Private Finance Initiative - Treasury Contents

Further written evidence submitted by the Foundation Trust Network (FTN)



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.


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.


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.


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.


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.


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.


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.


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.


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.


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?


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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Prepared 10 August 2011