Prudential Borrowing Code for NHS Foundation Trusts
Comments from ACCA
July 2004
Executive Summary
The Association of Chartered Certified Accountants (ACCA) is pleased to have this opportunity to provide comments to the Independent Regulator of NHS Foundation Trusts on the Consultation Document Draft Prudential Borrowing Code for NHS Foundation Trusts (the draft Code). These comments have been developed in consultation with members of ACCA's Health Panel and with ACCA members who are employed in senior positions across the NHS.
The primary objective of the Code is to enable NHS Foundation Trusts (NHSFTs) to operate with an appropriate degree of independence, while not compromising service delivery. ACCA agrees with the appropriateness of this objective but believes that it needs to be strengthened by additionally requiring NHSFT plans to be �affordable, prudent and sustainable'.
We consider that the system as proposed is overly focused on financial viability and that this may sometimes cause service delivery to be compromised. We think, therefore, that the decision on whether to approve an NHSFT's annual borrowing limit should be based on the strategic robustness of its spending plans, not just on its compliance with the five ratios.
ACCA believes that the suggested ratios will prove to be a valuable tool for informing the decision-making process, but is concerned that there will be instances where, in the interests of service delivery, an NHSFT may apply for an annual borrowing limit that does not always meet each of the ratio thresholds. In such cases we consider that the system should be sufficiently flexible to allow the Regulator to agree the requested borrowing limit if it would enhance service delivery and if the NHSFT is able to explain clearly why it is necessary to breach the thresholds.
Responses to the Consultation Questions
Question 1. Are these the appropriate objectives? Should the Code seek to achieve any other objectives?
ACCA agrees that the objectives of the draft Code are appropriate but we believe that they would be strengthened if there were also a requirement for borrowing plans to demonstrate that they are affordable, prudent and sustainable.
We suggest, therefore, that the primary objective be amended to say:
�The primary objective of this Code is to enable NHSFTs to operate with an appropriate degree of independence within the above framework, while ensuring that plans are affordable, prudent and sustainable, so as not to compromise service delivery.'
Question 2. Is BBB (or equivalent) the appropriate target rating?
We agree that the Code should be made consistent with the NHSFTs being rated in at least the minimum investment grade category (i.e. BBB or equivalent).
We question, however, the ease with which NHSFTs may be able to obtain a credit rating. The NHS reforms programme (eg, patient choice initiatives) and the continual advancements in medical technologies will make it difficult for organisations to forecast long-term future cash flow with the degree of certainty that lenders may require and we are concerned that this may have an adverse impact on an organisation's application for a credit rating.
Will organisations be required to obtain a credit rating within a certain number of years of achieving FT status?
Question 3. Are these the correct ratios? Or are there other ratios, definitions or magnitudes you wish to propose? If so why?
We consider these to be the correct ratios to test for financial viability but believe that there needs to be a degree of flexibility around their application, to ensure that the agreed annual borrowing limit does not compromise service delivery. The ratios should be viewed as a useful tool for informing the decision-making process but other factors, such as robustness of plans, value of service development plans to the local health economy, and stakeholder support, should not be ignored.
It is also crucial to take a long-term view of an organisation's proposals. For example, it is possible that an NHSFT will fail the �maximum debt-capital ratio' in one year if it is required to make a staged repayment, but will meet the ratio thresholds in all subsequent years. The system should be made sufficiently flexible to accommodate such cases, when the NHSFT can clearly explain the reasons for a temporary breach of a ratio threshold.
Question 4. Are the definitions and magnitudes appropriate?
We agree with the proposed definitions of all the ratios but, as stated above, we believe that the magnitudes should be viewed as a guide rather than a threshold to success. In particular, we are concerned that the threshold of 10% on the maximum debt-capital ratio may too restrictive to allow for sufficient investment by NHSFTs.
There are two definitions that we consider need clarifying: the definition of �revenue' and the definition of �debt'.
Definition of �revenue'
The definition of �revenue' needs clarification, to say whether revenue should include both recurrent and non-recurrent items.
Definition of �debt'
The definition of �debt' needs to be more clearly expressed. For example, if an NHSFT has a Private Finance Initiative (PFI) refurbishment on its balance sheet as a finance lease, is this classified as �debt' for these purposes?
Question 5. Do you agree with the system proposed above for setting borrowing limits? Do you wish to propose an alternative or variation?
In principle, we agree with the proposed system and believe that it will bring necessary discipline and regulation to the process. We consider, however, that the system, as proposed, is overly prescriptive and that it should be made more flexible.
The primary objective of the Code is to allow NHFTs to operate independently, while not compromising the delivery of required services, but the Consultation Document focuses on financial viability and not on service delivery.
We are concerned that there will be times when an NHSFT is able to satisfy the financial tests, but when its plans for development will not be in the best interests of service delivery; and that there will be times when an NHSFT is not able to satisfy the five ratios, but when its plans are in the best interests of service delivery.
For example, advances in technology may require an NHSFT to make an immediate investment in new equipment. This investment may be in the best interests of patients but may not pass the ratio tests.
We are also concerned that the system as proposed does not appear to consider the purpose for which an NHSFT is wanting to borrow. If the NHSFT is using its annual borrowing limit to support an underlying problem, rather than to invest in new services then, in the long term, this will have an adverse impact on service delivery.
We consider, therefore, that when setting an annual borrowing limit for an NHSFT, the NHSFT's proposed service development strategy and its financial and business plans, including financial viability, should be fully reviewed.
Question 6. Is there anything else that should be included in the proposed arrangements for setting borrowing limits?
We believe that there are two issues that the Consultation Document fails to consider: external audit and under-investment
External audit
Paragraph 14 of the Consultation Document states that a breach of the Prudential Borrowing Limit (PBL) will be a breach of the NHSFT's Terms of Authorisation and that, if significant, may be considered by the Regulator to justify intervention, pursuant to Section 23 of the Act.
It is possible, however, that external audit's definition of �a significant breach of the PBL' will be different from that of the Regulator. External audit may view all breaches of the PBL as matters of concern.
Under-investment
The proposed system will not identify instances of under-investment by NHSFTs. We consider that, where borrowing has been approved, there should then be some form of monitoring mechanism in place to ensure that investments do actually occur.