Further written evidence submitted by
the Foundation Trust Network (FTN)
ISSUES AROUND ACCESS TO CAPITAL FOR NHS FOUNDATION
TRUSTS AND AN NHS BANKING FACILITY
INTRODUCTION
1. The Foundation Trust Network is the independent
membership organisation for authorised and aspirant foundation
trusts. We represent 212 public provider organisations in the
acute, mental health, ambulance and community services.
2. We understand that the Committee received
oral evidence on 14 June from the NHS Confederation and following
that has requested a supplementary note on an NHS banking function.
This is a critical issue for FTN members and we have been considering
the role of a banking function for some time. Below we outline
some of the emerging issues from our perspective, which we hope
is helpful to the Committee's deliberations and which we consider
complements the NHS Confederation paper.
3. Our members have a particular concern for
the access of public sector providers to capital and working capital
in future. There is undoubtedly a need for banking functions for
the NHS to support re-structuring, day to day risk management
and longer term capital investment programmes. Adequate amounts
of capital are unlikely to be available from the public purse
alone.
BACKGROUND
4. The original form of the Health and Social
Care Bill proposed significant changes to the environment for
financial activities, including:
— All
NHS Trusts to become Foundation Trusts (FTs) by 2014—even
though this has now been "softened" and the deadline
will be extended for some.
— More
freedoms for FTs including removal of prudential borrowing limits
and the Private Patient Income Cap; clarification on the responsibilities
of FT Directors; and extended roles for FT governors (although
this will not now be in force until 2016 as Monitor's jurisdiction
has been extended to this date);
— A new
sector regulator with the duty to set prices;
— Proposals
for a new asset steward / investment management function to oversee
the £23 billion of PDC in provider organisations to be known
as the NHS Investment Agency (NHSIA).
5. For those organisations working towards FT
status, access to capital on the pipeline will be critical.
6. There were some changes to the Bill following
the pause that are less helpful and where uncertainty remains.
These changes are to the original proposals covering continuity
of services and a special administration / failure regime which
were meant to be developed under the purview of the regulator.
7. Whilst no policy has finally been decided,
it now appears that the failure regime will not be independent
and that the Secretary of State will have step in or veto rights
within it. Additionally, the system for protecting patient services
and who pays for such protection remains an unanswered question,
but is much more likely to be controlled by the NHS Commissioning
Board. Taken together with greater powers of challenge for Health
and Wellbeing Boards with Overview and Scrutiny Committees remaining
intact, it will be even more difficult for providers to successfully
reconfigure services in order to avoid failure.
8. It had been planned that the NHSIA will take
over the functions of the existing Foundation Trust Funding Facility.
It is not yet clear how much the NHSIA role and scope will change
as a consequence of the recent re-think—for example whether,
and how far, the NHSIA will have responsibility for dealing with
failure and pre-failure, but we anticipate it to have some duties
that act as the investment banker on behalf of the public purse.
9. Foundation Trusts are currently classified
as Central Government by the ONS. This classification means that
all expenditure by Foundation Trusts scores against Departmental
spending limits whether financed by Government or from commercial
sources.
THE FOUNDATION
TRUST REQUIREMENT
FOR CAPITAL
10. Below we outline what we perceive the need
for access to various forms to capital to be, cover how it is
supplied at the moment and look at the options of how it might
be supplied in future.
UNSECURED WORKING
CAPITAL
11. Originally it was believed that the DH would
provide working capital for foundation trusts, but this was not
the case and trusts now seek this from commercial banks. The regulator,
Monitor, has required foundation trusts to have an arrangement
in place which they need to maintain financial ratings even when
they do not immediately need the cash. In recent years the banks
have doubled, and even trebled their charges, costing the FT community-we
believe—over £20 million per annum. In recent months
there have been examples of FTs actually needing the cash, and
finding the facilities withdrawn. Working capital will be increasingly
necessary to manage the service reconfigurations required to face
the QIPP financial challenge, so lack of access is a problem that
should be solved rapidly.
UNSECURED CAPITAL
EXPENDITURE FINANCE
12. The capital budget has been under spent for
several years suggesting there has not been a supply problem to
date, but as public capital will be more restricted in future
this may not continue to be the case.
13. The FTFF has committed over £1 billion
to date. The commercial banks have not lent to foundation trusts
unsecured for anything beyond a year. Up to date the FTFF has
lent at cost without adding a risk premium in general or differentiating
between borrowers in particular.
14. Bank credit committees dislike the uncertainties
about insolvency, are uncomfortable with the way risk is managed
across the system and, have particular concerns about the financial
health of the commissioners. In the past the commercial sector
has been unwilling to lend without specific use of the Deed of
Guarantee from the Secretary of State.
15. If price is a problem for the commercial
sector, then the logical solution would be to allow the price
to rise to the point at which banks are prepared to lend. Whilst
some might consider this to be a sound medium term objective,
currently it would seem to be politically unpalatable to raise
the cost of finance to FTs in order to benefit private sector
lenders. In addition no public provider would be enthusiastic
about lobbying for a cost increase. This would only be tenable
if there is an allowance for full cost recovery in independent
price setting. Given the fiscal challenges to the system this
seems increasingly unlikely. In addition foundation trusts are
unlikely to make the kinds of surpluses that can finance large
scale capital investment.
UNSECURED SECURITISATION/SYNDICATION/POOLING
16. It is in the tax payers' interest to keep
the cost of lending as low as possible. As commercial banks are
currently reluctant to lend to individual organisations, it might
be possible that a portfolio of risks already processed by the
FTFF might be attractive to lenders wishing to explore the market.
There are precedents in other parts of the public sector such
as Housing Associations and Student loan books. In general a spread
of risk should attract a better price than an individual risk.
LONGER TERM/PERMANENT
CAPITAL
17. The existing stock of Public Dividend Capital
(PDC) is significant (some £23 billion) but the policy is
that no new PDC should be issued. For foundation trusts with existing
PDC the future management should be a relatively passive exercise.
For unsuccessful trusts and those trying to acquire them the problem
may be that the nominal PDC may be greater than the economic value
of the trust. Managing the revaluation of the investment is likely
to be highly complex and fraught. Any entity invited to take on
existing PDC as the result of a merger or acquisition would insist
on undertaking a due diligence exercise to establish any diminution
of value before its board accepts such responsibility.
RESTRUCTURING
18. The original Bill provided for DH and Monitor
to borrow in order to lend. There was no pre funded solution beyond
the idea of some sort of risk pooling. The problem of such pools
is that successful organisations see themselves paying for the
failures of their weaker competitors and regard this as wrong.
The system needs a pot to solve problems. It would need to be
transparent and accountable but it needs to be available. As we
saw in the banking crisis, where the government is looking for
the private sector to help solve problems, government support
may even make the pricing more competitive than for unsupported,
but better managed organisations. There is the potential that
we see a "too big to fail" effect.
THE BALANCE
BETWEEN PUBLIC
AND PRIVATE
CAPITAL
19. The attraction of the private sector as a
supplier of capital should remain a medium term objective whilst
recognising that experience so far suggests it will be expensive.
However, if banks are not prepared to take risk without at least
implicit government support, what are they contributing that government
itself cannot provide more cheaply? The ultimate solution might
be to look a risk sharing between public and private sectors.
20. If government is to provide a temporary solution
itself through making banking services/ capital available, there
is a need to question whether or not this should be further complicated
by creating a bank which has to manage its liabilities as well
as its assets. This might work best if the structure is a bank
with the government as sole depositor, but this would require
more public money than Government seems willing and able to contribute.
21. It should be noted that the funding of trusts
that are in difficulties (but not yet in administration) is a
different skill set and should be separated from the business
as usual in any organisations. Foundation trusts will be nervous
that if an NHS Bank did not have convincing operational freedom,
it would provide a conduit through which government ministers
can intervene in ways that would undermine the independence of
foundation trusts.
INTER-LOCKING
POLICY PROBLEMS
TO BE
RESOLVED
22. There are inter-linked issues that need to
be addressed in order to solve the issue of longer term access
to commercially provided capital at affordable cost for the FT
sector in the context of restricted public capital. These are:
— Will
the proposed failure regime have enough independence not to close
out access to private capital and what will be the pecking order
of creditors in the regime?
— What
should the pre-failure regime look like and which agency might
manage a pre-failure regime and what implications would this have
for the FT governance lines of accountability currently proposed
in the NHS Health and Social Care Bill to take effect after 2016?
— How
will the government structure public dividend capital between
debt and equity and is there a realistic prospect of debt being
paid off and equity refinanced from other than government sources?
If so what are the timescales for achieving this?
— How
far will the NHS tariff price setter take capital demands into
account in the price and how far will the financial structures
of foundation trusts need to change to accommodate this?
— How
can the Treasury limitation of the Departmental Expenditure Limit
total be overcome?
CONCLUSION
23. As set out at the head of this submission,
there is undoubtedly a need for banking functions for the NHS
to support re-structuring, day to day risk management and longer
term capital investment programmes. Adequate amounts of capital
are unlikely to be available from the public purse alone. Unless
the inter-locking policy considerations outlined above can be
successfully reconciled, it is unlikely that this can be provided
commercially at reasonable cost. This will leave public providers
unable to properly manage their risks.
June 2011
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