Capital ideas

by Debbie Paterson

26 October 2018

The NHS needs a new system to allocate capital to support investment in transformation

There isn’t anyone in a senior management post in the NHS who doesn’t understand the importance of control totals as a measure of finance performance.  But could you say the same thing about the balance sheet and associated measures of financial performance? There is increasing concern in the finance community that the balance sheet, capital investment and the long-term position is being neglected to manage the short-term challenges in the revenue position.

The problem is that the state of the estate (£5bn backlog maintenance reported in the 2017/18 ERIC estates returns) and the need for new investment to undertake transformational programmes is about to get as critical as the revenue position – and possibly even more critical.

To invest in new capital, all entities need to have a strong balance sheet – either the cash to invest or the assets and long-term financial stability to borrow against. A number of providers are far from this position. Instead they are relying on short term borrowing to pay the bills on a monthly basis and are in the position of simply rolling forward loans rather than repaying them.

To achieve transformational change in the way that we treat patients, we need to invest in fixed assets. This may mean maintaining the existing estate to a standard that allows us to deliver the world class patient care that we aspire to. But it also means new facilities, sometimes in different locations, to support new models of more integrated care. We also need to invest in new technology that will enhance care, patient experience and the ability to collect the information we need to improve service delivery and planning.

Now is the time to think about how these thorny issues can be solved.  NHS Improvement and NHS England are developing a 10-year plan on the back of the five-year financial settlement announced last June.   The capital settlement for the next five years has not been announced although we may learn more in Monday’s (29 October) Budget. What is completely clear is that more funding is needed.

But beyond that we need to pay attention to the way resources are allocated in a transparent way that is fair to providers and delivers funds in a timely manner so they can be used a well-managed and planned way. The HFMA’s new briefing – NHS capital – a system in distress? – recognises this is a difficult issue to solve but identifies the characteristics needed by any future system.

Recognising the complexity of the current system, it explores simpler options including giving NHS bodies their own cash backed capital allocations before the start of each year – either for all capital needs or for backlog maintenance expenditure. In this second case, new investment funding could be sought from the centre or local system via a business case model.

This is not a perfect solution and would mean dismantling the current arrangement of repayable loans as well as stripping out capital costs from tariff prices, but something needs to change. And the briefing is intended to be a platform for a detailed discussion.