Health and SocialCommunity Health and Standards) Bill

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Clause 11

Power of Secretary of State to give

financial assistance

Question proposed, That the clause stand part of the Bill.

Sir George Young: We now come to financial matters. Clause 11 gives the Secretary of State powers to provide financial assistance to foundation trusts. It would be helpful at this stage if the Minister were to set out the framework for the debate on this part of the Bill, which is at the heart of the arrangements for foundation trusts. That would provide a framework in which to consider some of the other amendments.

The question that I want to pose on clause 11 is quite simple. The whole point of becoming an NHS foundation trust is to access capital through the prudential borrowing code and from the private sector. A foundation trust would no longer get its capital allocations from the Treasury; that is the whole point. Under clause 11, the Secretary of State may give financial assistance to any NHS foundation trust. Can the Minister explain how the regime will work?

It cannot be the case that trusts would continue to get the capital allocations that they would have received had they not become foundation trusts. I understand that that flow of capital would cease and that trusts would then turn to the private sector—the City—to borrow what they could. Against that background, we need to know in what circumstances the Secretary of State could continue to give financial assistance to foundation trusts. Presumably they cannot have their cake and eat it, in that they cannot

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continue to get what they would have received in addition to whatever they can borrow from the City.

Dr. Murrison: As the Minister will know, I have some first-hand experience of moneys being dished out to hospitals in trouble—or not being dished out to hospitals in trouble—as in the case of the Royal United hospital, Bath. I was somewhat surprised by the protective way in which the Minister has treated the public purse in respect of my local hospital. I am questioning the Minister because—given my experience and the experience that I suspect hospitals throughout the country have had—I am trying to get an idea of what circumstances the Minister can conceive of that would lead him to interfere in these new public benefit corporations to the extent of providing moneys from the public purse. How will that differ from the current arrangements, which, I have to say, work so poorly for my local hospital?

10.45 am

Mr. Lansley: I do not want to go on at length, but as clause 11 introduces the provisions on financial matters, it would be useful if the Minister could give us some indication of the nature of the capital regime within which NHS foundation trusts are going to operate before we discuss the borrowing powers and classification of capital as provided to NHS foundation trusts.

I confess that my understanding of this is perhaps less than that of other members of the Committee. I am aware that hospitals receive capital from the Exchequer through a range of sources: there are strategic capital schemes, through which, following the approval of a business case, the Department provides three-star trusts with discretionary capital for particular purposes; operational capital is allocated by way of a formula rather than by approval of specific projects; the access fund is the provision of funds to hospitals following the achievement of certain activity targets; and the Modernisation Agency provides modernisation funding.

For the year ahead, £1 million—a three-star reward, as it were—has been built in to the external capital provision for Addenbrooke's. However, I am not sure that that money can be relied on for subsequent years. I would leave the Committee this morning with a spring in my step if I knew that the Department planned to provide an equivalent additional bonus for three-star trusts for the years beyond 2003–04.

I do not for a minute suggest that the availability of those sources of capital means that there will not be any requirement for additional borrowing. As I understand it, the point of the system is that we should be able to put additional capacity in place. Reading about the capital available to Addenbrooke's for 2003–04, I found it interesting that its proposed allocation of £7.5 million to capital projects was related to capital bids from the trust for £22.5 million. Indeed, to those of us who have been in business, the idea that a growing organisation with a projected turnover of £230 million in the year ahead should be growing, modernising and improving with £7.5 million of capital expenditure a year does not seem feasible.

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My hope is that we will discuss how trusts will be able to access capital above and beyond that which is available through Exchequer sources. Before we discuss other aspects of capital, it might be useful to understand whether each of the sources of capital available to existing NHS trusts will be available on the same or similar terms to NHS foundation trusts.

Mr. Streeter: I endorse my hon. Friend's request that the Minister helpfully set out the funding arrangements for foundation trusts. It is fair to say that foundation trusts will stand or fall, succeed or fail, not on whether the democracy arrangements work, but on whether the funding arrangements work. As the Committee looks forward to clauses 12, 13 and beyond, I ask the Minister to help us. Will he say a word or two about public dividend capital, which is mentioned in clause 11(2)? To my shame, all I know is that it is a scheme that operates in NHS trusts. It would help the Committee to understand a complex area better, and would also help me in putting future questions to him, if the Minister were to give an introduction to the subject in his response to the debate.

The Chairman: I hear what the hon. Gentleman says. If it facilitates the Committee, I am happy to tolerate a wider-ranging debate on clause 11, provided that that is borne in mind and we do not repeat everything on clauses 12 and 13. Does that suit the Minister?

Mr. Hutton: I am, as always, in your hands on such matters, Mr. Atkinson.

Clause 11 is about the Secretary of State's ability to make loans, grants and other sources of finance available to NHS foundation trusts. Other parts of the Bill relate to public dividend capital, for example. With great respect to the hon. Member for South-West Devon, I must tell him that it is probably best to discuss public dividend capital when we reach those parts of the Bill—he can, of course, translate that to mean that that will be when I have better and further notes. I spent most of the night going through the material on public dividend capital, but I am none the wiser for it. Therefore I look forward to the debate on clause 13.

May I correct one point? There will be a different regime for NHS foundation trusts' access to capital; the right hon. Member for North-West Hampshire was right about that. However, he was not right to say that NHS foundation trusts would have no access to public sector capital. I think that the hon. Member for South Cambridgeshire was developing those points, and I will say more about that subject shortly.

We should be clear that clause 11 simply replicates the existing provisions for NHS trusts regarding the Secretary of State's powers to make financial support available to NHS foundation trusts. I will explain in a moment why flexibility and parallel sets of powers are needed.

The right hon. Member for North-West Hampshire was right, in a general sense, to say that what we are doing with NHS foundation trusts is a break with the

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past. For example, they will have access to wider sources of funding to support their capital programmes, including funding from the private sector. That freedom is not exercisable by NHS trusts, as I will explain in a moment.

In general, an NHS foundation trust's future access to capital will depend on its ability to service debt, not on centrally controlled capital allocations. As is clear from the Bill, the amount that trusts can borrow will be determined by a formula based on each NHS foundation trust's ability to repay associated principal and interest. That will be dealt with by the prudential borrowing code. The regulator will set up a formula on which those decisions will be made, which in turn will depend on the strength of projected cash flows.

Each NHS foundation trust will calculate its borrowing limit, which will be confirmed by the independent regulator and will appear in the trust's terms of authorisation. Against that borrowing limit, foundation trusts will be able to raise finance from Government and private lenders to build new facilities and improve existing ones. However, they will not be able to use protected assets—which we will come to later in the Bill—as security for that borrowing, because those assets are necessary to preserve the continuity of NHS services for the public.

The failure regime later in the Bill is designed specifically to ensure that if there is corporate failure on the part of a foundation trust, NHS patients will not be the losers. We need a regime to protect and preserve those assets. Foundation trusts will, however, be able to use non-protected assets as security for that borrowing. Most importantly, the most likely source of security will be the associated revenue streams that will go with the commissioning arrangements that are made with primary care trusts.

The right hon. Gentleman asked from whom trusts would be able to borrow and how much it would cost. I am not sure that in the immediate short-term future—the next three, four or five years, for example—the private sector will lend a huge amount directly to NHS foundation trusts. Initially we expect that most, if not all, new borrowing will be sourced from a new financing facility that the Department of Health is establishing. Therefore we must ensure that the Secretary of State has the power to make loans available to NHS foundation trusts. That is another reason why clause 11 is in the Bill.

We intend independent credit specialists acting on behalf of the Department to operate this financing facility on an arm's-length basis.

Loan applications from foundation trusts will be assessed using generally accepted credit analysis principles. The specialists will not be subject to direction by the Secretary of State in determining loan applications. The analysis will be based on credit worthiness—for example, whether the loan is likely to be repaid—and not on policy-based assessments of the loan purpose, which is current practice.

All new loans will be based on the repayment of principal and interest. It is envisaged that the financing facility will set interest rates for NHS foundation trusts. For protected businesses—that is, core NHS

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services—the interest rates will be set at the prevailing national loans fund rate, which is very favourable. I think that it is 3.5 per cent, but someone will be able to confirm the figure shortly. The interest rates for non-protected businesses such as subsidiary interests of foundation trusts, or joint ventures, will be set at a level consistent with private sector borrowing rates. Foundation trusts will pay the prevailing private sector interest rates for borrowing that they draw from the private sector.

I hope that access to public capital has been dealt with in those remarks. I should also let the right hon. Gentleman know that, as announced in the House before Christmas, we have already made three-year allocations of the operational capital that the Department makes available to the NHS. That includes the 29 applicants that are proceeding to the second stage of foundation trust status. Allocations of operational capital have already been fed into the system from public sector routes.

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