Technical: Understanding how CDEL constrains capital spending

There is broad agreement the NHS needs increased capital investment to help it transform services and develop new, sustainable models of care. Pension investment or borrowing from local government have both been suggested as opportunities to expand capital investment. However, under current government capital controls, neither would actually increase capital resources, writes Steve Brown.

The problem comes in the form of the Department of Health and Social Care’s capital departmental expenditure limit (CDEL).

Performance against CDEL should not really be a consideration for NHS bodies as it is applicable to, and managed by, the Department. However, all spending on capital across the whole NHS has to be contained within this limit no matter how it is funded – with perhaps one exception. It is therefore important that everyone has a basic understanding of how their decisions impact on the group’s financial performance.

So, funds spent by NHS providers from internally generated resources (such as built-up surpluses and the charge for depreciation) count towards the limit. The same goes for centrally allocated capital funds (in the form of public dividend capital) and capital borrowing – whether from the Department’s Independent Trust Financing Facility or a private bank.

Without a rule change, borrowing from a pension fund or local government would similarly be captured and therefore not increase the overall funds available for investment.

The one exception has been private finance initiative funding, which benefited from dual accounting arrangements. PFI deals are effectively treated as capital investments at provider level, with assets appearing on the balance sheet and unitary charges split between financing and facilities management costs. But at the national level, most of this ‘capital spending’ is stripped out, with asset costs not hitting the CDEL. Only those rare PFI deals that are ‘on-balance sheet’ under the European System of National and Regional Accounts (ESA 10) would count against CDEL.

However, PFI (or PF2) has been dormant for a while and was finally taken off the public sector options list (in its current form at least) in October’s Budget.

Nor is the full CDEL available for local investment. The CDEL budget was set at £5.6bn in 2017/18 and of the actual spending of £5.2bn, NHS providers accounted for just £3bn. The biggest other component was research and development, which has been counted as capital expenditure since 2016.

Given the desperate need for capital resources in general (see HFMA briefing NHS capital – a system in distress?), which have been further depleted in recent years by capital to revenue transfers, the shortfall against the overall limit is not ideal. Although a small underspend is expected given the CDEL is a hard limit that cannot be exceeded, there were concerns about the size of the underspend – with providers contributing the bulk of it at £267m.

Underspends can easily arise as building projects can be delayed even after resources have been allocated. However, NHS Improvement said this forecast underspend emerged only at the very end of the year, preventing it being used as emergency capital funding during the year. It is currently reviewing the capital regime along with the Department.

To ensure the CDEL is not breached, the Department has a number of controls and mechanisms. NHS trusts are given capital resource limits and they, along with financially distressed foundation trusts cannot enter into capital schemes with an investment value of more than £15m without submitting a business case to NHS Improvement even when they have the resources available to do so. They also need approval for any loans to finance capital expenditure.

Foundation trusts were set up to have more freedom and do not have any capital spending limits. In theory, they can incur capital expenditure as long as they have the resources to do so. However, with more than 100 providers in deficit at the end of 2017/18 (mostly acutes), the surpluses that can create the cash for investment are less common. And depreciation is not enough to cover all required capital expenditure.

Any borrowing would similarly be subject to a business case and only approved where there is available headroom within the CDEL. And there are two metrics within the single oversight framework use of resources assessment (capital service capacity and liquidity) that providers need to keep in mind when considering borrowing for or spending on capital.

Assets sales can extend the usable amount of CDEL. When an asset is sold any profit is recorded as income in the statement of comprehensive income. This may contribute to a surplus in year, which could contribute to resources to support capital investment. For NHS trusts and foundation trusts in financial distress a business case is also required for sales where disposal proceeds are more than £15m.  Where there is a plan to reinvest the disposal proceeds, the business case will have to cover that too. Foundation trusts do not need to follow this process unless they are in financial distress.

At the national level, the net book value of the asset which has been sold is a benefit that increases the capital spending possible before hitting the CDEL limit.