We now come to financial matters. Clause 11 gives the Secretary of State powers to provide financial assistance to foundation trusts. It would be helpful at this stage if the Minister were to set out the framework for the debate on this part of the Bill, which is at the heart of the arrangements for foundation trusts. That would provide a framework in which to consider some of the other amendments.
The question that I want to pose on clause 11 is quite simple. The whole point of becoming an NHS foundation trust is to access capital through the prudential borrowing code and from the private sector. A foundation trust would no longer get its capital allocations from the Treasury; that is the whole point. Under clause 11, the Secretary of State may give financial assistance to any NHS foundation trust. Can the Minister explain how the regime will work?
It cannot be the case that trusts would continue to get the capital allocations that they would have received had they not become foundation trusts. I understand that that flow of capital would cease and that trusts would then turn to the private sector—the City—to borrow what they could. Against that background, we need to know in what circumstances the Secretary of State could continue to give financial assistance to foundation trusts. Presumably they cannot have their cake and eat it, in that they cannot
continue to get what they would have received in addition to whatever they can borrow from the City.
As the Minister will know, I have some first-hand experience of moneys being dished out to hospitals in trouble—or not being dished out to hospitals in trouble—as in the case of the Royal United hospital, Bath. I was somewhat surprised by the protective way in which the Minister has treated the public purse in respect of my local hospital. I am questioning the Minister because—given my experience and the experience that I suspect hospitals throughout the country have had—I am trying to get an idea of what circumstances the Minister can conceive of that would lead him to interfere in these new public benefit corporations to the extent of providing moneys from the public purse. How will that differ from the current arrangements, which, I have to say, work so poorly for my local hospital?
I do not want to go on at length, but as clause 11 introduces the provisions on financial matters, it would be useful if the Minister could give us some indication of the nature of the capital regime within which NHS foundation trusts are going to operate before we discuss the borrowing powers and classification of capital as provided to NHS foundation trusts.
I confess that my understanding of this is perhaps less than that of other members of the Committee. I am aware that hospitals receive capital from the Exchequer through a range of sources: there are strategic capital schemes, through which, following the approval of a business case, the Department provides three-star trusts with discretionary capital for particular purposes; operational capital is allocated by way of a formula rather than by approval of specific projects; the access fund is the provision of funds to hospitals following the achievement of certain activity targets; and the Modernisation Agency provides modernisation funding.
For the year ahead, £1 million—a three-star reward, as it were—has been built in to the external capital provision for Addenbrooke's. However, I am not sure that that money can be relied on for subsequent years. I would leave the Committee this morning with a spring in my step if I knew that the Department planned to provide an equivalent additional bonus for three-star trusts for the years beyond 2003–04.
I do not for a minute suggest that the availability of those sources of capital means that there will not be any requirement for additional borrowing. As I understand it, the point of the system is that we should be able to put additional capacity in place. Reading about the capital available to Addenbrooke's for 2003–04, I found it interesting that its proposed allocation of £7.5 million to capital projects was related to capital bids from the trust for £22.5 million. Indeed, to those of us who have been in business, the idea that a growing organisation with a projected turnover of £230 million in the year ahead should be growing, modernising and improving with £7.5 million of capital expenditure a year does not seem feasible.
My hope is that we will discuss how trusts will be able to access capital above and beyond that which is available through Exchequer sources. Before we discuss other aspects of capital, it might be useful to understand whether each of the sources of capital available to existing NHS trusts will be available on the same or similar terms to NHS foundation trusts.
I endorse my hon. Friend's request that the Minister helpfully set out the funding arrangements for foundation trusts. It is fair to say that foundation trusts will stand or fall, succeed or fail, not on whether the democracy arrangements work, but on whether the funding arrangements work. As the Committee looks forward to clauses 12, 13 and beyond, I ask the Minister to help us. Will he say a word or two about public dividend capital, which is mentioned in clause 11(2)? To my shame, all I know is that it is a scheme that operates in NHS trusts. It would help the Committee to understand a complex area better, and would also help me in putting future questions to him, if the Minister were to give an introduction to the subject in his response to the debate.
I am, as always, in your hands on such matters, Mr. Atkinson.
Clause 11 is about the Secretary of State's ability to make loans, grants and other sources of finance available to NHS foundation trusts. Other parts of the Bill relate to public dividend capital, for example. With great respect to the hon. Member for South-West Devon, I must tell him that it is probably best to discuss public dividend capital when we reach those parts of the Bill—he can, of course, translate that to mean that that will be when I have better and further notes. I spent most of the night going through the material on public dividend capital, but I am none the wiser for it. Therefore I look forward to the debate on clause 13.
May I correct one point? There will be a different regime for NHS foundation trusts' access to capital; the right hon. Member for North-West Hampshire was right about that. However, he was not right to say that NHS foundation trusts would have no access to public sector capital. I think that the hon. Member for South Cambridgeshire was developing those points, and I will say more about that subject shortly.
We should be clear that clause 11 simply replicates the existing provisions for NHS trusts regarding the Secretary of State's powers to make financial support available to NHS foundation trusts. I will explain in a moment why flexibility and parallel sets of powers are needed.
The right hon. Member for North-West Hampshire was right, in a general sense, to say that what we are doing with NHS foundation trusts is a break with the
past. For example, they will have access to wider sources of funding to support their capital programmes, including funding from the private sector. That freedom is not exercisable by NHS trusts, as I will explain in a moment.
In general, an NHS foundation trust's future access to capital will depend on its ability to service debt, not on centrally controlled capital allocations. As is clear from the Bill, the amount that trusts can borrow will be determined by a formula based on each NHS foundation trust's ability to repay associated principal and interest. That will be dealt with by the prudential borrowing code. The regulator will set up a formula on which those decisions will be made, which in turn will depend on the strength of projected cash flows.
Each NHS foundation trust will calculate its borrowing limit, which will be confirmed by the independent regulator and will appear in the trust's terms of authorisation. Against that borrowing limit, foundation trusts will be able to raise finance from Government and private lenders to build new facilities and improve existing ones. However, they will not be able to use protected assets—which we will come to later in the Bill—as security for that borrowing, because those assets are necessary to preserve the continuity of NHS services for the public.
The failure regime later in the Bill is designed specifically to ensure that if there is corporate failure on the part of a foundation trust, NHS patients will not be the losers. We need a regime to protect and preserve those assets. Foundation trusts will, however, be able to use non-protected assets as security for that borrowing. Most importantly, the most likely source of security will be the associated revenue streams that will go with the commissioning arrangements that are made with primary care trusts.
The right hon. Gentleman asked from whom trusts would be able to borrow and how much it would cost. I am not sure that in the immediate short-term future—the next three, four or five years, for example—the private sector will lend a huge amount directly to NHS foundation trusts. Initially we expect that most, if not all, new borrowing will be sourced from a new financing facility that the Department of Health is establishing. Therefore we must ensure that the Secretary of State has the power to make loans available to NHS foundation trusts. That is another reason why clause 11 is in the Bill.
We intend independent credit specialists acting on behalf of the Department to operate this financing facility on an arm's-length basis.
Loan applications from foundation trusts will be assessed using generally accepted credit analysis principles. The specialists will not be subject to direction by the Secretary of State in determining loan applications. The analysis will be based on credit worthiness—for example, whether the loan is likely to be repaid—and not on policy-based assessments of the loan purpose, which is current practice.
All new loans will be based on the repayment of principal and interest. It is envisaged that the financing facility will set interest rates for NHS foundation trusts. For protected businesses—that is, core NHS
services—the interest rates will be set at the prevailing national loans fund rate, which is very favourable. I think that it is 3.5 per cent, but someone will be able to confirm the figure shortly. The interest rates for non-protected businesses such as subsidiary interests of foundation trusts, or joint ventures, will be set at a level consistent with private sector borrowing rates. Foundation trusts will pay the prevailing private sector interest rates for borrowing that they draw from the private sector.
I hope that access to public capital has been dealt with in those remarks. I should also let the right hon. Gentleman know that, as announced in the House before Christmas, we have already made three-year allocations of the operational capital that the Department makes available to the NHS. That includes the 29 applicants that are proceeding to the second stage of foundation trust status. Allocations of operational capital have already been fed into the system from public sector routes.
In a second. Operational capital is about only a quarter of the capital requirements of that NHS trusts. Those allocations have already been made, and the Government will certainly not be withdrawing them from NHS foundation trusts.
The Minister has virtually answered my query in his last half sentence. Can he assure me that the Government do not intend to withdraw existing streams of capital to hospitals that will become foundation hospital trusts, either within the three-year allocation cycle or thereafter? Is the extra borrowing capacity provided for in the Bill intended to provide extra resources, or do the Government intend to save their own money, so to speak, in years to come?
I can speak only about the three years for which allocations have been made. As regards wider access to public capital per se, however, there are some obvious areas for concern. Among those important services and systems that glue the NHS together, the need to upgrade the information technology infrastructure in the national health service is a priority.
The operation of private finance initiatives in relation to NHS foundation trusts is another big issue. The Government want to ensure that sponsors and funders are left in no worse a position as a result of the introduction of the new legislation and the establishment of NHS foundation trusts. The Government are proposing that, in future, all Department of Health-approved NHS foundation trust PFI schemes will be under novation to the Secretary of State. PFI consortia will be in a direct primary contractual relationship with the Secretary of State. The Secretary of State will, in turn, appoint the NHS foundation trust—either as his agent or subcontractor—to perform the obligations arising under the contract on his behalf. There will, therefore, be no substantive change.
The question arises more widely about access to public money; for instance, for initiatives that might arise under national service frameworks or the need to
upgrade the information technology infrastructure of the NHS. In future, resources will be allocated mainly through the system by the new national tariff arrangements; that is true for NHS foundation trusts as well as those trusts that are not foundation trusts. If the Department requires NHS foundation trusts to procure a specific item—for example, in relation to a new initiative linked to implementation of a national service framework—the Department would have to fund it. Otherwise, the NHS foundation trust might not be in a position to participate.
The key point in relation to any central initiative such as this is that the relevant requirements should be set out in the terms of the authorisation, and I expect that they would be. If any public funds were made available for a central initiative such as information technology, NHS foundation trusts should have access to an equitable proportion of those funds. The Government intend that to be the case.
The Minister has moved on to the relationship between the national tariff and the capital of NHS foundation trusts as distinct from non-foundation trusts. I thought that the Committee would deal with that matter later. My understanding is that the intention is to have a single national tariff. If, on the one hand, the tariff for NHS foundation trusts is designed to provide sufficient resources—not only to meet the costs of providing the service in revenue recurrent terms but to repay the capital costs of borrowing to support additional capacity—and, on the other hand, non-foundation trusts had not borrowed but had had their capacity provided by direct departmental capital grants, how does one equalise the national tariff? Will departmental capital grants to non-foundation trusts be capitalised on their balance sheets so that they have to repay the capital charge to the Department in the same way as foundation trusts would have to pay a private lender?
When we discuss the public dividend capital in clause 13, we need to deal with how capital is financed and how repayments are structured, because there is an overlap. The hon. Gentleman and I have a fundamental disagreement; namely, should there be a national tariff? He would prefer price competition among NHS providers to a national tariff.
There is nothing in the Bill about the national tariff. This clause is about financial flow arrangements. I should like it recorded in Hansard that the web site is a real peach. The hon. Gentleman should refer to it if he would like more information about financial flows.
It is a good web site. It took me a while to access it, but it is well worth the effort, especially if one has trouble sleeping.
The national tariff is not designed to give an unfair advantage to one set of NHS trusts over another. The intention is to fix a standard price for similar
procedures. That is what the healthcare resources group definitions set is all about. When a tariff is set, there should be no unfair competition based on reducing NHS quality of care. We have been there and done that, and it is a really bad place to go. My hon. Friend the Member for Cardiff, Central has some concerns about this, but we want to encourage efficiency and productivity. A national tariff can do that, because if an NHS trust or an NHS foundation trust can provide a service at a lower cost than the national tariff price, it can keep the difference between the national tariff price and the service price under which it can operate. There is clearly an imperative on, and an incentive for, NHS foundation trusts to operate at an optimum level and to use the proceeds and the benefits of that productivity to reinvest their savings and efficiency in the provision of NHS health-care services.
On a point of order, Mr. Atkinson. I share some of the concerns of the hon. Member for South Cambridgeshire, in that amendment No. 247 asks some of the questions that the Minister is answering. I do not wish to interrupt his flow, but I wish to seek advice from you about how to deal with the matters in amendment No. 247, because the Minister may repeat something he has already said. Although not too much time has been invested in this debate, I should be grateful if you guided members on how to structure debates on the next clause, given the Minister's extensive explanation, which, by his own admission, covers many of the issues in clauses 12 and 13.
These groups of amendments flow into one another, because they deal with financial matters. I said that I would be tolerant of a wider debate on clause 11, but that I would ask the Committee to keep to the subject when discussing clauses 12 and 13. When we come to amendment No. 247, the hon. Gentleman will be able to ask his chosen questions, but I shall insist that the debate is narrowly focused on that amendment.
I am grateful to you, Mr. Atkinson. If I strayed too widely, it was inadvertent, because I have not dealt with the hon. Gentleman's amendment No. 247. There is another argument that applies to that amendment, which I have not knowingly made yet.
Having set a tariff, would a foundation trust that is more efficient than others in a particular set of operations—my right hon. Friend the Minister has explained that such a foundation trust would be able to keep the excess proceeds—be able to do more operations because it could do them more efficiently? If not, what incentive would there be for commissioning bodies to go to the most efficient provider, since the tariff is going to be the same regardless of which provider they choose?
I agree that, by common consent, there is a weakness and a fault in the current method of commissioning care in the NHS. Most commissioning is based on block contracts that are not activity-based. In the current system, there is no incentive to do more, because people do not get paid to do more. That is
ridiculous, and I am sure that many hon. Members will be surprised to learn that as a result, the available capacity in the NHS is not being fully utilised.
It is important for the health of any organisation—be it in the private or public sectors—that its financial arrangements encourage the utmost efficiency and productivity and provide incentives for other organisations to reach the same level. With the best will in the world, the existing financial flows within the NHS do not do that. In future, there will be a direct incentive for providers—NHS foundation trusts and non-NHS foundation trusts—to do more, because they will be paid for the work that they do, which will be at the national tariff rate, and will retain the surplus proceeds, if there are any. We will encourage the fullest possible utilisation of NHS capital assets.
My hon. Friend the Member for Cardiff, Central wants a system in place within the NHS where money flows in a way that encourages innovation, efficiency and productivity; that is what we are proposing. We can achieve it without replicating the deficiencies and defects of the internal market of the Conservative party, which was structured fundamentally on a system of competition based on those who could provide the lowest cost to the NHS. That type of market, based on price competition alone, is bad for the NHS; it does not place the right emphasis on quality, and we must achieve that. That is partly why we have included the Commission for Healthcare Audit and Inspection and the National Institute for Clinical Excellence in the Bill; not to mention clause 40, the new approach to setting national standards, the stronger and tougher inspection regime for, for example, non-NHS foundation trusts, and the annual CHAI inspections of quality and performance.
All these things are important. However, I say to all my hon. Friends that efforts to improve NHS efficiency will not be at the expense of the values and ethos of the public service itself. Those of us on the centre-left of British politics must learn a lesson from the past; if we leave it to the Conservative party to control the language of choice, diversity, plurality, efficiency and productivity, we have sold out the centre-left case in Britain. Those are not Tory words; they should be Labour words.
The Minister has given an interesting perspective on the way in which the Government want to use what I am happy to call the internal market—under the terms that he has used—and the split between commissioning and providing. However, if money is to follow not only price but efficiency and activity, the implication is that it might flow from places that are less efficient and active to those that are more so in a way that does not happen at the moment due to the block contract.
My concern is about those providers that are unable to increase their efficiency or capacity because of factors beyond their control, such as supply of labour or capacity in the social care sector. They will lose funding that they do not lose at present, because of the greater flows. That will make their situation even worse because they will be less able to compete in the labour market. They will be less able to buy extra capacity because they will have lost the funds that they
had been accumulating in order to compete. That is our real problem with the beginnings of the operation of this flow.
That is precisely why we are not doing it with a big bang approach. We are starting with about 15 healthcare resources groups this year. There will be a gradual move to a wider application of the national tariff. On a point of clarification, the national tariff will encompass some of those regional cost pressures and differences that the hon. Gentleman mentioned; for example, the higher cost of labour in the south and south-east.
The Minister talked about the ability of foundation trusts to retain excess funds and invest them in improving patient service. It is clearly not his intention that non-foundation trusts can also retain that money to invest in patient service. How will he avoid the national tariff, by definition, imposing unfair competition between those who have the power to retain money and invest it and those who must return it to the Treasury?
That is why it will be a gradual process. It must be remembered that there will not be a full application of the national tariff system within our desired time frame for the establishment of NHS foundation trusts. We are alert to the issue that the hon. Gentleman mentioned, and there is a way through it.
I apologise, Mr. Atkinson; the discussion has been rather wider than I intended, but I hope that it has been useful. There is one important issue for the Committee. I know that it is not in the Bill, but the funding flows of the national health service and the arrangements that any Government make will determine to a large extent the issue that clause 11 addresses, which is one of borrowing and the ability to service debt.
As I said, the overwhelming amount of resources for NHS foundation trusts will come from their commissioning arrangements with PCTs. The basis on which those commissioning arrangements are structured will have a direct impact on the level of borrowing of an NHS foundation trust, so there is a connection.
I say to the hon. Member for Oxford, West and Abingdon and the Committee that it is difficult to go down that road; I accept that. We are going to change the inertia in a system that does not provide incentives and, perversely, rewards the least productive parts of the national health service. However, we are not imposing some penal provision on NHS foundation trusts in the way that the hon. Gentleman has described. We are working with trusts through the additional resources, the extra support that CHAI is providing and the hospital improvement programme, about which my right hon. Friend the Secretary of State made a further announcement only a few weeks ago, with additional resources going to support those who are not performing to the extent that they should.
We want to bring the entire NHS up to an effective level of performance. That is our focus; we are not leaving behind those who are currently struggling with some of the problems that the hon. Gentleman
suggested. We seek to bring the NHS as a whole to a point at which it can benefit from the freedoms of the Bill and provide a better service to the public.
It is important that we do not run away from some of the difficult decisions that must be made. Let me be blunt; we should not have a system in which the least efficient and effective parts of the NHS are funded in the same way as the most efficient and effective. That is what we want to change, and we should change it. In addition, we should also make it clear to primary care trusts, as we have done, that they are free to commission from whatever provider is best in order to provide a service for their patients. That is also a very important point, because there is no better way to try to encourage stronger and better performance in the NHS than to make it clear to providers that there is no guarantee. We want to have a system that encourages good performance.
I want to emphasise the Minister's point. Not only does the current system treat inefficient areas the same as efficient areas, but, in order to make efficiency gains, there are short-term costs and difficult decisions to make. In a system such as ours that equalises payments, the difficulties of short-term costs are emphasised because there is no gain after they have been taken.
Sometimes there is a need to invest to produce efficiency and more effective services. I accept that. I cannot deal with specifics if my hon. Friend has a particular case in mind. However, I can strongly make the case on the generality that the capital investment going into all parts of the NHS is rising significantly. In addition to our funding streams, there is the Treasury's invest-to-save budget scheme, which is designed to deal with some of the points that my hon. Friend and others have made. This has been a wide-ranging debate.
I accept that it is vital that commissioners have the freedom to choose from whom they commission services, and realise that they have and can use that freedom. That is how we will get a more responsive NHS. Does the Minister accept that equity is involved? For example, a commissioner may wish to commission services locally—even at a less efficient rate—to ensure that there is equitable access for those who are unable to travel to where there is a more efficient provider. Although it may not be his preference, does he accept that an alternative way of solving that problem is to allow commissioners to raise revenue locally in a democratically accountable way? He could put it to the people that they must pay a premium if they want local services that may not be as efficient as those elsewhere. If he does not do that and cuts back on the availability of central funds—which will dampen the market that he wants—how will he solve the problem of equity that concerns all of us on the centre-left?
Welcome to the centre-left. We could debate this until the cows come home, Mr. Atkinson; as you represent Hexham, that subject is perhaps closer to your heart than it is to mine.
The hon. Gentleman is right to say that primary care trusts themselves should eventually have the freedom to take decisions at an operational level, because they are the commissioning bodies. We have emphasised to primary care trusts that they should be free to commission from those that provide the best service. Issues of equity and access will prey heavily on the minds of primary care trusts, and it is right that they should. The national tariff will operate as I have described; not as a barrier to access, but as a way to improve it. Together with the other reforms that we are introducing, the tariff will add into the system a direct incentive for local providers to do more.
A primary care trust may be faced with the difficulty, which is often faced in various parts of the country, that it cannot get a service that provides rapid access to deal with, for example, the problem of long waits because of local shortages. If that is the case, it is important that it is free to commission a service from other parts of the national health service, or from other providers, to ensure that local people get access to NHS-funded care more quickly. That is a separate issue from the one that the hon. Gentleman raised about somehow withdrawing support from local providers. It is not about that; it is about commissioning an additional service. However, it is also about allowing the local provider an opportunity to provide that additional service, since a direct financial incentive is available to them.
I have said previously to the hon. Gentleman that the difference between us is that he represents in this place a set of very deep and conservative attitudes about the national health service that places the interests of producers and providers above the needs and interests of the patients. That is not just my view; it is the view of many of his hon. Friends. I see what is written about him and his Front-Bench performances in ''Focus'' and other magazines, in which he is regularly attacked as being an old-style politician who is not prepared to embrace change. I know that he is trying to learn the language of reform and change, and I will provide some seminars and support for him if he wants to attend. However, he is gradually edging in our direction, which is welcome.
I hope that the right hon. Member for North-West Hampshire—who started this debate by asking about the sourcing of borrowing and capital for NHS foundation trusts—has had some answers. It seems a very long time ago since I started to respond to him, and I have no memory at all of what I said. I will look in Hansard to see whether I answered him. [Interruption.] I see that he wants to have another go at me, so I am happy to give way.
I misinterpreted the right hon. Gentleman's intention. I do not wish to go on any longer; I have run out of material. This is probably a good point at which for me to stop.
I had not intended to make a significant contribution to this debate, which spread
wider than I anticipated. I shall save some points for the amendments that are to come, but I should like to deal with some of the Minister's remarks.
The Department of Health has been setting up the special funding facility in recent weeks. Is that facility being set up with public funds rather than being sourced from the private sector?
Mr. Hutton indicated assent.
I see that the Minister is nodding. If it is ring-fenced, with access decisions that are not in the gift of the Secretary of State, what is the Treasury's role in the distribution of that money? Is it genuinely an independent pot with an independent panel that has total freedom to allocate it to whoever it wants, or does some degree of control still rest with the Treasury?
Is there a limit on the total amount of that money? Is it simply an initial amount that is available now, or is it a fund that will be expanded as time goes by? Will it be entirely dedicated to foundation hospitals, and is it the sole source of public capital moneys that foundation hospitals can access? What criteria will those distributing the money use in their lending decisions? Will they be using some of the criteria that are set out in the clauses concerning the prudential code? Will they be looking at the creditworthiness of the trusts?
A private-sector lender to an independent organisation would make judgments and set repayment rates against accepted assessments of creditworthiness. International organisations such as Dun & Bradstreet and Standard & Poor's specialise in producing such ratings. Is similar information being used in the distribution of this money? Does the Minister envisage such ratings being used in those assessments in future?
As regards this money—and, more broadly, the total borrowings that NHS foundation trusts can take on—will these funds appear as part of the PSBR? Are they official public sector borrowings or will they be purely on the balance sheets of the foundation trusts themselves? What provision is being made for any new entrants to the marketplace under clause 5? On what basis will those organisations that are not currently NHS trusts have access to that money if they apply for foundation status? Inside what time frame does the Minister envisage those organisations being in a position to access the funds available, if indeed—[Interruption.]
The Chancellor of the Exchequer said recently that money borrowed by foundation trusts can only come out of the total pot of money available for borrowing in the NHS. Will the Minister clarify whether that money has been taken away from a general NHS capital pool? If it has, what proportion of that pool does it represent? Will the creation of this special funding facility impact on the availability of capital to non-foundation trusts in the coming financial year or in future financial years?
I intervened on the Minister to express anxiety that we would be creating a situation in which foundation trusts would be at an advantage, owing to their ability to retain funding, and that we would be creating a two-tier system. Will the national tariff be introduced before all hospitals become foundation hospitals? In what time frame does the Minister expect all hospitals to become foundation trusts? Will the Minister set the introduction of the national tariff in context against
the process of expanding foundation trust status to other hospitals? If that is the case, will the Minister tell us what provision he expects to make—
It being twenty-five minutes past Eleven o'clock, The Chairman adjourned the Committee without Question put, pursuant to the Standing Order.
Adjourned till this day at half-past Two o'clock.