Following the Money: The new NHS CFO inherits a tinderbox

Flammable situation

Julian Kelly – the new chief financial officer for the NHS – has inherited a seriously messy and flammable situation when it comes to capital funding.

Several years of tightened budgets and capital funds being used to prop up the revenue account have led to hundreds of projects being delayed, and a huge backlog of maintenance problems.

This means there’s a massive amount of pent up demand for routine capital investment, at a time when the NHS also needs urgent investment in strategic projects that drive transformation and efficiencies.

Last year’s long-term funding settlement did nothing to release the flood gates, because it only applied to revenue funding.

The capital envelope is due to be set in the spending review this autumn, but ongoing uncertainties around Brexit mean there’s likely to be a delay. And it is anyway doubtful whether the Department of Health and Social Care’s capital spending limit (known as CDEL) would receive any significant boost, as it also depends on the Brexit outcome.

So for now, NHS providers will have to trundle on with the £3.5bn or so that they’ve got.

What makes this even more contentious is that dozens of foundation trusts with relatively healthy finances actually have the cash available to spend – thanks to the heavily lopsided distribution of sustainability funding over the last three years.

They now want to start using these cash reserves – but under government accounting rules all spending scores against the CDEL for the year in which it is spent, so this creates a major risk of the department blowing its budget for 2019-20.

The problem for Mr Kelly and the DHSC is they have no formal powers to restrict these FTs, which means they’ve had to plead with the sector to make voluntary reductions to their spending plans, and will seek help from STP leaders to make further reductions.

These efforts seem rather unlikely to deliver the reductions required, so further unspecified control measures have also been threatened.

This is where the situation could really ignite, because national leaders can only control the spending of non-FTs or FTs in financial distress, by imposing lower spending limits or tightening the strings on the central pot of cash that trusts apply to when they cannot generate surpluses themselves.

And as you would expect, these are typically the providers with the worst estates and most in need of investment; we’re talking the likes of Pennine Acute, Hillingdon Hospitals FT and Barts Health Trust.

You can see how a pretty toxic narrative could easily develop from this – of national leaders cutting off funding for trusts in deprived areas most in need of investment – while providers in leafier boroughs and which already benefit from largely modern estates (the likes of The Christie and University College Hospitals London) can go on spending.

This is why NHS England has put forward legislative proposals to impose capital limits on all providers, including the rich FTs.

But, as Sally Gainsbury of the Nuffield Trust has pointed out, this risks angering some of the most high profile and powerful NHS organisations in the country, who will feel they have kept their end of the bargain already by reporting giant surpluses in recent years - to get the DHSC out of jail on its revenue budget.

As NHS Providers have warned this morning, there is a real risk of “mutiny” here. Hospital leaders could easily start raising specific patient safety concerns over the state of their buildings, and blaming this on the shortage of capital funding.

It all adds up to a tinderbox situation for Mr Kelly, and he will need to tread carefully.

The Naylor money

If you’re wondering what happened with the Naylor Review and the £10bn of “additional” capital that was supposed to follow from it, the NHS is basically still waiting.

In 2017, the government suggested a third would come from public spending, a third from sales of existing estate, and a third from private investment.

However, there has so far been no significant uplift to the CDEL, no significant rise in land sale receipts, and the private finance initiative has been scrapped (with a wide-ranging review of private finance ongoing).