Foundation Trusts: a capital idea

Right from the outset, the NHS has been hesitant about the financial freedoms conferred on Foundation Trusts. Where next for this flavour of FT autonomy?

Alan Milburn’s grand idea was that Foundation Trusts (FTs) should be independent of central control. Having earned their autonomy, they should be left to get on with it. The Treasury was not so keen, fearing that FTs would do bad things that would then find their way onto the Government’s balance sheet and so it was agreed that FTs should be subject to borrowing limits.

Borrowing limits came off

Ten years later, Andrew Lansley approached his reform of the NHS with the logic of the free marketeer. On a day-to-day level at least, each layer of the NHS (NHS England, clinical commissioning groups, FTs) should be autonomous except where it was failing (failure justifying intervention). If FTs wanted to borrow, that would be up to them and the market would decide how much it would lend to them.

Interestingly, the “lines for Ministers” issued alongside Lansley’s Health and Social Care bill contained a question about whether, as a result of the reforms, FTs would be now be off the Government’s balance sheet. The answer was along the lines of “that is a matter for the Office for National Statistics”.

Reading it made me curious about what the ONS might previously have said about FTs. I discovered that they had looked at the on-/off- balance sheet question before. In concluding that FTs were on the Government’s balance sheet, the ONS had set out the characteristics of FTs that supported their conclusion - which looked an awful lot like the things that were being removed by the Lansley reforms. However, as things stand today, FTs remain on-balance-sheet and the legislative changes proposed by NHS England and NHS Improvement (NHS E&I) make it highly unlikely that this will change.

Capital spending limits proposed

Among NHS E&I’s slimmed-down legislative proposals to support the NHS Long Term Plan (announced last week) is a new power to restrict the annual capital commitments of individual FTs, which NHS E&I describe as a “reserve power”. This is a row-back from their original proposal that all FTs should be subject to capital spending limits, and presumably means that NHS E&I have concluded this (taking central control of all FTs’ capital commitments) is not a necessary component of taking the market out of the NHS. However, it may not be the reprieve that FTs are hoping for.

While the limits can only be applied against individual FTs for a given year, this is actually how the FT borrowing limits worked in the early days of FTs. At that time, every FT had an individual borrowing limit that was calculated and set annually in line with the Prudential Borrowing Code, so the real test will be what NHS E&I understand by “reserve power”. In addition, there is a question mark over how the market will react if an FT is not able to make firm commitments to capital projects other than year-to-year, because even if it is not on the (to-be-described) naughty step this year, it may be there next year, or in four years’ time.

Public Dividend Capital risk

To add to the uncertainty, the Department already has the right to claw back PDC from an FT at any time, which could seriously clip the wings of FTs hoping to make use of their accumulated surpluses. Readers will recall that retention of surpluses was another of the original FT “financial freedoms”. By way of example, while one large FT ended financial year 2019 with £150 million in cash (up £10 million from the previous year), its PDC at the year-end was £400 million, so it would have been quite possible for the DHSC to call in all of the cash. The only brake on the exercise of this power is the Treasury.

Is there an alternative to capital spending limits?

The answer to this question rather depends on what NHS E&I have in mind as the circumstances in which it will use its “reserve power”.

The NHS E&I publication says: “The revised power provides an ultimate safeguard to the taxpayer in the event that an individual trust's actions threaten to breach national capital expenditure limits. This is an issue of equity as well as proper financial management - if one trust's actions breach the capital limit it means capital spending in another community has to be reined back to ensure the NHS as a whole lives within its allotted capital resources.”

We suspect that NHS E&I has in mind real circumstances in which it would have used this power if it had been available. From that perspective, identifying when to use it, and issuing guidance to FTs with examples of when it will be used, may not be too difficult and may help to settle providers’ jitters.

If the issue had been FT borrowings/commitments appearing on balance sheet, then there are alternative funding arrangements that some of the most successful FTs may be able to use, although they are unlikely to be available for everyone.

And if the issue was simply money, then Lord David Prior, Sir Jim Mackey and others have already suggested how an NHS bond could be used at national level (and regional or even individual Trust level arrangements should also be possible, based on our experience of bonds in other sectors) to provide an immediate cash injection and unlock more than the initial six projects announced by Matt Hancock last week.

Another approach would be to give FTs more autonomy, not less, with a view to taking them off the Department’s balance sheet, but that seems unlikely.

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Every piece of content we create is correct on the date it’s published but please don’t rely on it as legal advice. If you’d like to speak to us about your own legal requirements, please contact one of our expert lawyers.

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