NHS TRUST FINANCING GUIDANCE: OVERALL CONTEXT

INTRODUCTION I II This document sets out guidance for NHS trust financing as follows: Section 1: NHS Trust Capital Regime Section 2: NHS Trust Limits Section 3: NHS Trust Capital Investment Loans Section 4: NHS Trust Working Capital Loans 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 the 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. 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 allocations. This included the introduction of interest bearing loans as the primary source of additional financing for capital investment rather than public dividend capital.

IV

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.hmtreasury.gov.uk/psr_mpm_index.htm , and in accordance with NHS legislation, particularly the NHS Act 2006.

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 Principles 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 capital 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 priorities. 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 agreed with DH. DH will: Review 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 trusts to tailor plans accordingly. Test whether Capital Cash Management Plans (CCMPs) have been completed in accordance with the guidance. Review requests for loans and PDC.

General Principles for Funding Investment 1.6 Under the NHS trust capital regime, the following general principles for funding capital investment in NHS trusts apply: NHS Trusts may retain internally generated cash over year end for reinvestment in future years subject to constraints set out below. The primary source of funding above 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.

Internally Generated Cash 1.7 NHS trusts are able to use internally 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 depreciation; Receipts from asset disposals; I&E surplus (both in year and cash brought forward from earlier years); Cash released from movement in debtor/creditor balances (although NHS trusts must take account of Better Payment Practice Code including the latest guidance on 10 day payments); In addition, NHS trusts may receive grants or donations for the purpose of capital investment.

1.8

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 from DH. These loans should be identified in plan and agreed with the SHA and subsequently with DH.

1.10 Loans are considered against the Prudential Borrowing Limit (PBL) of the trust. This limit is set annually by DH and is a indication of the maximum borrowing 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 Public Dividend Capital 1.12 Under the capital regime the primary source of additional capital is through loans, however, in exceptional circumstances, DH may provide financing in the form of Public Dividend Capital (PDC). 1.13 Unlike 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 loan).

1.14 DH 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 Any requests for exceptional PDC should be agreed with SHAs 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. Central Programmes 1.17 Central programme capital has been available to NHS trusts to provide support for central initiatives. 1.18 NHS trusts will receive CRL cover for any central programme budget allocations. In addition, PDC will be provided to NHS trusts for central programme budgets where internally generated capital cash from 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 generated 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. Any PDC drawn and unspent in one year will need 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 including carry forward) has been fully utilised. The level of repayment required will be calculated annually on the basis of final accounts.

1.20

Slippage on Central Programme 1.21 Central programme budgets provide funding only for the year in which they are allocated. If a scheme slips there can be no guarantee that funding or CRL cover will be made available in subsequent years. 1.22 NHS trusts should identify any such slippage in central programmes as part of the planning round. Affordability will be assessed alongside other priorities.

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-End 1.24 To allow NHS trusts to operate properly in the new regime, similar flexibilities to FTs on retaining cash for one year to the next have been introduced. NHS trusts are able to: Retain revenue cash generated through revenue 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-provide equivalent PDC and CRL for planned capital investment within the current 3-year allocation/settlement period where internally generated capital cash is fully utilised. Cash balances must be retained in NHS Trust OPG accounts, not commercial accounts, and NHS trusts must ensure that investment rules are followed.

1.23

1.24 These 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 the spending power is not lost to other parts of the NHS in the intervening period. This will allow NHS trusts to plan their capital investment in a similar way to FTs. 1.25 NHS Trusts should not draw down PDC unless there is a need for financing above internally generated capital cash (including that from earlier years). Any 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, proceeds from asset disposals will only be considered as being spent once depreciation has been fully utilised.

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 External Financing Limits (EFLs) needed to change and why Net Borrowing Requirements (NBRs) were introduced as an additional control. This paper is attached at Annex A.

GUIDANCE Capital Resource Limits 2.3 The capital resource limit controls the amount of capital expenditure 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. Each trust will be allocated an initial CRL based on planned capital expenditure. 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 expenditure. 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 NHS trusts must not overspend against CRL, this is a Regulatory/Departmental duty. In addition, significant 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.

2.4

2.5

2.6

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 Limit External Financing Limit 2.8 The External Financing Limit (EFL) is a control on net cash flows of NHS trusts. It sets a limit on the level of cash that an NHS trust may: Draw from either external sources or its own cash reserves positive EFL; or Repay to external sources or increase cash reserves negative EFL.

External Financing Requirement 2.9 In essence, the External Financing Requirement (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 negative EFR indicates that a trust plans to spend less cash overall that it will generate. EFL performance is measured against the EFR as discussed below.

2.10

EFL performance 2.12 EFL performance is measured by comparing EFL against for the full year.

2.13 If the EFR exceeds the EFL this is an EFL overshoot. NHS trusts must not overshoot their EFL, this is a Regulatory/Departmental duty. 2.14 Undershooting the EFL (i.e. the EFR is lower that the EFL) should be avoided but is considered less serious, however significant undershoots may be considered as an indication of weak financial planning. EFL at plan 2.15 2.16 At plan stage, the EFL is set to equal the external financing requirement (EFR). 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.

2.17

Equally a positive EFL does not indicate that a trust is eligible to PDC, simply that it has a net cash requirement which may be met through its own reserves, loans or PDC. PDC repayments and allocations will be identified and actioned through adjustments to the net borrowing requirement PDC (NBR PDCs). This is explained later in this note.

2.18

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 these elements of financing are agreed.

2.20 Further adjustments to initial EFLs will only be made where there is an impact on the external financing requirement. EFL under/over shoots 2.21 In simple terms an EFL under or over shoot will occur where there is a variation from plan that affects the external financing requirement (e.g. any changes in net cashflow for operating activities or investing activities). If a trust believes these may result in an EFL overshoot they should speak to their SHA. SHAs can discuss 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 made 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 flow in-year from operating activities (i.e. reduced income or increased cost). This will result in an increased EFR and with no adjustment this could result in an EFL overshoot. A trust then has the following two options to consider: If the trust has sufficient in-year surplus or cash reserves from previous years, then the cash shortfall could be covered from the trusts own cash reserves. However, an EFL overshoot would still occur. In such

cases, NHS trusts will need to come to DH via their SHA to request an EFL adjustment. The requirement for such an EFL adjustment would be considered 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 an 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 loan would be referred to the NHS Financial Controller Team 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. Example 2: Capital investment - An NHS trust fails to obtain capital 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 EFL cover. These are two examples of how EFL variations may occur in-year and actions that could be taken. There may be other circumstances in which EFL variations may occur and SHAs should contact DH if they need to discuss particular cases.

2.24

2.25

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

2.27

Initial limits 2.28 Both NBR PDC and NBR loans are set to zero in initial limits. This reflects the new rules on NHS trust cash management where NHS

trusts are allowed to retain unspent capital cash1. While it is expected that some trusts will have excess capital cash, a negative NBR will not be set as this would incorrectly indicate the requirement for a repayment. 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 positive 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 working capital or capital investment loan will result in a negative NBR loan adjustment. 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.

2.30

Drawing cash in excess of need 2.31 Any allocation of NBR PDC for capital investment will be dependent on a trust demonstrating in its capital cash management plan that it has fully consumed all internally generated capital cash (ie from depreciation and assets disposals) for the current year plus any unspent capital cash from earlier years. All such internal capital cash must be consumed before any allocation of NBR PDC will be actioned. This will be agreed as part of the planning process. If capital expenditure slips then 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. 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.

2.32

2.33

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

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General Guidance 2.35 2.36 Initial limits and any subsequent changes to limits will be identified through monthly limits reports to NHS trusts. Appendix B sets out the limits adjustments that are likely to occur with various transactions.

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SECTION3: NHS TRUST CAPITAL INVESTMENT LOANS

GUIDANCE NOTES
PURPOSE 3.1 This section gives further guidance and background on NHS Capital Investment Loans. Capital Investment Loans (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 (principally 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 made in accordance to HM Treasury 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. Repaid twice yearly with equal instalments of principal.

3.3 A Capital Investment Loan facility can accommodate multiple drawdowns within a spending review period to match staged progress of a capital programme. 3.4 Repayments of principal can be made from capital or revenue cash. This means that both the cash received 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 Loans and, working with NHS trusts, should make certain that: The loan is required to fund capital expenditure; The loan is affordable in terms of cash to meet principal repayments; The loan is affordable in terms of revenue to cover interest charges and additional running costs; An appropriate term for the loan has been chosen, taking account of the life of the asset(s) the loan is to fund; The trusts 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.

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Planning for Capital Investment 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 the shortfall. NHS trusts should discuss the need for a capital investment with the SHA to establish support. 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. 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 borrowing limits are issued annually to NHS trusts under a separate FMWP.

3.7

3.8

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 adjustment will then be made to the trusts Net Borrowing Requirement (NBR) - Loan, the Capital Resource Limit (CRL), and the External Resource Limit (EFL). This gives the trust the authority for the trust to draw down from the DH and spend the resource.

Loan 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 required). The loan term cannot exceed the shorter of, the life of the asset being purchased/built or 25 years. Once set in the agreement, the loan term cannot be changed other than where an overpayment settles the loan in full. Final repayment dates are either 15 Sept or 15 March each year.

3.12

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 loan. 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.

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3.15

The interest rate is set at the prevailing National Loan Funds (NLF) rate 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/currentRates.pdf&p 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 original pen to paper signature (in blue ink) of the trust Chief Executive or Director of Finance representing the borrowers agreement to the loan. Completed loan agreements must be returned to the DH at the below address on or before the Monday in the week prior to the drawdown date. FAO Mrs Helen Taylor Senior Finance Manager Loans Team Group Finance - Financial Management Department of Health Rm 4W57 Quarry House Quarry Hill LEEDS LS2 7UE

3.16

3.17

3.18 3.19

It is recommended that these sensitive documents be sent by special delivery. After examination, a duly completed loan agreement will be authorised by DH. Should any errors or omissions be identified, then financial Management will contact the SHA immediately to resolve. 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 to the trust.

3.20

3.21 An example of a Capital Investment Loan agreement populated for a hypothetical loan of 15million over 15 years at a rate of 4.69% can be seen at Appendix C.

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Drawing of Loan 3.22 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 dates set out below each year: 15 July, 15 September, 15 December, 15 March. However, if there is a need for funding ahead of these dates then a Temporary 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. A Drawdown Request Form L2 (or forms where multiple drawdowns are a feature of the loan) is contained in the loan facility agreement, and, once completed, provides the FM Cash team with the authority to fund the Trusts OPG account.

3.23

3.24

Repayments of interest and principal 3.25 Repayments of principal and interest against the Capital Investment Loans are collected twice yearly, 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. The first repayment falls due at the 15 September where loans are drawn in March or July, and 15 March, where they are drawn September or December. Amounts of loan principal and interest to be recovered can be derived from the repayment schedule contained in the loan agreement. These repayments will be taken directly from trust Office of Paymaster General (OPG) accounts by Internal Direct Debit (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.

3.26

3.27

Failure to meet repayments 3.28 As set out in the 2009/10 NHS Operating Framework, defaulting 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 still result in being designated financially challenged. Such cases will be referred immediately to the NHS Financial Controller.
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Overpayments 3.29 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 (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 at the discretion of the DH with notice being given no later than the submission of Q2 plans for that financial year.

3.30 The 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 repayments, by the DH loans team. 3.31 NHS 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 settlement 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 correspondence.

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SECTION 4: NHS TRUST WORKING CAPITAL LOANS

GUIDANCE NOTES
PURPOSE 4.1 This section gives further guidance and background on NHS trust Working Capital Loans (WCLs), which were first introduced in 2006-7 following the withdrawal of brokerage between NHS Trusts. Working Capital Loans seek to ensure trusts have access to sufficient cash to operate.

KEY PRINCIPLES 4.2 Working Capital Loans are made in accordance to HM Treasury guidance set out in Managing Public Money, in particular, Annex 5.6 Departmental Lending. Key elements of the loans; 4.3 National Loan Fund interest rates are used. Loans are made at a fixed rate of interest for the loan period. Repaid by twice yearly equal instalments of principal Working Capital Loans would normally be agreed 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 trust surpluses.

4.4 SHAs fulfil the assurance role in the letting of Working Capital Loans and have a duty to work with the NHS Trust to make certain: The loan is required to provide working capital finance; The loan is affordable and the Trust will generate sufficient surpluses to cover the principal repayments; The Trust has taken interest charges into account when calculating that sufficient surpluses will be delivered; An appropriate term for the loan has been chosen, and the loan fits within the Trusts 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 cash 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.

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4.6

Where this support is given, the NHS trust should identify the loan requirement within their financial plans. The loan should be identified in the cashflow statement of the trust. DH will then consider the loan against affordability of the overall cash available and the PBL of the individual trust.

4.7

4.8 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. 4.9 A positive adjustment will then be made to the trusts 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 plan, but subsequently considers that one is required, then the request should be fed via the SHA to the 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 taken. If the loan is approved, the EFL and NBR-Loans of the trust would be adjusted ahead of the loan being drawn.

4.11

Loan Term 4.12 The term of the loan will need to be provided by the SHA/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 required). All 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 exceptionally 5 years in line with the statutory breakeven duty. 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 remains a key part to the financial regime and NHS trusts must continue to make plans that meet this duty. Final repayment dates are either 15 Sept or 15 March in every year.

4.13

4.14

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Loan Facility Agreement and Interest Rate 4.15 The loan facility agreement 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 Loan. It details the specifics of the loan, including the amount, the draw date, and interest rate applied to the facility. Normally, the document is released for full population from DH three weeks ahead of the anticipated loan being let. The interest rate is set at the prevailing National Loan Funds (NLF) rate 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/currentRates.pdf&p 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 original pen to paper signature (in blue ink) of the trust Chief Executive or Director of Finance representing the borrowers agreement to the loan. Completed loan agreements must be returned to the DH at the below address on or before the Monday in the week prior to the drawdown date. FAO Mrs Helen Taylor Senior Finance Manager Loans Team Group Finance - Financial Management Department of Health Rm 4W57 Quarry House Quarry Hill LEEDS LS2 7UE 4.19 4.20 It is recommended that these sensitive documents be sent by special delivery. 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. 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 to the trust.

4.16

4.17

4.18

4.21

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4.22

An example of a loan agreement populated for a hypothetical loan of 5000k over 4.5 years at a rate of 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 with their SHA. The process for accessing a TBL can be found in FMWP(08-09) 03. 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 trusts OPG account.

4.25

Repayments of interest and principal 4.26 Repayments of principal and interest against the working capital loan are collected twice yearly, 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. 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 December.

4.27

4.28 Where 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 is recovering the deficit. 4.29 Amounts of loan principal and interest to be recovered are given in the repayment schedule contained in the loan agreement. Repayments will be taken directly from trust OPG accounts by Internal Direct Debit (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.

Overpayments

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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 (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 at the discretion of the DH with notice being given no later than the submission of Q2 plans for that financial year. As with scheduled repayments all over payments should be backed by in year surpluses.

4.31

4.32 The 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 will be made available to the SHA/trust, reflecting the new repayments, by the cash management team. 4.33 NHS 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 simply 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, defaulting 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 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 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 correspondence.

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