Debt write-off and capital regime outlined

02 April 2020 Seamus Ward

Health secretary Matt Hancock (pictured) said the historical debt would be scrapped, giving the service a strong foundation to tackle the Covid-19 pandemic, and laying a strong foundation for the future. He also formally launched the temporary financial regime for England, which sees the suspension of payment by results and the introduction of block contracts.Matt Hancock

‘As we tackle this crisis, nobody in our health service should be distracted by their hospital’s past finances. Today’s £13.4bn debt write off will wipe the slate clean and allow NHS hospitals to plan for the future and invest in vital services,’ he said.

‘I remain committed to providing the NHS with whatever it needs to tackle coronavirus, and the changes to the funding model will give the NHS immediate financial certainty to plan and deliver their emergency response.’

As previously mooted, the write off will be achieved through a debt for equity swap, with the affected trusts receiving additional public dividend capital (PDC). The Department of Health and Social Care said that adjustments would be made to ensure providers’ surplus/deficit positions are not negatively affected by debt write-off.

The scheme applies to interim revenue debt, including working capital loans, and interim capital debt. The final figure will be validated by providers, but currently stands at £13.4bn.

The loans will be frozen from 1 April and interest will cease to be payable. The Department of Health and Social Care said the loan principle and outstanding interest would be removed from balance sheets in a transaction during the financial year. It added that adjustments would be made to ensure trusts’ surplus/deficit positions are not negatively affected.

Normal course of business loans are not included in the scheme. Explaining the reasoning behind this decision, the Department said these loans were entered into ‘at the option of the provider, confirmed as affordable and continue to operate effectively’.

Details of the capital envelopes for 2020/21 have also emerged, with NHS England and NHS Improvement outlining a twin-track system. One will provide capital for the Covid-19 response, while the other offers operational capital funding. Separate guidance on Covid-19 capital will set out how trusts can access the funding.

The operational capital budget is £5.8bn – £1.3bn more than the forecast outturn for 2019/20. The national bodies said this would allow providers to continue affordable self-financed spending, and, compared with 2019/20, have around £200m additional funding for emergency capital requirements and backlog maintenance.

The operational capital is split into three categories:

  • System level - £3.7bn for day-to-day operational investments, typically self-financed by system organisations – through depreciation or other locally held cash – or from Department emergency loans
  • Nationally allocated funds – £1.5bn to cover strategic national projects that have already been announced, plus other developments or construction schemes, such as hospital upgrades, diagnostic equipment and new hospitals
  • Other national capital investment – this £800m fund will include expenditure on national technology schemes provided by NHSX, though some elements of this allocation could be transferred into system or national allocations during the financial year.

These figures – adding up to £6bn – include a small over-allocation across the three elements given the uncertainties on capital delivery in 2020/21. This will be reviewed in the second half of the year and any adjustments made at that stage.

In 2020/21, capital proceeds from the sale of assets will be available to systems to invest in line with their estates strategy in the year of disposal and in the following two years, in addition to system-level allocations. Large proceeds from the sale of significant assets will continue to be managed nationally on a case-by-case basis.

NHS England and NHS Improvement said system spending envelopes would be set out shortly, together with the methodology used to calculate capital allocations. They added that, in future, the allocations would be made over a multi-year period, subject to the outcome of the spending review.