Feature / Working model?

A sample of 60 NHS foundation trusts are spending a total of £3m on working capital facilities for the current year, according to a survey by the HFMA. This is despite just one FT in the sample anticipating needing to draw down on its facility during the year.

This follows a similar pattern to last year, when again just one trust in the sample actually accessed its facility– and then just for one day due to payroll clearing earlier than planned.

Some finance managers are questioning whether the cost of these facilities can be justified when the service is looking to make challenging cost improvements.

Relative to overall FT budgets, working capital facility costs are relatively trivial. According to the survey, which was conducted this summer by the HFMA FT Finance Technical Issues Group, on average FTs in the sample paid £55,000 as a set-up fee for their facility – although in some cases the costs were more than £100,000.

This is a drop in the ocean relative to the combined turnover of the trusts in the survey – about £14bn – but given the squeeze on budgets, more and more questions are being asked about the value for money of these payments.

One FT finance manager commented: ‘The trust has retained its working capital facility in order to achieve an appropriate financial risk rating with Monitor. It is not considered the best use of public monies. Monitor should consider changing the [liquidity calculation within the] risk rating or the Department of Health should provide access to a facility. This would considerably reduce the cost of most FTs paying an arrangement fee, particularly when the vast majority of FTs are not using their facility.’

Another said FTs could save in the region of £10m across their whole cohort (a number more or less borne out by the survey) with some form of central or pooled system.

‘These are the easy efficiencies we really need to be taking in the current financial climate,’ said the manager.

Many FTs did view their facilities as providing real protection against a shortage in cash. But this was outweighed by those seeing it more as a process requirement. While 45% of the sample  identified ‘real protection’ as a motivation, a bigger proportion identified a boost in the liquidity rating (73%) and meeting a Monitor ‘requirement’ (73%) as key reasons.  Making this point, one finance manager said its working capital facility ‘provides expensive headroom to maintain the liquidity rating’.

Another FT manager said the trust had in fact dropped its working capital facility a couple of years ago and that ‘it felt like (perhaps wrongly) it was perceived as a “negative”.’

Financial safety net

For some organisations, however, the facility clearly does provide a real safety net – even if usage to date has been limited. ‘As the FT does not have significant cash reserves, the facility provides real protection,’ said one FT manager.

Including the contribution of working capital facilities, the lowest level of liquidity included in plans for 2011/12 (for the lowest quarter) was 15 days’ operating expenses, with just seven FTs reporting less than 20 days.

Without the help of the working capital facility, 14 trusts would be looking at zero liquidity or worse for at least one quarter of the year.

For these organisations, even if they are not planning to use their facility, the availability of funds provides significant financial reassurance that they will be able to manage the peaks and troughs in their cash flow.

At the other end of the scale, 12 trusts boasted a liquidity of more than 50 days if you include working capital facilities. In two cases, liquidity stretched beyond 80 days. Even without working capital facilities in place, more than half the sample were predicting at least 10 days liquidity for their worst quarter.

 Organisations contacted by Healthcare Finance that had very good liquidity even without a bank ‘overdraft’ suggested there were a number of reasons for retaining a facility. First, it was seen as providing security against a significant problem with income from a major commissioner. The additional ‘insurance’ was seen as outweighing the cost – though some may question whether an income problem would ever stretch to nearly three months’ operation.

A further reason given was a perception that if an FT gave up its facility, it could find it more difficult to reinstate downstream if times get tougher. 

One FT indicated that the bank had asked the trust if it wanted to reduce its facility – perhaps an indication of banks’ own difficult financial position, suggesting they can identify more lucrative uses of these committed resources.

There are definitely signs of FTs having to jump through more hoops to secure the facilities – or at least to secure preferential charges. Four in 10 of the FTs surveyed had both their commercial banking and investment/deposit services with the same provider as their working capital facility, with this being linked to the rates charged in some cases.

Deposit link

One FT said it had an informal arrangement to ‘maintain our cash balances within their deposit accounts for a reduced cost of the facility’. In other cases the requirement was more formal. Several FTs suggested that 50% of the facility kept on deposit was needed to secure a reduction in fee – in one case reducing the fee by 25 basis points.

The argument from some FTs that working capital facilities might be difficult to reinstate once relinquished – or at least more expensive – is given some credibility by one FT’s report. It spent five months without a facility last year because the banks were unwilling to renew or offer a facility while the trust was in receipt of a section 52 notice (indicating a breach of its authorisation).

Another FT reported that a shopping-around exercise had unearthed no banks interested in quoting for a facility.

With very little experience of actually using working capital facilities, the service is in the dark as to what to expect if it has to make use of the safety net. There are concerns that facilities could disappear just when FTs need them, with a difficult financial position potentially triggering a default.

There has been scrutiny of default clauses in FT working capital agreements in recent years – and some central agreement on the clauses that are ‘acceptable’ – but there is ongoing interest in the small print of individual deals.

While only small numbers of FTs (6%) said they had reported any default clauses to Monitor (over and above those already recognised as normal), one FT commented that it had ‘asked – and the bank had agreed – to remove non-standard default clauses’.

Just two FTs in the sample had chosen not to take out a facility. One was projecting more than 50 days of liquidity without it. It similarly had no facility in place last year, when the worst its liquidity got to was 22 days.

Another FT said it operated a buffer of more than £6m, held in a separate bank account, instead of a facility. Board committee authorisation was required to use it and it hadn’t been accessed for the past two years.

Question of value

One FT finance director contacted by Healthcare Finance acknowledged that for FTs with cash reserves the costs were becoming harder to justify. She was due to take a paper to the FT board proposing the ending of the facility for the next year. She said this would have no direct impact on the FT’s risk rating and she expected other organisations in similar circumstances to start questioning the value of their own facilities.

To date there appears to have been a reluctance among FTs to follow suit. However, comments in the survey suggest there remains significant support for a central ‘non-bank’ solution. Many see this as a no-brainer in the current cost improvement environment and it is believed there is support for it at the centre, at least for existing FTs.

However, it is believed that the potentially greater needs of those NHS trusts still in the FT pipeline has led to further investigation, while the whole issue of a broader central banking function has also hindered the chances of a quick solution for working capital.