The way in which capital is allocated across the NHS has changed over recent years. At the start of 2020/21, DHSC and NHSE introduced changes to the NHS capital regime, including setting capital spending limits at integrated care system (ICS) level in anticipation of ICSs being placed on a statutory footing. At the same time there has been fierce competition to access national capital funding pots to fund strategic transformation and investment.
In this section we cover the role of systems in capital planning, how the national public spending framework constrains capital spending across the NHS, and how trusts make the case for their capital bids at both the system and national level.
Operational capital and system prioritisation
What is the role of systems in allocating capital?
Capital envelopes are held at 'system' level by ICSs and managed through integrated care boards (ICBs). The system approach to capital allocations represents a significant change to planning processes. ICBs now play a key role in operational capital planning and prioritisation across the system, whereas clinical commissioning groups (CCGs) did not take on this function.
Operational capital allocations are informed by the value and depreciation costs across the NHS estate. As a result, there is limited headroom for strategic capital investment across systems beyond existing national priorities, constraining the scope for vital transformation of the estate and limiting the role of ICSs in targeting investment to where they agree it’s most needed. As the role of systems in capital allocation is refined, there would be value in exploring how they might play a more integral role in managing strategic capital investments in future.
Capital limits and restrictions on capital spending
Capital departmental expenditure limits
In 1998 a new fiscal framework was introduced by HM Treasury to separate capital and resource budgets, to counter a concern that a lack of distinction between revenue and capital spending had enabled a bias against investment, given that net capital spending across the public sector had fallen from 3% of GDP in 1978-79 to 0.75% in 1998/99. Departments have since been given firm multi-year limits set in cash terms to incentivise them to improve spending control and promote long-term financial planning.
Providers' ability to invest in capital schemes is limited by DHSC’s capital departmental expenditure limit (CDEL). Regardless of the source of cash, capital spend by NHS organisations in aggregate must not exceed the national CDEL.
Foundation trust freedoms and constraints
Previously, foundation trusts were free to spend their surpluses on capital investment (or carry the surplus over into the next financial year). However, following the passage of the Health and Care Act 2022, NHSE can use powers to impose capital limits on foundation trusts where they are at risk of breaching their system’s capital envelopes. This proposal arises from the need for DHSC and NHSE to ensure the national CDEL is not breached. The rationale is that without mechanisms to set capital spending for foundation trusts, there may be instances where it is necessary to constrain or delay capital spending by non-foundation trusts (which may be more urgent or address higher priority needs than foundation trust plans).
System capital limits put a constraint on foundation trusts’ ability to invest in their estates, despite having cash available which would previously have been earmarked for capital investments. This does however ensure more of a level playing field in the context of system capital planning. The balance sheet position is mixed across the country, but there are some providers are sitting on historical surpluses which they cannot invest in the wider estate due to system CDEL restrictions.
The role of retained surpluses and the value of needs-based capital planning at the system level
The current capital framework is underpinned by a system-level approach to financial planning, which does challenge the historical foundation trust model and role of organisation-level financial incentives. As The King's Fund noted in its review of system capital allocations, there is a wider question about the role of retained surpluses for capital investment within the current financial architecture, and in particular the freedom to spend surpluses as an incentive for financial delivery.
Systems can now access additional capital funding on a weighted population basis dependent on the previous year’s revenue performance.68 For example, systems' ICB allocations may be uplifted on a fair share basis against a £300m fund, should systems deliver surplus and breakeven positions or if they hit nationally set targets in the previous financial year. Therefore, while financial incentive levers remain within the allocation framework, historical surpluses (i.e. before the previous financial year) are not included in the current methodology.
It is still unclear the extent to which trusts retained surpluses can in future be reinvested in their estates. However, if there is a materially higher level of operational capital available in future, allocations need to be weighted to reflect organisations' needs.
Limited capacity for commercial growth
All trusts recognise the need to avoid breaching nationally set capital limits. However, the current system also means that trusts are often restricted in investing in projects beyond maintenance renewal, including opportunities for commercial growth. The need to ensure operational capital is allocated to business-as-usual activity and maintenance repairs limits the scope for more innovative commercially driven investment.
There are trusts providing specialised services which are hubs for clinical innovation and are capital intensive. However, given the demands on limited capital budgets, commercial development opportunities are less likely to be prioritised.
Business case approvals and releasing funding at the local and national level
Capital bids must be underpinned by robust business cases. When additional capital spend is required, trusts will put together business cases to assess the strategic fit of a project or programme, evaluate the commercial and management approaches to delivery, quantify the lifetime costs and benefits, and ensure projects and programmes align with the five-case model to deliver public value. This is a recommended methodology and assurance framework underpinning business case development, ensuring that bids demonstrate the strategic, economic, commercial, financial and management case for investment. Depending on the scale of investment, business cases will be subject to oversight and assurance from NHSE, DHSC and HMT.
However, the business case approval process for access to national funding pots can be beset by delays, regionally and nationally. The Nuffield Trust has challenged the extent to which the approvals process is entirely proportionate for capital bids of relatively small value. Given there are well established processes for business case oversight, it is important for government and NHSE to ensure the approval process at the national and regional level is expedited as quickly as possible.
Trusts note how delays in releasing funding can hamper their ability to manage year-to-year capital spend. Limits on the capacity of trusts and systems to reprofile spend, and the need to use capital funds within annual limits, means money is not necessarily spent on the original priorities set out in initial capital plans. Delays to major national programmes are also increasing the cost of capital projects given inflationary pressures, thereby challenging trusts' initial cost estimates.
There is also often a "hockey stick" effect whereby capital spending is backloaded to the final quarter of the financial year and spent in haste to avoid underspends. This can lead to a last-minute bidding culture. Late notification of available funding means some trusts might advance their projects at risk, without certainty of funding by year-end.