Technical: HFMA calls for greater balance sheet focus and capital regime changes

Current attention on financial sustainability – at organisational and system level – and the importance of capital investment to transformation mean that the HFMA’s new briefing on the NHS capital system is a timely contribution to an essential debate, writes Debbie Paterson.

NHS capital – a system in distress highlights the twin problems of a lack of focus on balance sheet metrics as a financial management tool and the difficulty of accessing capital finance. It sets out what a healthy balance sheet should look like and identifies the following qualities to look for:

• Sufficient cash balances to finance short-term working capital needs
• Historic and in-year surpluses that have allowed the build-up of cash balances to finance the capital programme
• Debt (where it exists) is being used to finance capital investment rather than servicing working capital needs
• An unqualified value-for-money conclusion from the auditors with no emphasis of matter in the audit report.

Few NHS provider bodies will have all of these qualities, given the sustained period of austerity and continuing rising demand. Getting back into financial shape will take time and resource and is a problem too big to be solved in one briefing. 

However, in the short term, NHS bodies can improve their financial reporting to include balance sheet metrics as well as the all-important revenue/control total metrics. The HFMA will continue to look at best practice in financial reporting over the next few months.

Many NHS bodies are frustrated by the current system for financing capital and are looking to find alternatives to borrowing from the Department of Health and Social Care (DHSC).  The paper sets out the reasons why the current system works as it does and highlights the fact that all capital expenditure in the NHS needs to stay within the DHSC’s capital departmental expenditure level (CDEL).

While other sources of finance may seem attractive, they do not increase the overall amount that can be spent in any one year. The paper, therefore, considers how the resource available could be best allocated across the sector and identifies the key characteristics of any capital financing regime:

• Open and transparent
• Fair and equitable
• Based on clear criteria
• Co-operative rather than combative
• Timely
• Able to provide long-term certainty
• Streamlined.

In 2017/18, the DHSC reported an underspend of £360m against the CDEL, of which £267m related to NHS provider bodies – most of which was not forecast until the end of the year. This is not carried forward to the next year, but is lost to the NHS. 

A better system of allocation with the characteristics set out above may have allowed the available capital resource to be spent in year, but it is not all down to the system of allocation. Some NHS bodies are able to finance part of their capital expenditure internally without additional funds from the centre – 77% of the capital expenditure in 2017/18 was financed internally. However, this all counts against the CDEL. So, to manage the national position, the DHSC needs accurate forecasts of capital expenditure throughout the year, especially at the year-end. 

The paper identifies possible changes that may go some way to resolving current difficulties:

• Consider the revenue and capital problems as a single issue. Basic double-entry bookkeeping dictates the income and expenditure position is linked with the balance sheet. NHS bodies in deficit cannot build up reserves to finance investment.
• Consider a financial reset that removes the historic deficits that some NHS bodies are managing. Any financial reset would have to recognise that some NHS bodies do not have historic deficits and should not be penalised.
• Develop a longer term system of capital. allocation that allows NHS bodies to plan their capital programmes from the start of the year rather than having to wait for approval during each year.
• Determine a fair and transparent basis for allocation – there will never be enough resource, so there needs to be a mechanism for determining where it is allocated
• Simplify and streamline the current system.