Capital punishment

NOEL PLUMRIDGE on the capital and revenue distinction

In spite of its well-documented and pressing need for 'backlog maintenance', the NHS's level of real spending on building renewal may now actually be falling.Only the final accounts will tell for certain, but already, as 2003-04 draws to a close, a curious pattern seems to be emerging: the NHS returning unspent capital funds to the 'centre'.

A quick note for interlopers with neither knowledge of, nor any real interest in, accounting niceties: by 'capital'we mean the permanent infrastructure of the NHS - its land, buildings, equipment and so on - as against its day-to-day running costs such as drugs, dressings, electricity and contract cleaners.

One working definition, favoured by the Society of Pragmatic Accountants, goes: 'If you can see it from the road, it must be capital.' Staff, perversely, are always classified as revenue, even though most of them satisfy the other pragmatic definition of capital 'must last longer than a year', and even when gathered on the hospital front steps for a quick cigarette, they are temporarily visible from the street.Hope that clarifies things.

At the start of 2003-04, the Department of Health earmarked just under£2.9bn for capital spending this year. Of this, a total of£844m was allocated directly to trusts as 'operational' capital (formerly known as 'block' capital),£100m was set aside in an 'access fund' and£684m was allocated to strategic health authorities for 'major investment in priority areas'. The rest (£1.27bn) was retained by the DoH, mainly for centrally sponsored initiatives such as investment in information systems.

These are impressive sums, and were acknowledged as such at the time. Back in the 1990s, NHS capital allocations were cut back sharply - part of a programme of fiscal measures to meet the Maastricht convergence criteria.

Never mind, we were told, PFI would fill the gap. It never did, so this reinvestment of government funds offered the prospect of modernisation at last reaching the cheesier parts of the NHS estate.Moreover, the DoH simultaneously announced that by 2005-06 the total would grow to over£4bn a year.

Investment in information systems continues apace. Recent announcements include£2.6bn for electronic patient records and£530m to build a broadband network. But what of the buildings and equipment?

Headline-grabbing announcements of huge private finance initiative schemes, like the new Birmingham hospital network and the development in London's Paddington basin, appear to conceal a growing reluctance to invest at local level.

How has this come about? Well, big capital schemes take time to plan and organise. Procurement processes can be protracted; would-be contractors stall or change their minds; and the bureaucracy of bids and business cases lengthen the start-up time further. And, naturally, the NHS doesn't pay up front: why should it? So those big information system projects will not, in practice, spend so very much this year. But this is no more than prudent, careful management, and nothing new.

More of a problem is the rigid way the NHS defines a capital asset, which in turn determines how funds allocated as capital can legitimately be used. Forget the simple rules suggested above: the NHS capital accounting manual runs to many pages, and its core definition - the item must cost at least£5,000 - has numerous footnotes, loopholes and areas of discretion.

A project to refurbish a wilting 1970s hospital (the NHS has many) will include plenty of items, such as replacing the rotting window frames, which must be classified as revenue.

And revenue, as we know, is in short supply, so the scheme is shelved.

So, you might ask, why not just merge the capital and revenue allocations and make life simpler for everyone? With its 1 million employees, the NHS can accommodate a vast spectrum of contributions to the national good. But the team that polices the accounting definition of capital could seemingly be released from its toil without any major impact on patient care.

The Treasury, however, prefers separate allocations, presumably for fear that the NHS might stop investing completely. In recent years, capital 'underspend' has been routinely used to subsidise revenue budgets, and a more rigorous enforcement in 2003-04 of the distinction between revenue and capital allocations lies beneath some embarrassing revenue deficits.

Meanwhile, a new threat to capital investment has emerged: uncertain revenue funding under payment by results, perhaps exacerbated by patient choice.

With much of the rhetoric aimed at 'expensive' providers and their need to reduce costs - and with a transitional regime that may deny low-cost providers access to full tariff income until 2007 - trusts are right to be wary of investment in projects involving big revenue commitments.

The combined effect is of a growing blight that makes building renewal appear to be a financial risk, rather than a necessity. NHS organisations, increasingly in direct competition with the independent sector, may yet regret this short-termism. Under patient choice, hospitals with shabby buildings may find that 'cheap and cheerful' is not necessarily the key to success.

How much capital, unspent this year, will be lost forever to the NHS? It is still hard to say, but perhaps upward of£100m might eventually be returned to the Treasury for reallocation.

Other departments have watched with envy as the government has committed its resources to healthcare; some, like defence, have unforeseen pressures of their own.And with a major efficiency review under way at national level, the knives may well be out for health.

It is understandable, but sad.

What my local hospital couldn't do with£100m!

Noel Plumridge is a former NHS finance director and a monthly columnist for HSJ. noelplumridge@aol. com