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Standing Committee E
Thursday 22 May 2003
[Mr. Win Griffiths in the Chair]
Power of Secretary of State
to give financial assistance
Question proposed [this day], That the clause stand part of the Bill.
Question again proposed.
Chris Grayling (Epsom and Ewell): I welcome you back to our debate, Mr. Griffiths. I was midway through my remarks, and I have been scrabbling around in my notes to work out what I had asked the Minister, and he likewise. He plans to answer some of my questions in detail, so I shall not reiterate them now.
In concluding my remarks, I should like to touch on two issues to which I should be grateful for the Minster's response this afternoon. First, where will the allocation appear on the nation's accounts; both the new facility that he talked about this morning—which has been set up in his Department—and additional borrowing secured by foundation trusts from the private sector or other sources? Will it appear as part of the public sector borrowing requirement, or will it simply and only appear on the foundation trust's own balance sheets?
I touched on my second point as we were about to adjourn this morning. It concerns the impact of the national tariff's phased introduction on foundation and non-foundation trusts. Clearly, there is a risk. If a foundation trust can retain a surplus generated by producing its services at a lower cost than the national tariff, it will gain a specific benefit. It will be able to reinvest that money in additional services and improve its position relative to other trusts. Under the current rules, those trusts that are not entitled to foundation status must return any surplus generated in the same circumstances to the Treasury. Therefore, those trusts would be at a disadvantage. That highlights one of the reasons why my right hon. and hon. Friends and I had significant misgivings about the overall measure.
Mr. Andrew Lansley (South Cambridgeshire): My hon. Friend said that, currently, an NHS trust that generated a surplus on its activities would have to return the money to the Treasury. I am not sure that I understand the point in the way that he does. Would they not be able to carry over any surplus at the year end?
Chris Grayling: Not under the national tariff. The Minister made the point this morning that once the tariff is introduced, foundation trusts that can carry out services for a lower cost than the national tariff rate will be able to retain that difference as a profit
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margin and reinvest it. However, my understanding—the Minister can correct me if I am wrong—is that a non-foundation trust will not have the same right. Therefore, it will not have the same incentive to reduce costs and become more efficient. It will not be able to generate additional funds in that way to enable it to invest in more and better services.
Mr. Lansley: I did not understand the matter that way, but there is no point in debating it because the Minister will tell us in a minute. There will be other issues, but I did not see this as the source of a disparity. I saw all trusts possibility being lower-cost providers and therefore generating surpluses that would be available for investment elsewhere.
Chris Grayling: I am sure that my hon. Friend will agree that if this were a general right for all trusts, it would not be something that would relate to foundation hospitals. It would be a matter of course for all trusts, regardless of their circumstances.
Dr. Evan Harris (Oxford, West and Abingdon): This is a fundamental question, and it is easily answered. In order that we can make progress, I invite the hon. Gentleman, in his interesting and well-thought-through address, to request the Minister to deal with the question now. We can then make progress on some of the substantive matters.
Chris Grayling: I was about to conclude my remarks by saying that I hoped that the Minister could enlighten us on that. Our argument has always been that foundation status should be accorded to all hospitals. If foundation status is phased in, only a small number of hospitals will have foundation status at the start. Phasing in the national tariff will create distortions between hospital trusts. That cannot work to the advantage of patients. I should be grateful to the Minister for clarification on those points, and I hope that he will be able to enlighten us.
Sir George Young (North-West Hampshire): I am sure that the entire Committee was grateful to the Minister for setting the framework for this part of the Bill this morning. That will save time when we are dealing with subsequent clauses, in the sense that we now have the template within which we are operating.
I want to return to clause 11 and the question of grants. I am sure that my hon. Friend the Member for South-West Devon (Mr. Streeter) was right when he said that although foundation trusts are interested in pioneering a new form of social ownership, they are much more interested in whether they can be free of the shackles of the Treasury, access more capital and help to deliver a better local health service.
The Minister's comments on the national tariff were interesting, albeit somewhat tangential. As my hon. Friend the Member for South Cambridgeshire said, the level at which the national tariff is pitched will decide the extent to which foundation trusts can borrow, because it will determine the margin between their income and their expenditure. There is also the related issue—touched on by hon. Friend the Member for Epsom and Ewell (Chris Grayling), which I know the Minister wants to address—of what happens to the surplus in the hands of non-foundation trusts.
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Returning specifically to clause 11, I repeat my question from some time ago; how will the grant regime differ when a NHS trust becomes a NHS foundation trust? The Minister made the point that we must keep that in perspective, given that the capital allocations are relatively small compared with the revenue. North Hampshire hospital's capital allocation for the current year is £2 million, whereas its revenue expenditure is in the region of £100 million.
I think that I heard the Minister say that operational capital is allocated three years in advance and will not be clawed back if the trust becomes a foundation trust. He went on to say, however, that that only accounted for some 25 per cent. of the capital allocation, leaving unanswered the question, to which I will return in a moment, of the other 75 per cent.
The Minister said that a foundation trust would continue to be eligible for a range of grants from his Department. He mentioned national initiatives for the national service framework and touched on an IT strategy. However, I, and directors of finance up and down the country, assume that foundation trusts will not continue to receive from the Department all the capital that they would have got had they not become foundation trusts. It would be helpful if there were some body language from the Minister that confirmed or denied that assertion.
I assume that foundation trusts will not receive the total flow of capital from the Department that they used to get, but will be invited to use the facilities under clause 12 to borrow from alternative sources. I know that financial directors up and down the country are asking that question because they are trying to work out whether they would be better off going down the foundation trust route, which would mean forgoing an element of capital but receiving more from the facilities that I will come to in a moment.
Chris Grayling: My right hon. Friend puts his finger on an important point. If foundation hospitals represent a genuine way to expand the capital available for foundation trusts, they will be able to enhance their services. If, however, the introduction of borrowing powers is simply an opportunity to replace money that currently comes from central Government, it will not generate improvements in patient care in the hospitals concerned.
Sir George Young: The best way for the Minister to resolve the matter is to take the case of a typical hospital trust and tell us what would happen if it were to become a foundation trust, how much of its existing capital it would continue to receive and what proportion it would no longer receive but would be expected to get through the new route that is being opened up under this part of the Bill. If the Minister were able to do that, he would answer my hon. Friend's question and mine.
My final point is more fundamental. The original concept was that private borrowing in which the trust is engaged would not score against the departmental baseline, but would be incremental and increase the
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total amount of capital invested in health. That battle was fought and lost. We now know that borrowing privately will score against the departmental total. I was slightly alarmed this morning when the Minister said that when the Bill is passed, he does not expect a huge amount to be lent from what I would term the ''private sector''; banks and the City. Instead, he described a new NHS financing facility. That would be the route down which trusts will go for capital.
The Minister explained that that would be kept at arm's length from the Department, and would be operated by independent credit specialists who would assess the loans using normal credit analysis. However, in response to my hon. Friend the Member for Epsom and Ewell, he then said that it would be funded by public expenditure; it would come from his Department. If that is the case, we have gone round in a complete circle.
As things stand, a non-foundation trust would get its capital from the Department. However, it seems that if such a trust went through the hoops to become a foundation trust, cleared the social ownership hurdle and the regulatory hurdle and was given a prudential borrowing limit, it would not go to the City for funding, which is what I thought would happen, but would go back to the Department. Having jumped all of those hurdles, the trust would get its money from the Minister. We seem to have travelled in a complete circle.
I hope that the Minister will disabuse me of that view, tell me that I have totally misunderstood what he said this morning and say that the situation is not as I described. However, if it were as I described, far from diminishing the regulatory burden, we would have substantially enhanced it. We must press the Minister a little more on how the new regime would work. There must be absolute clarity as to how that would benefit both the Department and the trust that goes round the course.