Clause 12 - Prudential borrowing code
Health and Social Care (Community Health and Standards) Bill
3:45 pm
Mr Chris Grayling (Epsom and Ewell, Conservative)
Amendment No. 273 is a probing amendment designed to establish more clearly the Government's intended criteria for shaping the code and, in particular, what is meant in subsection (2) by:
''any generally accepted principles used by financial institutions to determine the amounts of loans to non-profit making organisations.''
Non-profit organisations are diverse and their financial structures differ. At one extreme, for example, is Standard Life, one of Europe's biggest insurance companies; at the other, a local sports club. Clearly, the financial structures within which both of those structures must work in order to secure borrowing are hugely different. Therefore, it would be valuable to understand precisely what the Government mean by ''generally accepted principles''. Why, indeed, is this subsection even necessary?
For a major lender lending to a non-profit organisation, the primary criterion is the ability to pay. The major lender will look at the nature and security of the income that the organisation receives. The nature of the membership of the organisation will also be considered because one issue that a lending organisation will inevitably consider is liability. We touched on that earlier in the debate, but the Minister has not yet dealt with it fully.
A borrower providing finance to a non-profit organisation will ultimately look at the security for that lending, which may be against assets. However, as we know, the core assets of a foundation trust cannot be used as security against lending. Therefore, an additional criterion that a lender will use to judge the security or otherwise of an organisation, its ability to repay and the fall-back if something goes wrong with its revenues, is the strength of the financial substance behind it. With a major limited company, the amount of money against which a lender will usually lend is related to the capital base of that organisation, which is the shareholding base. When Railtrack went into administration, the core value against which the administrator and creditors sought to take action was the money that the shareholders had invested. Ultimately, shareholders are the last group to lose
their money when something goes wrong. The capital that they have invested disappears. In the case of a non-profit organisation, there are no shareholders and no shareholder capital raised through a stock market issue. Therefore, where does the liability ultimately lie? Who ultimately pays the bill or loses their money if things go wrong?
If a typical, small non-profit organisation—the Minister's local Labour party association, for example—were to fall into major financial difficulties, in most circumstances, it is the members who carry the can. I suspect that his local association is not unusual in that respect. If members take on a property liability or fail to pay their tax on time and find that they run into cash flow problems, they are ultimately liable if the creditors come after them. Therefore, one of the generally accepted financial principles that financial institutions will use to determine the amounts of loans to non-profit organisations is whether the money can be recovered against the membership. However, in the case of a foundation trust, the membership consists of those who signed on the dotted line for £1.
With the Bill and the Government's drive towards creating foundation trusts, it is essential to understand what the liability is. Who carries the can? Who pays the bill if something goes wrong? Will the Secretary of State automatically step in, or are the individual members ultimately liable? When a non-profit-making organisation takes out a loan, one key criterion that the lender uses is, ''Where do I get the money from?'' Ultimately, the members are the ones who pay.
In framing the clause, what discussions did the Minister and his Department have with commercial organisations about the criteria that they use? Is the clause based on a substantial exchange of ideas and information? Is there a substantial basis for it? Has the Minister received guidance from the industry on what it would look for from foundation hospital trusts? Will he clarify whether such discussions have taken place?
May I anticipate slightly the issues that the hon. Member for Oxford, West and Abingdon will raise under amendment No. 247? That amendment raises a number of other questions; it is about the impact of borrowing by foundation trusts on the rest of the NHS. The Minister has clarified the fact that private borrowing by foundation trusts will not be able to increase the total amount of borrowing for the NHS. Of course that means that if a foundation trust secures private sector money, that will reduce the amount of public money that the Government have for spending on the health service, so arguably that is a way of cutting Government investment—replacing Government investment in the health service with private money.
I should be grateful if the Minister would address that issue. The provision that we are discussing risks constraining the freedom of foundation trusts to grow and develop their business. Let us suppose that a foundation trust decides to go to the private sector and borrow to buy a clinic. Let us say that the trust has been working closely with the private sector and
subcontracting work to a cataract clinic, and the parent company runs into difficulties and goes into administration. That asset is there on the shelf, waiting to be bought from the administrator. The foundation trust decides that it wants to borrow from the private sector, buy the clinic, expand its own capacity and continue to provide that service to patients. That is a perfectly realistic and reasonable scenario, and we certainly expect the freedoms that will be granted to foundation trusts to come into their own.
However, if my understanding of the current situation is correct, such a decision could not be taken without money being taken away from investment in other parts of the NHS. For the foundation trust to borrow the money to buy the clinic and continue providing its services to patients and develop those services, money would have to come off the borrowing available to another hospital elsewhere in the NHS. Surely that makes a mockery of the rationale for creating foundation hospitals. Surely the purpose of the exercise is to create freedoms that allow them to expand and develop their services. I do not see how such a constraint can permit foundation hospitals to have the freedom that they need to develop their services.
Inevitably, if a foundation hospital is in such a position, it will think of other ways of doing things. It might want to buy a new scanner. If it cannot borrow the additional amount without having an adverse effect on the NHS, it might look to lease the scanner. Will the borrowing code take into account classic off-balance-sheet debts, such as long-term leases? Will they have to be reflected in the total amount set out in the limit that each trust has, generated from the core code that the Government will develop? Or will off-balance-sheet financing, such as long leases, not have to be taken into account in the prudential borrowing code?
Lastly, has the prudential code already been developed? At the bottom of page 17, the guide states:
''The prudential code will be made available to applicants during the time period for submission of the initial applications.''
Last week the Government announced their first shortlist of applications for foundation status. One would therefore assume that the time period for submission of initial applications has passed. If so, and if the Government have fulfilled the undertaking that the prudential code would be made available to applicants, one would assume that the code has already been developed. If that is the case, can the Minister outline the shape of that code? If that is not the case, why does the guide say that the code would be made available? If the code has been developed, why does the clause say:
''The regulator must make a code''?
The regulator has not yet been appointed. I imagine that that person will not be appointed for several months, despite the fact that the job has been advertised. Could the Minister state whether the code has been developed, and if so, what it contains? I look forward to hearing his answer.