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Published: 27/06/2002, Volume II2, No. 5811 Page 13 14

Even Alan Milburn is vague on the shape and role of foundation trusts, but some managers have already got an idea what they'd like them to offer - easier access to capital.Daloni Carlisle reports

If the devil is in the detail then Old Nick is playing a close hand when it comes to elaborating on foundation trusts. For despite much trumpeting and a good deal of politicking, very little in the way of hard facts has emerged about how exactly these independent, not-for-profit organisations will operate.

We know only three-star trusts will be able to apply, but what other entry criteria to the new elite club will be set? And how will star ratings work after they are set free from central bureaucracy?

As for the rest, It is as clear as mud.

What will they look like in terms of their corporate governance and legal standing? Given that new legislation will be required, can the Department of Health really be serious in suggesting a timetable of setting up shadow foundation trusts by spring 2003?

What financial freedom will they have? Will they be able to borrow money, and if so, against what and will this appear on the public sector balance sheet? Does financial freedom mean release from the private finance initiative straitjacket?

A few concrete facts did emerge at a 12 June session of the health select committee where health secretary Alan Milburn gave evidence alongside DoH finance director Richard Douglas. But nothing came over so clearly as that very little has been decided yet. Three stars will be required, he told the committee - though this is in itself contentious.

Dr Mark Goldman, chair of the two-star Birmingham Heartlands trust and a member of the Modernisation Board, says: 'We have to go through the Stargate to become a foundation trust. I suspect there are two-star trusts that could probably become foundation trusts and it would probably be a pity to exclude them.'

But Mr Milburn quashed any hopes that foundation trusts might be exempt from the ratings.

He said: 'I think there has to be a level playing field... My view is that there should be star ratings of foundation trusts.' Should a foundation trust be shown to be failing, then 'perhaps the Commission for Healthcare Audit and Inspection could do some sort of franchising arrangement for foundation trusts which were really deeply in serious trouble'.

Other criteria for applying for foundation trust status will be strong leadership, a sound financial basis and the backing of commissioners. Trusts will not be line-managed by the DoH but be held accountable through performance contracts negotiated with their primary care trust and other commissioners, said the DoH last month.

Even less clear are the financial implications. Mr Milburn presented two options to the committee. The first would be a 'prudential borrowing scheme' along the lines currently under discussion for local authorities. It would allow borrowing outside normal Treasury rules but maintain trusts' debts on the public balance sheet. His preferred option, though, is to get their debt off the balance sheet and allow them to borrow with some as-yet-unspecified safeguards.

Mr Douglas, head of the finance directorate at the DoH, said access to capital had to be at the heart of the reform. 'If our real aim in this is to free people up and give them the opportunity to perform better, then that is one freedom they really need, ' he said. 'One of the biggest complaints you get in the service is the pace at which we move as an organisation... in giving people quick access to capital.'

One potential foundation trust finance director agreed. 'Finance is the biggest problem we have in terms of expansion. If we want to build a new theatre, It is a long and bureaucratic procedure. Lots of that is because it is within the public sector borrowing requirement. If we could be freed from that by getting access to publicly financed capital it would allow us to gear up much faster.'

Alan Turner, acting chief executive at Peterborough Hospitals trust, another potential foundation trust, agreed that access to capital was essential but pointed out: 'I am not sure how we pay the interest. Even if it is only 1 per cent, it has to be paid.'

All this is under examination at the DoH and questions include whether trusts will be able to borrow from the private sector (unlikely) or against property (again unlikely) and what role the NHS Bank will play. Also under discussion is the level of inherited debt they would carry - probably 6 per cent of the assets to be covered by revenue from commissioned contracts.

But on whether PFI rules would have to be followed, Mr Milburn and Mr Douglas were non-committal in their response to the select committee. 'I suppose it would be for them [foundation trusts] to determine, ' they agreed.

To set all this up will require a 'new legal vehicle', as Mr Milburn put it. Various models have been put forward, including providentfriendly societies, housing associations and even Welsh Water. All are characterised by freedom from central control, stakeholder representation and operating on a not-for-profit basis.

Mr Milburn favours an as-yetuntried model - the public interest company.He explained: 'What it does, unlike an organisation which accounts to its shareholders which is not what I want to see... is make sure the assets remain within the public services and are protected against takeover by anywhere else.' Currently, this does not exist in British law.

Trust chief executives were nonplussed when questioned about their preferences. 'I do not think anybody fully understands the options or what they mean, ' said one, in a characteristic response.

Clearly trust chief executives feel starved of information and may not be prepared to make informed decisions about what lies ahead.

As one said: 'We are going to be on a steep learning curve.' l In the style of. . . possible models for foundation trusts Friendly societies These are voluntary, mutual organisations whose main purposes are assisting members during sickness, unemployment or retirement and the provision of life insurance.They may undertake business through subsidiaries, providing profits are ploughed back into the society.Potentially, all members of a local community could become members of a foundation trust set up as a friendly society, though they can be established to provide services for the benefit of the community and not just members.

Housing associations A variety of models operate - co-operatives, trusts and companies but in the main housing associations are run as not-for-profit businesses.They are registered with the Housing Corporation, a non-departmental public body accountable to Parliament.The Housing Corporation manages investment of public money through housing associations and regulates associations.A key feature is a board or committee of volunteers that has overall responsibility for the work of the organisation.This will include tenants, representatives of the local authority, business people, politicians and community groups.

Glas Cymru (Welsh Water) Glas Cymru was set up as a company limited by guarantee in 2000 to provide water services to four million people. It has no shareholders but was financed by a£1.9bn bond issue.

It operates as a not-for-profit business with a complicated structure of companies, one registered in the Cayman Islands.Revenue is used to pay bondholders'dividends, improve customer services and to build up a financial reserve.This reserve allows the company to borrow money for capital projects at a preferential rate.