This follows on from my previous article: “The NHS needs more capital, not unicorns”.
In that article, I argued that the NHS only has two realistic options to generate capital to pay for projects – the capital budget and surplus estate. This article explores in detail how to assess a scheme to see if it can create an exception to this. For example, could the NHS Bond be another way to create capital? Or fully repairing leases? Are there any private funding routes left?
Most innovative funding routes usually involve an attempt to avoid (a) using the capital budget and (b) using prudential borrowing. So, there are two rules they need to comply with:
- You can’t spend the money
- You can’t borrow the money
Spending the money
If your solution involves the NHS spending the money and building the capital, then you are, perhaps unsurprisingly, spending capital budget – and that requires a capital business case. It doesn’t matter what clever idea you have for getting the money in, you’ve still spent it – and that will be a draw on your capital allocation.
The only exception to that is if you have generated a capital receipt by, for example, selling land or buildings – where you can probably argue an offset. Of course, in that case, you are really funding your project from the sale of surplus land – which isn’t a unicorn, despite how hard it might be for you to find that surplus land. And, even then, you will probably need a capital business case anyway.
Borrowing the money
You also, probably, can’t borrow the money – unless you have a lot of prudential borrowing headroom. This is where things like the NHS bond falls down. It’s still borrowing. And, once you’ve borrowed the money, you then need to turn it into a shiny new facility. Which means you need to spend it somehow – which will probably mean spending it on your capital project, which takes you back to the first rule, you can’t spend the money without drawing down capital.
So whatever the solution you are looking at, it needs to involve someone else building and funding your facility – but it can’t be PFI because that’s banned. Unfortunately, there aren’t a lot of investors lining up to build enormous hospitals speculatively in the hope that the NHS might want to pay to use them on a casual, month to month basis. So any such investor would want some kind of long term commitment (and actually, so will the NHS, because the NHS probably doesn’t want to be summarily turfed out of a fully operational health facility at little or no notice). The problem being that any long term commitment to use a health facility is almost certain to look and smell like either (a) a lease or (b) a banned PFI arrangement.
So a lease then? Unfortunately, the accounting profession has decided that leases are basically the same as ownership. This will no doubt come as a surprise to tenants up and down the country who now find that their accountants have decided they in fact own their properties. As a result, if you lease something, you will end up with both a lease liability, but you can’t borrow, and the creation of a capital asset, but you can’t spend capital to create one. That’s an “on-balance sheet” lease. There are virtually no practical “off-balance sheet” leases except maybe some types of PFI and even these will probably be on-balance sheet soon given further planned tightening in accounting guidelines. So leases don’t work.
Are you starting to feel hemmed in yet?
But, aha, you say. What if I get a friend to finance and build the facility? Someone I trust to keep it available for me? Something like a wholly owned subsidiary or a JV over which I have control? Well, that’s where the accountants again have you cornered. Both of those arrangements are almost certain to be consolidated into your accounts. In accounting terms, you control the organisation and, therefore, their borrowing and their spending is your borrowing and your spending – and unfortunately, you can’t borrow and you can’t spend, without a capital business case.
Linked charities have also been looked at for this kind of arrangement since they have been set up to be independent. So you could perhaps approach yours to see if they will build it for you. That’s a possibility provided they have the money now to do it and provided you are sure that you are not unduly pressuring them (in which case you might be seen to control them which brings both the accountants and the Charities Commission down on both of you). Plus, if they don’t have the money, it will be hard for them to borrow it without a long term commitment from you which will probably end up looking like a lease (which won’t work) or a banned PFI arrangement (which probably won’t work, depending on whether DHSC and Treasury are willing to look at form over substance).
Local authority funding is another option which is often put forward – It’s still possible to have the local authority effectively borrow for you, using their much more generous prudential borrowing arrangements. That might well get the facility built – but then how do you access it? If you follow the Northumbria model, you can do it through a PFI contract, but that was using an existing PFI arrangement. A new one would likely be caught by the policy against PFI. Otherwise, you are probably in a lease arrangement of some kind, which takes you back to square one.
So how on earth do you navigate this new world?
As I said earlier, you need good advice if you think you have found something that works. And, if you haven’t, you need to become skilled at navigating the business case process so that your project has the best chance.
And then there is the “but”. In the third and final article in this series, I will take a look at how you might be able to find a ray of sunlight, if your scheme involves third-party revenue.