NHS TRUST FINANCING GUIDANCE: OVERALL CONTEXT

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1

NHS TRUST FINANCING GUIDANCE
: OVERALL CONTEXT


INTRODUCTION


I

This document sets out guidance for NHS trust financing as follows:




Section 1
: NHS Trust Capital R
egime



Section 2
: NHS Trust Limits



Section 3
: NHS Trust Capital Investment L
oans



Section 4
: NH
S Trust Working Capital L
oans


II

This document consolidates and builds upon guidance issued in earlier
FMWPs.


BACKGROUND


III

A Foundation Trust style financial regime was introduced for NHS
trusts to both capture the financial incentives offered by th
e FT regime
and to help NHS trusts achieve the transition to FT status. The NHS
trust regime captures a number of the key freedoms of the FT regime,
but retains elements of DH control (e
.
g
.

spending limits) as are
appropriate given the different status of
NHS trusts and FTs.


IV


The regime was introduced in two stages:




In 2006/07 working capital loans were introduced to provided working
capital support replacing cash brokerage
.



In 2007/08

bottom up capital planning was introduced to replace top
down alloc
ations. This included the introduction of interest bearing
loans as the primary source of additional financing for capital
investment rather than public dividend capital.


CONTEXT


V

The regime has been developed within the principles set out in
Managing
Public Money published by HM Treasury



in particular
issues on drawing and use of cash
-

http://www.hm
-
treasury.gov.uk/psr_mpm_index.htm

,
and in accordance with NHS
legislation, particularl
y the NHS Act 2006.




2

SECTION 1
:
2008/09 NHS TRUST
CAPITAL REGIME


INTRODUCTION


1.1

This section of the guidance consolidates and builds on existing
guidance on capital investment issued in earlier FMWPs.


1.2

It sets out general principles for the capital
regime for NHS trusts.


Planning
-

General P
rinciples


1.3

From 2007/08 NHS trusts operate under an FT style capital regime.
This means that NHS trust capital planning is a locally driven process.
NHS trusts draw up capital investment plans and associated capi
tal
cash management plans in line with local investment priorities and
affordability.


1.4

Capital plans should be agreed with SHAs. In agreeing NHS trust
plans, SHAs should ensure that they are affordable, achievable and in
line with local and strategic prior
ities. SHAs should also undertake
analysis of capital cash management plans to ensure that they are in
accordance with guidance set out in this document, the operating
framework for the year being considered and any further guidance.


1.5

Plans are then agree
d with DH. DH will:




R
eview
affordability
against
the overall NHS capital programme and
the
total available capital resource

overall available capital resources.
Should capital plans exceed available resources then SHAs will be
required to work with NHS
tru
sts to tailor plans accordingly.




T
est whether C
apital Cash Management Plans (C
CMPs
)

have been
completed in accordance with the guidance
.



R
eview requests for loans and PDC
.


General Principles for Funding I
nvestment


1
.6

Under the NHS trust capital regi
me, the following general principles for
funding capital investment in NHS trusts apply:




NHS Trusts may retain internally generated cash over year end for re
-
investment in future years subject to constraints set out below
.



The primary source of funding ab
ove internally generated cash will be
interest bearing loans
.



PDC will be available in a limited and

rapidly

reducing number of cases
as exceptional support or through central programmes
.





3




Internally Generated C
ash


1.7

NHS trusts are able to use interna
lly generated cash to fund
investment as follows:




Unspent capital cash brought forward from previous years (
unspent
depreciation and receipts from asset disposals);



Cash associated with the charge for d
epreciation;



Receipts from a
sset disposals;



I&E surpl
us (both in year and cash brought forward from earlier years);



Cash released from movement in debtor/creditor balances (although
NHS trusts must t
ake account of Better Payment Practice Code

including the latest guidance on 10 day payments
);


1.8

In additio
n
,

NHS trusts
may receive grants or donations for the purpose
of capital investment.


External Financing


Loans


1.9

The primary source of cash for capital investment, in addition to that
financed from internal sources, is through interest bearing loans fr
om
DH. These loans should be identified in plan and agreed with the SHA
and subsequently with DH.


1.10

L
o
ans are considered against the Prudential Borrowing L
imit (PBL) of
the trust. This limit is set annually by DH and is a indication of the
maximum borrowi
ng a trust may take. Details

of how PBLs are
calculated are
covered in a separate FMWP each year.


1.11

Further details of Capital Investment

Loans can be found in Section 3

of this document.


Exceptional P
ublic Dividend Capital


1.12

U
nder the capital regime
the primary source of addi
tional capital is
through loans,

however,

i
n exceptional circumstances, DH may pr
ovide
financing in the form of Public Dividend C
apital

(PDC)
.


1.13

U
nli
ke loans, PDC

has no fixed repayment period, but DH can require
PDC repayments e
.
g
.

for excess capital receipts. PDC does not attract
a charge directly but the assets purchased attract a capital charge of
3.5% on its net book value (under a loans regime the value of the asset
will be offset by the
outstanding principal
value of the l
oan).


4

1.14

D
H will consider cases for exceptional PDC where
a
trust

has a zero or
low
prudential borrowing limit
and
/or

where a major capital scheme
forms part of the financial recovery

of the trust.


1.15

A
ny requests for exceptional PDC should be agreed with SHA
s and
included in plans. SHAs and NHS trusts will be asked to provide
further supporting evidence and this will be used by DH to review
requests on a case by case basis.


1.16

The DH

will review the policy on providing exceptional PDC on an
annual basis.


Cent
ral Programmes


1.17

C
entral programme capital has been available to NHS trusts to provide
suppo
rt for central

initiatives.


1.18

N
HS trusts will receive CRL cover for any central programme budget
allocations. In addition, PDC will be provided to NHS trusts for ce
ntral
programme budgets where internally generat
ed capital cash
fr
om
depreciation and asset sales

(including any capital cash brought
forward from earlier years)

is already fully committed.


1
.19

NHS Trusts should not
draw down PDC when internally generate
d
capital cash will be available during the year. If there is an in
-
year
timing difference between the need to incur expenditure covered by a
central programme and the availability of internally generated capital
cash
,

DH will consider providing temporary

PDC.


1
.20

A
n
y PDC drawn and unspent in one year

will
nee
d to be

repaid (or
offset against any new allocation of PDC) in the following year
.

PDC
will not
be
considered as spent until internal sources of capital cash
(depreciation and asset disposals

incl
uding carry forward) has

been
fully utilised.
The level of repayment required will be calculated
annually on the basis of final accounts.


Slippage on Central P
rogramme


1.21

Centra
l programme budgets provide

funding only for the year in which
they are alloca
ted.

If a scheme slips there can be no guarantee that
funding or CRL cover will be made available in subsequent years.


1.22

N
HS trusts should identif
y
any such
slippage in central programmes as
part of the

planning round.

Affordability will be assessed alon
gside
other priorities.


5

Drawing PDC


1.23

NHS trusts must not draw PDC in advance

of need ie where there is no
requirement for external financing above internally generated capital
cash. This is covered in more detail below.


Retaining Cash at Year
-
E
nd


1.24

T
o
allow
NHS trusts to operate proper
ly in the new regime, s
imilar
flexibilities to FTs on retaining cash for one year to the next

have been
introduced. NHS trusts are

able to:




R
etain revenue cash generated through reve
nue surpluses for
revenue
spending in
future years (subject to compliance with statutory
breakeven duty) or capital investment.



Unspent cash associated with the charge for depreciation may be
retained for capital investment only.



Retain capital receipts to finance capital investment in future
years.
Where the sums are immaterial, NHS trusts will be able to retain the

cash locally. Where the sums are material the Department will take a
PDC repayment and capital resource limit (CRL) reduction in the year
of the disposal, and re
-
provid
e equivale
nt PDC and CRL for

planned
capital
investment within the current 3
-
year allocation/
settlement period

where internally generated capital cash is fully utilised
.



1.23

Cash balances must be retained in NHS Trust OPG accounts, not
commercial accounts
,

and NH
S trusts must ensure that investment
rules are followed
.


1.24

T
hese guidelines maintain

a degree of equity with the FT regime in
ensuring that the benefit of the capital receipt is not lost to the Trust
,
whilst ensuring that th
e

spending power is not lost to o
ther parts of the
NHS in the intervening period.

This will allow NHS trust
s

to plan their
capital

investment in a similar way to FTs.


1.25

N
HS Trusts sh
ould not draw down PDC unless there is a need for
financing above internally generated capital cash (includ
ing that from
earlier years). A
ny
PDC drawn and unspent in a particular year will
need to be repaid
.

PDC will not
be
considered as spent until internal
sources of capital cash (depreciation and asset disposals) have been
fully utilised. Similarly,

proceed
s from asset disposals will only be
considered as being spent once depreciation has been fully utilised.

6

SECTION 2:

NHS TRUSTS LIMITS

GUIDANCE



CAPITAL
RESOURCE LIMITS (CRL), EXTERNAL FINANCING LIMITS
(EFL) AND NET BORROWING REQUIRMENTS (NBR)


PURPOSE


2
.1

This section

gives further guidance and background on NHS trust
limits, building upon guidance issued in FMWP (07
-
08) 50

(Appendix
A)

and within planning guidance
.


BACKGROUND


2
.2

FMWP (07
-
08) 50

set out reasons why the interpretation of E
xternal
Finan
cing
L
imits (EFLs)

needed to change and why
Net Borrowing
Requirements (
NBRs
)

were in
tr
oduced as an additional
control
. This
paper is attached at A
nnex A.


GUIDANCE


Capital Resource Limits


2
.3

The capital resource limit controls the amount of capital

ex
penditure

a

NHS trust may incur in a year
. NHS trusts require capital resource limit
to cover all capital expenditure and must not incur expenditure in
excess of this limit.


2
.4

Each trust will be allocated an

initial CRL

based on planned capital
expend
iture. This will change during the year if additional capital
resources are allocated from DH. Additionally, NHS trusts credit the
carrying value of asset disposals to CRLs which allows them to use the
proceeds of such disposals to incur capital expendit
ure.


2.5

DH will allocate capital resource limits to NHS trust in two ways:




As part of initial limits. DH will set an initial CRL based on agreed
plans. This will include all expenditure financed from internally
generated sources excluding disposals.



CRL will be allocated in
-
year for additional expenditure as agreed with
DH eg as financing through loans or public dividend capital (PDC) is
agreed or through the allocation of central programme budgets


2
.6

NHS trusts must not

overs
pend

against CRL
, thi
s
is a
Regulatory/Departmental duty
.


In addition, s
ignificant underspending
would be considered as an indicator of poor planning. Underspends
should be identified during the year

and no later than Q2. DH may
adjust CRLs accordingly.


7

2
.7

There is no carry

forward of underspends of CRL. CRL will be set
each year for NHS trusts based on agreed spending plans for that
year.


External Financing L
imit


External Financing L
imit


2
.8

The External Financing L
imit
(EFL)
is a control on net cash flows of
NHS trust
s. It sets a limit on the level of cash that an NHS trust may:




D
raw from either external sources or its own cash reserves


positive
EFL; or



R
epay to external sources or increase cash reserves negative EFL
.


External Financing R
equirement


2
.9

In essence,

the External Financing R
equirement (EFR
) is the
difference between the

cash a NHS trust plans to spend in a year and
what it can generate through its operations. EFR can be positive or
negative. A positive EFR indicates a net
requirement for cash and a
negat
ive EFR indicates that a trust plans to spend less cash overall
that it will generate.


2
.10

EFL performance is measured

against

the EFR
as discussed below.


EFL performance


2.12

E
FL performance is measured by comparing EFL against for the full
year.



2.13

I
f the EFR exceeds the EFL this is an EFL overshoot. NHS trusts
must

not overshoot their E
FL, this is a Regulatory/Departmental duty.


2.14

U
ndershooting the EFL (i
.
e
.

the EFR is lower t
hat the EFL) should be
avoided but is considered less serious
, howeve
r significant
undershoots may be considered as an indication of weak financial
planning.


EFL at plan


2
.15

At plan

stage,

the EFL is set to equal the externa
l financing
requirem
ent (EFR)
.


2
.16

EFLs may be positive or negative. Unlike in previous years a

negative
EFL does not indicate that a trust must make a PDC repayment, rather
it indicates that the trust is generating a net inflow of cash from
operating/investing activities.


8

2
.17

Equally a positive EFL does not indicate that a trust is eligible to P
DC,
simply that it has a net cash requirement which may be met through its
own reserves, loans or PDC.


2
.18

PDC repayments and allocations will be identified and actioned through
adjustments to the net borrowing requirement PDC (NBR PDCs). This
is explain
ed later in this note.


Initial limits


2
.19

Initial EFLs are set based on EFR from agreed plan, but excluding
spend on capital which requires external financing from DH in the form
of capital investment loans or PDC. EFL is allocated alongside CRL
when t
hese elements of financing are agreed.


2.20

F
urther adjustments to initial EFLs will only be made where there is an
impact on the external financing requirement.


EFL under/over shoots


2.21

I
n simple terms an EFL under or over shoot will occur where there is a
va
riation from plan that affects the external financing requirement (e
.
g
.

any changes in net cashflow for operating acti
vities or investing
activities).

If a trust believes these may result in an EFL over
shoot they
should speak to their

SHA. SHAs can discus
s cases with the DH
financing team.


Changes to

EFL


2.22

EFLs may need to change during the year. This may be either
because of allocations made by DH for capital investment (see above)
or because of changes in local circumstances. Changes to EFL can
only ma
de by DH.

Where a NHS trust believes it will overshoot its EFL
it should first consider whether this could be

managed locally and
contact the

SHA to discuss options. The SHA may then need to make
a case to DH for an EFL adjustment. DH will not normally
consider
requests to change EFL where trusts believe they will undershoot.



EFL variations


examples


2
.23

Example 1:
Working capital

-

An

NHS trust suffers

a reduced cash fl
ow
in
-
year
from operating activities (i
.
e
.

reduced income or increased
c
ost).
T
his will result in an increased EFR and w
ith no adjustment this
c
ould result in an EFL overshoot. A trust
then
has the following
two

options to consider
:




If the trus
t has sufficient in
-
year surplus

or cash reserves from previous
ye
ars, then

the cash shor
tfall
could

be
covered from the trust’s own
cash reserves
.
However,
an EFL overshoot
would still occur
. In such
9

cases
,

NHS trusts will need to come to DH via their SHA to request an
EFL adjustment.

The requirement for s
uch an EFL adjustment would
be con
sidered as indication of
a
worsening of financial position and so
would be referred to the NHS Financial Controller Team in DH to
assess whether there is a performance issue that needs to be
addressed.

Subject to this review a
n EFL adjustment would

then be

made by DH.




The NHS trust could apply for a working capital loan to address the
cash shortfall. An application for an unplanned loa
n would be referred
to the NHS F
inancial
Controller T
e
am in DH

assess whether there was
a performance issue that needed

to be addressed. If the loan were
approved the EFL would be adjusted accordingly.



2
.24

Example 2:
Capital investment

-

An NHS trust fails to obtain capit
al
financing in the form of PDC. This may result in the following:




The investment may not happen.

As the initial EFL will have been
adjusted to exclude this investment pending agreement of PDC then
there is no variation from EFL
.



The NHS trust may take a capital investment loan to cover the shortfall
in PDC. EFL will be allocated alongside the loan.



The NHS trust uses cash from other sources (e
.
g
.

in
-
year revenue or
reserves) to finance the expenditure. This would result in a EFL
overshoot if the EFL is not adjusted. In these case the NHS trust
should make a case to DH via the SHA for additional EF
L cover
.


2
.25

These are two examples of how EFL variations may oc
cur in
-
year and
actions that could

be taken. There may be other circumstances in
w
hich EFL variations may occur and SHAs should contact DH if they
need to discuss particular cases.



Net Bo
rrowing Requirement (NBR
)


2.26

The net borrowing requirement is the level of cash that an NHS trust
may draw from or must repay to DH. It operates in a similar way that
the EFL operated until 2007/08.


2.27

There are two separate elements to NBR: NBR P
DC and NBR loans
that determine the level of PDC and loan principal to be drawn or
repaid respectively. These limits are managed separately.


Initial limits


2.28

Both NBR PDC and NBR loans are set to zero in initial limits. This
reflects the new rules o
n NHS trust cash management where NHS
10

trusts are allowed t
o retain unspent capital cash
1
.

While it is expected
that
some trust
s will

have excess capital cash, a negative NBR
will not
be set as this would incorrectly indicate the requirement for a
repaymen
t.


2.29

All subsequent transactions (excluding the issue and repayment of
temporary PDC) will be reflected in changes to NHS trust limits. For
example:




Allocation of PDC associated with a capital central programme will
result in a po
sitive NBR PDC limit

adjustment.



Repayment of PDC associated with impairments funds flows will result
in a negative NBR PDC adjustment.



Drawing against an agreed working capital or capital investment loan
will result in a positive NBR limit adjustment
.



Repayments against a wo
rking capital or capital investment loan will
result in a negative NBR loan adjustment.


2.30

In the case of NBR PDC, adjustments to limits will result in a net
borrowing capacity. This represents the limit of PDC against which a
NHS trust may draw. This

limit will equal the NBR plus any
repayments of PDC, less any advances already taken. If this results in
a negative borrowing capacity then a repayment is required, if it is
positive then the trust may draw PDC.


Drawing cash
in
excess

of need


2.31

Any
allocation of NBR PDC for capital inv
estment will be dependent on
a trust demonstrating in its

capita
l cash management plan that it has

fully consumed all internally generated capital cash (
ie from
depreciation and assets disposals) for the current year pl
us any
unspent capital cash from earlier years. All such internal capital cash
must be consumed before any allocation of NBR P
DC will be actioned.
This will
be agreed as part of the planning process.


2.32

If capital expenditure slips the
n

this is likely

to reduce the eligibility for
PDC as internal capital cash is freed up. In such cases
,

NHS trust
should underdraw PDC appropriate to the level of slippage.



2.33

If NHS trusts overdraw PDC in a given year eg draw more PDC than is
required to finance capital
spending after all other internal capital cash
is used, then they will be required to repay the overdrawn PDC

as soon
as possible and no later than

in the following year.





1

It should be noted than NH
S trusts do not have unlimited access to carry forward unspent
capital cash and DH reserves the right to take repayments.

11

General Guidance


2.35

Initial limits and any subsequent changes to limits will be

identified
through monthly limits reports to NHS trusts.


2.36

Appendix B

sets out the limits adjustments that are likely to occur with
various transactions.

12

SECTION3
:

NHS TRUST CAPITAL INVESTMENT LOANS
GUIDANCE NOTES


PURPOSE


3.1

This section gives fur
ther guidance and background on NHS Capital
Investment Loans. Capita
l

Investment L
oans
(CILs)
were first
introduced in 2007
/8
as part of the capital regime described earlier.
NHS trusts are now able to retain cash generated through operations
(principall
y depreciation) for reinvestment, and, subject to
demonstration of ability to service debt, they can borrow to finance
further capital investment.


KEY PRINCIPLES


3.2

Capital Investment Loans are mad
e in accordance

to HM Trea
sury
guidance set out in Managing

Public Money
, in particular, Annex 5.6
Departmental Lending. Key elements of the loans;




National Loan Fund interest rates are used
.



Loans are made at a
fixed rate
of interest
for the loan period
.



R
epaid

twice ye
arly

with
eq
ual instalments of principal
.


3.3

A Capital Investment Loan facility can accommodate multiple
drawdowns within a spending review period to match staged pr
ogress
of a capital programme.


3.4

Repayments of principal can be made from capita
l or revenue cash.
This means that both

the cash receiv
ed from an asset sale

and cash
associated with the charge for depreciation

can be used for
repayments.


3.5

SHAs fulfil the assurance

role in the letting of Capital Investment Lo
ans
and, working with NHS trusts, should

make certain

that
:




T
he loan is required

to fund capital expenditure;



T
he loan is affordable in terms of cash to meet principal

repayments
;



T
he loan is affordable in terms of revenue to cover interest charges and
additional running costs;



A
n appropriate term for the loan has been chosen, taking
account of
the life of the asset(s) the loan is to fund;



T
he t
rust’s plans for this year and beyond take into account the impact
of the repayments of this loan on the financing available to fund future
capital expenditure.






13



Planning for Capital Inves
tment Loans


3
.6

Should it become clear at the time of planning for the future financial
year that the trust is going to need additional cash to service their
forthcoming
capital plan, then the trust should

apply for a capital
investment loan to address th
e shortfall.
NHS trusts should discuss the
need for a capital investment
with the SHA to establish support.


3
.7

Where

this support is

given, the
NHS trust should identify the loan
requirement within their financial plans. The loan should be identified
in both the cashflow statement and capital cash management plan.



3
.8

DH will then consider the affordability of the loan against the available
PBL of the individual trust

and the capital resource available for the
NHS trusts that year
. Prudential borrow
ing limits are issued annually to
NHS trusts under a separate FMWP
.



3.9

Successful applications will be notified
by the DH

via the SHA
. A

loan
agreement will

then

need to be duly completed and authorised before
the process can be completed.


3.10

A

positive adju
stment will then be made to the trust

s Net Borrowing
Requirement (NBR)

-

Loan
, the Capital Resource Limit (CRL), and the
External

Resource

Limit (EFL). This gives the
trust the

author
ity for the
trust to draw
down from the DH and spend the resource.


Lo
an Term


3
.11

The term of the loan will need to be provided by the SHA and trust.
This will determine the interest rate and enable

the loan agreement to
be pre
-
populated. (Note: provisional repayments schedules can be
requested to aid this decision if req
uired). The loan term cannot
exceed the shorter of, the life of the
asset being purchased/built

or
25
years.


3
.12

Once set in the agreement, the loan term cannot be changed other
than where an overpayment settles the loan in full.
Final repayment
dates a
re either 15 Sept or 15 March each year.


Loan Facility Agreement and Interest Rate


3
.14

The loan facility agreement is a legal document
produced by the DH,
which is

populated
jointly
by the DH, relevant SHA and
the trust
seeking the
capital
investment
lo
an. It details the specifics of the loan,
including the amount, the draw date, and interest rate applied to the
facility.
It is normally released for full population from the DH three
weeks ahead of the anticipated loan being let.


14





3
.15

The interest r
ate is set at the
prevailing National Loan Funds (NLF) r
ate
for the day the loan facility agreement being issued.
The rate used is
the Equal Instalment of Principal (EIP) rate of the Public Works Loan
Board (PWLB), specific for the term of the loan.

The c
urrent rates can
be found at:


http://www.dmo.gov.uk/documentview.aspx?docname=/PWLB/current
Rates.pdf&p


3
.16

Within the schedules of the agreement is a business case that must be
completed by the SHA and the Trust. For the agreement to be
considered compl
ete, it must also have a copy of the resolution of the
Board of Directors of the borrowing trust and the original pen to paper
signature (in blue ink) of the trust Chief Executive or Director of
Finance representing the borrower’s agreement to the loan.


3
.17

Completed loan agreements must be returned to the DH at the below
address on or before the Monday in the w
eek prior to the drawdown
date.


FAO Mrs Helen Taylor

Senior Finance Manager



Loans Team

Group F
inance
-

Financial

Management

Department of Healt
h

Rm 4W57

Quarry House

Quarry Hill

LEEDS

LS2 7UE


3
.18

It is recommend
ed that these sensitive

documents be sent by special
delivery.


3
.19

After examination, a
duly
complete
d

lo
an agreement will be authorised
by DH
. Should any errors or omissions

be iden
tified
, then financial
Management

will contact the SHA immediately to resolve.


3
.20

Two copies of the completed and verified loan agreement will be sent
to the SHA by special delivery within 2 weeks of the drawdown

date.
One should be retained by the

SHA
, the other is to be forwarded on t
o
the trust.


3.21

A
n example of a
Capital Investment L
oan agreement populat
ed for a
hypothet
ic
al

loan of £15
million
over 15

years

at a

rate o
f 4.69
% can be
seen at Appendix C
.



15



Drawing of Loan


3
.22

There are four opportun
ities to draw down a Capital Investment Loan
each year. These are likely to be on the

working day closest to the

dates
set out below
each year:




15 July
,



15 September
,



15 December
,



15 March
.


3
.23

However
,

if there is a need for funding ahead of these dat
es then a
Tempor
ary Borrowing Limit (TBL) may

be considered by the trust with
their SHA. The process for accessing a TBL can be found in
FMWP(08
-
09) 03.


3
.24

A Drawdown Request Form

L2 (or forms where multiple drawdowns
are a feature of the loan) is

cont
ained in the loan facility agreement,
and, onc
e completed, provides the FM
Cash team with the authority to
fund the Trusts OPG account.


Repayments of interest and principal


3
.25

Repayments of principal and interest against the Capital Investment
L
oan
s

ar
e collected twice
year
ly
, 15 September and 15

March (or the
next working day.). T
he scheduled repayments of principal are equal
over the life of the loan and the interest is calculated daily on the
reducing balance.


3
.26

The first repayment falls due at t
he 15 September where loans are
drawn in March or July, and 15 March, where they are drawn
September or December.


3
.27

Amounts of loan principal and interest to be recovered can be derived
from the repayment schedule contained in the loan agreement.

Thes
e
repayments will be taken directly
from t
rust
Office of Paymaster
General (
OPG
)

accounts by
Internal Direct D
ebit

(IDD
).

However, the
trusts will be reminded of the amounts to be debited from their OPG
account in the week before the payment is taken.



F
ailure to meet repayments


3
.28

As set out in the 2009/10 NHS Operating Framework
, d
efaulting
on the
terms of an existing

loan, most probably by a trust moving into deficit
and so not being able to make planned repayments from generated
surpluses, will sti
ll result in being designated “financially challenged”.
16

Such cases will be r
eferred immediately to the NHS Financial
C
ontroller.



Overpayments


3
.29

The trust as borrower may, if it gives the lender (DH) not less than 14
days notice
,
prepay the whole or a
ny part of any loan (being a
minimum amount of

£250,000
), on the September repayment date of
any financial year. Overpayments on the March repayment date in any
financial

year will only be permitted a
t

the discretion of the DH

with
notice bein
g given no l
ater than the submission of Q2 plans for

that
financial year.


3.30

T
he overpayment of principal will be credited against the outstanding
principal balance of the Capital Investment Loan and the remaining
scheduled repayments will be revised down to accommodate

this
change. Please note that overpayments do not alter outstanding term
of a loan unless such an overpayment results in full and final
settlement of the loan. A new repayment schedule will be made
available to the SHA/trust, reflecting the new repayme
n
ts, by the DH
loans team
.


3.31

N
HS trusts may not

repay loans simply to obtain a

lower loan rate i
.
e
.

if
the loan rate falls NHS trust may
not
take a further loan at the lower
rate simply to repay the existing loan
.


Effect on PDC dividend payments


3.32

PDC

dividend payments are calculated upon average net relevant

assets, and therefore a

capital
investment
loan as a liability to the trust
will reduce the PDC dividend payable each year by 3.5% of the
average principal outstanding.


Full and final settlemen
t


3.33

Once the loan has been settled in full, either by reaching the end of the
term or via a final overpayment, then the trust will receive written
notification from DH that the debt has been settled in full. The SHA will
be copied into this correspond
ence.


17

SECTION 4:

NHS TRUST WORKING CAPITAL LOANS
GUIDANCE NOTES


PURPOSE


4
.1

This section gives further guidance and background

on NHS trust
Working C
apital

Loans

(WCLs)
, which

were first introduced in 2006
-
7
following the withdrawal of brokerage betwee
n NHS Trusts. Working
Capital Loans seek to ensure trusts have access to sufficient cash to
operate.


KEY PRINCIPLES


4.2

Working Capital Loans
are mad
e in accordance

to HM Trea
sury
guidance set out in Managing Public Money
, in particular, Annex 5.6
Departm
ental
Lending
.
Key elements of the loans;




National Loan Fund interest rates are used
.



Loans are made at a
fixed rate
of interest
for the loan period
.



R
epaid by twice yearly eq
ual instalments of principal


4.3

W
orking Capital

Loans would normally be agree
d

where trusts have
experienced an in
-
year or cumulative operating deficit

that has resulted

in

problems. Therefore, in order to demonstrate recovery from this
deficit position, principal repayments against the loan are required to
be backed by in year tr
ust surpluses.


4.4

SHAs fulfil the assurance

role in the letting of Working Capital Loans
and h
ave a duty to work

w
ith the NHS Trust to make certain
:




T
he loan is required to provide working capital finance;



T
he loan is affordable and the Trust will generat
e

sufficient

surpluses to
cover the principal repayments;



T
he Trust has taken interest charges into account when calculating that
sufficient surpluses will be delivered;



A
n appropriate term for the loan has been chosen, and the loan fi
ts
within the Trust’s

PBL
, taking account of any other existing capital,
working capital or rollover loans.


Planning for Working Capital Loans


4.5

Should it become clear at the time of planning for the future financial
year that the trust is going to
generate

insufficient ca
sh from operating
activities then the trust may apply for a working capital loan to address
the shortfall. The issue needs to be discussed in the first instance with
the SHA to establish support.


18

4.6

Where

this support is

given, the
NHS trust should ide
ntify the loan
requirement within their financial plans. The l
oan should be identified
in

the cashflow statement

of the trust.


4.7

DH will then consider the loan against affordability of the overall cash
available and the PBL of the indi
vidual trust.


4.8

Su
ccessful applications will be notified
by the DH

via the SHA
. A

loan
agreement will

then

need to be duly completed and authorised before
the process can be completed.


4.9

A positive adjustment will then be made to the trust

s

Net Borrowing
Requirement (NBR)

-

Loan
, which gives

the authority for the trust to
draw money down from the DH.


4.10

Should a trust not identify the need for

a working capital loan at p
lan
,
but subsequently considers that one is required, then the request
should be fed via the SHA to
t
he DH
NHS Loans team
.
This will be
taken as a indication of financial performance issues and as such the

case will be referred on to the NHS financial controller team in the DH

to determine whether there are underlying problems and what

action
should

be t
aken.


4
.11

If the loan is appr
oved, the EFL and NBR
-
Loans

of the trust would be
adjusted ahead of the loan being drawn.


Loan Term


4
.1
2

The term of the loan will ne
ed to be provided by the SHA/
trust. This
will determine the interest rate and enable

th
e loan agreement to be
pre
-
populated. (Note: provisional repayments schedules can be
requested to aid this decision if required).
A
ll NHS trusts should make
every effort to plan for a minimum repayment of 2% of income and a
term of
no more than
3 or

excep
tionally

5 years

in line with the
statutory breakeven duty.


4
.13

SHAs should recognise the need to meet

the statutory breakeven duty

when considering the level of surplus
generated by NHS trusts and the
speed at which the loan is repaid
. Breakeven duty r
emains a ke
y part
to the financial regime
and NHS t
rusts must continue to make plans
that meet this duty.


4
.
14

Final repayment dates are either 15 Sept or 15 March in every year.








19

Loan Facility Agreement and Interest Rate


4
.15

The loan facility agr
eement is a legal document that is
produced by
DH, and then

populated
jointly
by the DH, relevant

SHA and the trust
seeking the Working Capital L
oan. It details the specifics of the loan,
including the amount, the draw date, and interest rate applied to th
e
facility.
Normally, the document is released for full population from DH
three weeks ahead of the anticipated loan being let.



4
.16

The interest rate is set at the pr
evailing National Loan Funds (NLF) r
ate
for the day the loan facility agreement being
issued.
The rate used is
the Equal Instalment of Principal (EIP) rate of the Public Works Loan
Board (PWLB), specific for the term of the loan.

The current rates can
be found at:


http://www.dmo.gov.uk/documentview.aspx?docname=/PWLB/current
Rates.pdf&p


4
.17

Within the schedules of the agreement is a business case that must be
completed by the SHA and the Trust. For the agreement to be
considered complete, it must also have a copy of the resolution of the
Board of Directors of the borrowing trust and the o
riginal pen to paper
signature (in blue ink) of the trust Chief Executive or Director of
Finance representing the borrower’s agreement to the loan.


4
.18

Completed loan agreements must be returned to the DH at the below
address on or before the Monday in t
he
week prior to the drawdown
date
.


FAO Mrs Helen Taylor

Senior Finance Manager



Loans Team

Group Fi
nance
-

Financial
Management

Department of Health

Rm 4W57

Quarry House

Quarry Hill

LEEDS

LS2 7UE


4
.19

I
t is recommended that these sensitive

documents

be sent by special
delivery.


4
.20

After examination, a complete loan agreement will be verified as being
so with the added signature of a Senior Civil Servant of Group Finance.
Should any

errors or omissions be identified

then Group Finance will
contact

the SHA immediately to resolve.


4
.21

Two copies of the completed and verified loan agreement will be sent
to the SHA by special delivery within 2 weeks of the drawdown

date.
20

One should be retained by the

SHA, the other is to be forwarded on t
o
the trust
.


4
.22

An example of a loan agr
eement populat
ed for a hypothetical loan of
£
500
0k over 4.5

years

at a

rate o
f 4.01
% can be seen at Appendix D
.


Drawing of Loan


4
.23

There are four opportunities to draw down a Capital Investment Loan
each year. These are

likely to be on the

working day closest to the

below dates each year:


15 July

15 September

15 December

15 March


4
.24

However if there is a need for funding ahead of these dates then a
Temporary Borrowing Limit (TBL) should be considered by the trust
wit
h their SHA. The process for accessing a TBL can be found in
FMWP(08
-
09) 03.


4
.25

A Drawdown Request Form (L2) is contained in the loan facility
agreement, and, once completed, provides the FP&CM Cash team
with
the authority to fund the t
rust

s OPG accou
nt.


Repayments of interest and principal


4
.26

Repayments of principal and interest against the working capital loan
a
re collected twice
year
ly
, 15 September and 15 March (or the next
working day
). The scheduled repayments of principal are equal over
the

life of the loan and the interest is calculated daily on the reducing
balance.


4
.27

The first repayment against a working capital loan falls due at the 15
September where loans are drawn in March or July and 15 March
where they are drawn September or Dec
ember.


4.28

W
here the original loan was taken to address an accumulated
operating deficit, the repayment of principal should be backed by
surpluses generated by the individual trust in the financial year. This
will demonstrate that the trust i
s recovering the

deficit.


4.29

Amounts of loan principal and interes
t to be recovered are given in
the
repayment schedule contained in the loan agreement.
Repaymen
ts
will be taken directly from trust OPG accounts by Internal Direct D
ebit
(IDD).
However, the trusts will

be reminded of the amounts to be
debited from their OPG account in the week before the payment is
taken.


21


Overpayments


4
.30

The trust as borrower may, if it gives the lender (DH) not less than 14
days notice
,
prepay the whole or any part of any loan (be
ing a
minimum amount of

£250,000
), on the September repayment date of
any financial year. Overpayments on the March repayment date in any
financial

year will only be permitted a
t

the discretion of the DH

with
notice bein
g given no later than the submissio
n of Q2 plans for

that
financial year.


4
.31

As with scheduled repayments all over payments should
be backed by

in year surpluses.


4.32

T
he overpayment of principal will be credited against the outstanding
principal balance of the working capital loan and the
remaining
scheduled repayments will be revised down to accommodate this
change. Please note that overpayments do not alter outstanding term
of a loan unless such an overpayment results in full and final
settlement of the loan. A new repayment schedule wi
ll be made
available to the SHA/trust, reflecting the new repayments, by the cash
management team.


4.33

N
HS trusts may not repay loans simply to obtain an lower loan rate i
.
e
.

if the loan rate falls NHS trust may

not

take a further loan at the lower
rate sim
ply to repay the existing loan
.


Failure to meet repayment


4.34

As set out in the 2009/10
Operating Framework

for the NHS in
England, d
efaulting on the terms of an existing loan, most probably by
a trust moving into deficit and so not being able to make p
lanned
repayments from generated surpluses, will still result in being
designated “financially challenged”. Such cases will be referred
immediately to the NHS financial controller.


Effect on PDC dividend payments


4.35

PDC dividend payments are calculated

upon average net relevant
assets, and therefore a working capital loan as a liability to the trust will
reduce the PDC dividend payable each year by 3.5% of the average
principal outstanding.


Full and final settlement


4.36

Once the loan has been settl
ed in full, either by reaching the end of the
term or via a final overpayment, then the trust will receive written
notification from DH that the debt has been settled in full. The SHA will
be copied into this correspondence.