'Golden opportunites' for the NHS are not straightforward

25 Apr 17

Jim Mackey, chief executive of NHS Improvement - the organisation that provides financial oversight of NHS trusts, amongst other responsibilities - has been speaking openly about a 'golden opportunity' to raise money from the private sector or local authorities, without needing to look to the chancellor for extra cash.

His motivation is easy to understand.

In 2016/17, HM Treasury and the Department of Health took £1.2bn off the £4.8bn capital budget in health and switched it to support revenue spending.

Though this is the biggest cut yet, such transfers are becoming a routine fixture in the financial calendar.

As the recent Naylor Report on NHS Property and Estates makes clear, these combine to mean capital spending as a share of total spending has now fallen below 4%, well below the 6% seen in 2009/10 and low when looking at the historic track record of the NHS.

Though very welcome, the recent announcement in the Budget of extra capital for the NHS was not enough to materially affect this picture.

With private finance initiative slowing down as well, it is no surprise that backlog maintenance is rising, and high-risk backlog maintenance rising very fast indeed (up 69% in one year).

As high-risk backlog maintenance is defined as `where repairs/replacement must be addressed with urgent priority in order to prevent catastrophic failure, major disruption to clinical services or deficiencies in safety liable to cause serious injury and/or prosecution’ (NHS Digital), this is clearly concerning.

As emerging NHS plans to re-design care are likely to imply at least some additional capital spending as well, the gap between demand and affordability is only likely to grow.

So if the chancellor cannot provide extra cash for the NHS, could the private sector?

Interest rates remain low and there seems to be enthusiasm from some private investors to lend to the NHS.

Unfortunately, it is no simple matter to come up with a deal. Firstly, any deal is likely to struggle on showing value-for-money.

After all, given Her Majesty’s Government can borrow money at very low rates of interest, how does it make sense for a public body to borrow at a higher rate? Secondly, what security is given for any private loans?

This is a rather critical question given many NHS providers are deeply in deficit and reliant on cash from the Department of Health to pay their bills. The easy answer (and the one given in PFI deals by the ‘deed of safeguard’ provided by the Department of Health), is that the government underwrites any loans.

But doing so only emphasises the value-for-money challenge (if government has to underwrite any loan, why not simply borrow the money itself more cheaply?) and, importantly, means such loans score against public sector spending just as they would if the government had borrowed the money and gave it to the NHS to build hospitals.

Could deals be done without a government guarantee? This also is tricky: should an NHS provider fail to meet its debt payments, it is not practical policy to allow a private lender to re-possess an NHS hospital and turn it into a car park.

This means the NHS will struggle to provide any assets as security against such loans. It may look to identify non-essential assets and offer these up as security, but finding any significant unimportant assets in NHS hospitals will be a major challenge.

Practically this means either a private lender gets no security or the government guarantees the loan.

While borrowing from local authorities bypasses some of these issues, it still represents additional public sector borrowing – just what the controls on NHS capital spending were designed to limit in the first place.

This does not mean a deal is impossible (after all, for all its flaws, PFI found a way forward).

It does mean that any deal is not straightforward and that HM Treasury will be the ultimate arbiter.

Did you enjoy this article?