What do you do if you don’t have capital?
An IFRS16 / Private Funding-ban Tragic Opera
The Capital Desert
The NHS, particularly today, is plagued by a capital desert. At the same time, it is under increasing pressure to fix its infrastructure, physical and digital. This is partly about offering decent care settings and decent, modern workplaces but it is also about attracting investment to the UK economy in life sciences. Once upon a time there were three traditional routes: the capital budget, private finance through private finance initiatives (PFIs) or leasing, and surplus estate. But now PFI is banned, leasing now consumes the capital budget anyway thanks to IFRS16 and there is less and less surplus estate to consume.
The Vanishing Unicorns of NHS Capital – Act One
The idea of funding NHS projects without using the capital budget has captivated many, leading to proposals like service-inclusive leases, local authority borrowing, and NHS bonds. However, as I’ve written before, these often turn out to be unicorns – alluring but not possible, in the modern age, to find a functional one. The harsh reality is that most projects must navigate the bureaucratic terrain of capital business cases and government approvals. With PFIs banned and leases now treated as on-balance sheet liabilities, viable alternatives are scarce.
PFI was banned for the NHS by Phillip Hammond in 2019 and, despite some noises that it could be resurrected under Labour, that hasn’t happened yet. It’s out for now.
IFRS16 is an absurd proposition, brought into place by the International Accounting Standards Board (IASB), which pretends that a tenant who signs a lease has actually bought the property that they are leasing. That means that when the lease is signed, the IASB pretends that they have paid for the asset, which in Government accounting means that they have consumed capital budget roughly equivalent to the value of the asset being leased – the very thing that the NHS doesn’t have much of. It's a bit more complicated than that – but that’s roughly where we are. So leases, certainly long-term ones, don’t work.
And the NHS has been quite good at taking up the challenge of selling off its surplus estate, meaning that what’s left is rarely valuable enough to fund a new project.
So, generally speaking, we are left with the capital budget.
Solutions Denied – Act Two
Efforts to find creative funding mechanisms must align with two unyielding rules: avoiding direct spending and not creating prudential borrowing (which is banned). Innovative suggestions like NHS bonds fall into both pitfalls – they involve borrowing (which is banned) and, once you’ve borrowed that money, you still have to spend it, which consumes capital.
Lots of efforts have been made to make leases work. But if it looks and smells anything like a lease, IFRS16 will catch you out. The IASB is determined to pretend that this is capital expenditure and won’t be swayed. And your CFO is professionally obligated to participate in this fantasy.
So, unless you are able to find huge swathes of land and buildings you (a) don’t need and (b) can easily sell, the NHS is stuck with competing in the accelerating maelstrom of capital applications through an increasing labyrinthine capital business case process – and win the lottery of a share in this limited resource.
Sunlit Uplands – are there any? – Act Three
Although the financial landscape appears restrictive, a few opportunities stand out:
Income-Generating Developments
Projects like life sciences campuses, retail facilities, PPUs, car parks, GP hubs or care homes can generate income for investors. These initiatives rely on using assets creatively – either through joint ventures or strategic sales – to produce capital receipts or long-term income streams. If the NHS only sponsors and promotes these (to private investors) and does not guarantee or participate in them, they are likely to avoid using NHS capital.
Short-term leases
The IASB requires the capitalisation of the present value of the lease. If you can negotiate a short term or rolling lease, the amount of capital you need to use will be much reduced (but you will still need to use some). The problem with this is that you run the risk that the third party landlord will keep increasing the rent over time. So, it isn’t a great idea unless you operate somewhere with a competitive leasing market and you are only homing services that you can readily move.
Third-Party Contracts
It’s worth considering whether the service that needs a new home could be privately delivered. A private diagnostics provider or elective surgery centre may be able underwrite the facilities they need to deliver the service. These projects bypass NHS financing constraints but require careful structuring. As soon as you start offering volume guarantees, long tenures or try to secure the assets after the contract, you risk the IASB accusing you of really entering a lease.
A Strategic Path Forward
The challenges of NHS capital funding demand a strategic mindset. Trusts must focus on:
Strengthening their case-making processes to compete effectively for capital allocations.
Rigorously and sceptically evaluating alternative funding solutions while navigating regulatory constraints.
Exploring partnerships and innovative asset utilisation to generate new revenue streams.
In this constrained environment, collaboration, creativity, and precise execution are essential. While there are no magic solutions, these approaches provide a framework for NHS organisations to secure at least some of the capital they desperately need.
