Select Committee on Health Report

Table 4.8e.2

SOURCES AND APPLICATION OF HCHS CAPITAL, 1997-98 and 1998-99

£ million

		Plan	Forecast	Plan (1)
			Outturn (1)
		1997-98	1997-98	1998-99
Sources:	Net Capital HCHS Expenditure	1,315	1,086	1,216
	Plus:
	NHS trust capital receipts	45	206	58
	Retained estate receipts	244	230	214
	Total capital receipts	289	436	272
	Gross HCHS Capital Expenditure	1,604	1,522	1,488
Applications:	Retained estate costs (2)	33	51	49
	NHS trust capital receipts spent as capital (3)	45	147	58
	NHS trust capital receipts spent as revenue (3)	—	59	—
	Non NHS trust capital spend (4)	78	44	91
	Initial transfers to revenue (5)	194	194	200
	NHS trust voted capital	1,253	1,027	1,088
	Total Capital Applied	1,604	1,522	1,488
Financing of NHS trust capital:	Depreciation (6)	943	943	966
	External Financing Limit (EFL)	310	83	122
	Total NHS trust voted capital	1,253	1,027	1,088
	Plus:
	NHS trust capital receipts spent as capital	45	147	58
	Total capital spent by NHS trusts	1,298	1,174	1,146
Financing of EFL:	Net Borrowing from Secretary of State Voted in Estimates (7)	362	95	22
	Change in Market Borrowing (Non-Voted) (8)	­52	­12	100
	EFL	310	83	122
Footnotes:

  1.  The outturn position for 1997-98 is in line with the figures in Table 2.1.1. The figures for 1998-99 HCHS capital are only the original plan. They do not reflect adjustments to plan made at Main Estimates or any in-year changes and therefore do not match those in Table 2.1.1.

  2.  These are the costs associated with the maintenance and disposal of the NHS retained estate funded from gross capital receipts on the retained estate.

  3.  These are the capital receipts generated from the sale of NHS trust assets. These receipts can be spent in addition to those voted in estimates. It is forecast that of the £206 million NHS trust capital receipts available in 1997-98 £147 million will be spent as capital and £59 million as revenue by NHS trusts.

  4.  This is capital which is not spent by NHS trusts and is spent in Health Authorities or by Special Health Authorities such as the National Blood Authority and the Prescription Pricing Authority.

  5.  This is to cover:

(i)  the higher capital threshold in the NHS;

(ii)  capital expenditure on Joint Finance and GMS which are recorded as revenue as they are spent by a third party.

  6.  The element of capital charges included in HCHS revenue but earned by NHS trusts in prices and used to finance capital expenditure and/or repayment of principal on debt.

  7.  Net lending from voted monies to support NHS trust capital expenditure and short-term cash flow needs.

  8.  The movements in borrowing cash and investments outside the public sector of monies not voted in estimates in this financial year.

  9.  Figures may not sum due to rounding.

4.8f  Would the Department provide a breakdown of the net present value calculations upon which decisions about the private finance option are based? Would the Department indicate the sensitivity of these estimates to assumptions on factors such as risk, rate of interest, length of contract?

  1.  PFI offers better value for money by giving the private sector the incentive to use its skills and experience for the benefit of the NHS. PFI is not constrained by capital so more innovative design solutions can be put forward. In addition, PFI contracts are structured so that the private sector companies that provide the hospital facility have the same interests as the NHS in ensuring that a hospital is built and maintained to the highest standards. Where they are best placed to manage, risks are transferred to the private sector. Thus the risk of construction, time and budget overruns, standards of service support and maintaining the hospital in a fit state rest with the private sector. This enables the NHS to concentrate on its core functions and allow PFI to offer the taxpayer better value for money than traditional procurement.

  2.  Value for money for the public sector is assessed by comparing the costs and benefits of the PFI option with the costs and benefits of providing a hospital with the same level of health care output from public funds. Since the cost of the PFI option will include the value of risk which has been transferred to the private sector, but the publicly funded solution excludes the costs of risks we retain, a simple comparison of costs puts the PFI option at a disadvantage.

  3.  Therefore, as part of the economic appraisal, there is a requirement to include the expected value of risk held by the public sector under each of the options. By adjusting for the costs of the risks retained, it ensures comparisons are made on a like for like basis. The tables listed below do not allow direct comparisons between the different schemes. Investment appraisal conventions allow different approaches to counting costs. For example, provided the conventions are consistently applied in each appraisal, costs common to both alternatives can be either included or excluded and differences in costs can be scored rather than actual costs. Unless all the appraisals are re-calculated, it is not possible to say what basis costs have been included.

  4.  The robustness of the ranking of the options is tested using sensitivity analysis. The effect of varying assumptions regarding the costs of risks are carried out in each case. Each scheme has a different risk profile so without conducting a detailed analysis of each business case it is not possible to provide reliable information.

  5.  The risks most commonly tested for sensitivity are interest rates, inflation, and variations in the construction cost and timetable of the public sector comparator. Generally speaking, because many of the costs of the PFI option are fixed, the changes that could affect the financial appraisal ranking relate to the public sector comparator costing less to build than anticipated.

  6.  The interest rate is determined at financial close with the purchase of fixed rate funding. It may change between approval of the full business case and financial close. If the rate of interest changes sufficiently to alter costs by more than 10 per cent, or to change the ranking of the options, full business case approval lapses, and the case must be re-submitted.

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Prepared 2 November 1998