending up to 2020/21, with available capital totalling £5.9bn in the current year, £6.7bn in 2019/20 and £6.8bn the following year. Chancellor Phillip Hammond reiterated that he would consider a new multi-year capital settlement to support transformation – the NHS will have hoped to hear details of this in the Budget, but may now have to wait for next year’s spending review for figures to emerge.

The chancellor also had a surprise for the NHS and the wider public sector. The private finance initiative (PFI) and its successor PF2 – where the public sector takes an equity stake, reducing its ongoing payments – will no longer be used for new projects. Private finance schemes have been a source of bad press for successive governments, due to the high costs of annual payments, union opposition and the risks, as recently laid bare by the collapse of Carillion.

Of course, any announcement on capital or other elements of the Budget must be read in the context of the NHS long-term plan, which is due this month. But abandoning PFI and PF2 could leave the NHS with a gap in its capital funding and may serve only to ramp up pressure on the government to announce new funds.

In its response to the Naylor report on NHS capital needs, the government accepted the service would need £10bn to address backlog maintenance and provide the facilities required to support NHS transformation. The £10bn would be provided through public spending, receipts from the sale of surplus estate and roughly a third from other sources, including private finance.

It is important to note that the chancellor’s Budget announcement does not rule out other forms of private finance. The government’s response to the Naylor report was highly complimentary about the impact of local improvement finance trust (LIFT) schemes, used to fund new health centres and GP surgeries.

NHS Improvement chief executive Ian Dalton addressed the issue of PFI and PF2 at a November Commons Health Committee hearing on the impact of the Budget on the NHS.

‘The issue is how the non-use of PFI and PF2 during the next period, and the £3bn that was meant to come from that, is to be replaced,’ he said. ‘The importance that the NHS attaches to that is: if it is not coming through PFI, we need to see it replaced as part of the settlement.’

He added that the total PFI unitary charge – taken from revenue budgets – was £1.9bn last year across 50 NHS organisations. A small number of trusts had very high PFI costs that made it more difficult for them to balance their books. NHS Improvement would look closely at their private finance deals.

Rather than renegotiating PFI contracts to lower interest rates – as has happened in some cases – Mr Dalton is more concerned with ensuring existing contracts are managed well and value for money is delivered, particularly from facilities management deals bundled into PFI contracts.

A new centre of best practice in the Department of Health and Social Care, which will focus on improving the management of existing PFIs, was announced in the Budget.

Mr Dalton accepted that there was a need to address capital spending over the coming years. About 3.1% of total health spending in England is on capital, but this does not compare well internationally – the OECD average is 5.6% and spending in England is less than in Sweden, France and Germany.

He said that the NHS has ‘depressed’ capital spending over the past five years to balance the books. And though it was important to ‘open the taps on capital’ to address some of the maintenance backlog, there were other issues with a claim for capital spending.

‘One of the things that needs to change when we see what is in the spending review is the building of new facilities both in hospital and, frankly, in the community,’ said Mr Dalton.

Although the cost of addressing overall backlog maintenance had increased from £5.5bn to £6bn in 2017/18, he said it was more appropriate to look at maintenance that had been categorised as significant or high – those in greatest need of action. The cost of these categories had increased from £1.37bn in 2013/14 to almost £3.1bn in 2017/18.

He acknowledged that failure to address the highest priority maintenance backlog adversely affected patient care and staff morale. ‘If a lift breaks down, for instance, because it needs replacing, and that lift is meant to take a patient to theatre, the physical act of getting the patient from the ward to the theatre becomes more difficult. The number of patients who can be treated becomes more difficult.’

More and newer equipment, such as MRI and CT scanners, will be needed to serve a significant rise in demand for diagnostic tests, for example, due to the push for earlier diagnosis of cancer.

However, Mr Dalton said the rise in demand for diagnostics would require additional staff as well as more machines. ‘The reality is that we have a need for a significant capital injection through the spending review,’ he said. ‘Obviously, we do not know, over the next five years and preferably beyond, what the capital settlement for the NHS is.’

Capital investment produces gains in the long term, he said, and this was true whether it was addressing a high-priority maintenance backlog or building facilities in the community or new hospitals.

In written evidence to the inquiry, NHS Providers also urged the government to boost capital funding. ‘The government needs to ensure that, overall, sufficient funding is made available for capital, particularly because of the limits of land sales and alternative funding sources,’ it said.

While capital will be important, the hearing demonstrated other pressures on the wider health budget, with the government continuing its practice of only uplifting NHS spending (allocations to NHS England) in real terms while reducing the Department’s remaining budget.

MPs also noted the issues facing social care funding and how it increased demand in the health service.

Anita Charlesworth, Nuffield Trust director of research and economics, told the health committee there was an issue with the £1.25bn pension funding. It was unclear whether the funding for pensions will be added to the overall Department central budget or if it will be taken from the funding already set out.

However, in a later hearing, health secretary Matt Hancock confirmed the Treasury would fully cover the cost of the pension provision.

MPs were concerned about training budgets. NHS Improvement and Health Education England (HEE) will be working more closely, but Mr Dalton did not yet know HEE’s budget for the next financial year. Ms Charlesworth said HEE needed to be told its funding before the beginning of 2019/20, while public health grants are expected to be announced this month.  While announcing the education and training body’s funding before the beginning of 2019/20 is not impossible, time is running out, she added.

Mr Hancock told the committee that it was ‘not our intention’ to transfer funds out of the Department’s central budget to other areas of spending. The planning assumption for the HEE budget was there would be no cuts, he said.

Could the extra money needed for clinical training come from the increased NHS spending, MPs asked. Mr Dalton said it would not be in NHS Improvement’s interests to take money from the NHS budget to fund these areas, though he accepted they needed more funding.

‘The NHS is going to need the 3.4%, and that was the basis upon which the settlement was agreed. However, we also need – just as with capital, social care and public health – an adequate settlement for Health Education England,’ he said.

The five-year settlement for the NHS will not silence the voices calling for more money for health services. The government has said public health will be a key part of the long-term plan, so it will be pressed to find money for it.

The NHS will need more staff as the population ages and there could be a gap in capital funding needed to modernise and repair NHS facilities. The health service will be hoping more money is made available, so it can deliver all the government’s priorities.