The Lift health centre-building programme was expected to enjoy a bumper year in 2009. The launch of the much-anticipated Express Lift was hoped to extend the number of primary care trusts (PCTs) setting up Lift companies, as the programme looked to build on its solid, if unspectacular, start. Unfortunately, it hasn’t been an easy 12 months for the Lift community. And while the parlous state of the wider economy has weighed heavily on the sector, the cause of recent problems appears to be much closer to home.
The shift to International Financial Reporting Standards (IFRS) should have come as no surprise to those in the health service. After all, health trusts were originally meant to ditch the UK GAAP (Generally Agreed Accounting Practices) in time for the 2008-09 financial year, but, along with other government departments, were granted a year’s grace by the Treasury.
But although the NHS is a year older, as far as accounting practices go, it doesn’t appear to be any wiser. "PCTs are still struggling to understand the detail," complains Chris Whitehouse, chairman of representative body the Lift Council. "We need clarity and we need clear advice from the department to PCTs before they can be confident about moving forward."
That lack of clarity could be seen earlier this year, when Lift deals started to stall under confusion with the new system. The central concern, it seemed, was whether the building of new health centres and GP surgeries through Lift would be considered ‘on’ or ‘off’ balance sheet. Crucially, this determines whether or not deals attract capital charges and count towards departmental budgets – and makes them far less affordable in the eyes of health trusts’ financial officers.
Needless to say, such uncertainty had a crippling effect on deal flow in the sector. "[It] introduced the possibility that accounting treatment could become a barrier to the pipeline of deals at a time when such deals might be used to accelerate investment and boost the ailing economy," explains KPMG’s Jon Turton.
Ensuring PFI schemes stay off the government’s books has always been an exercise in diplomatic accounting. One way that bean-counters looked to manipulate the shift to the new accounting standard was to persuade health trusts to relinquish the option to purchase the land and buildings from the Lift company at the end of the typical 27-year lease. In doing so, PCTs would not be considered to be ‘controlling’ the use of the asset, as set down by the IFRS rules. Theoretically this could lead to a situation where Lift companies could sell the assets at the end of the lease to alternative buyers prepared to outbid the trusts.
The health ministry is quick to dismiss this scenario, though. "Existing, signed lease-plus Lift agreements would have to be broken and renegotiated to amend the end-of-concession purchase option," says a spokesperson, "which would not represent value for money for any of the parties." Indeed the department is adamant that trusts should not find themselves in a situation where they make decisions based on technicalities, rather than common sense. "Future Lift business cases will continue to be assessed on a case-by-case [basis] and, as now, approval decisions will be based on value for money and affordability and not on the accounting opinion per se."
The spokesperson confirms "under IFRS, Lift schemes will generally be accounted for as on balance sheet". The key question, though, is which balance sheet? While health trusts may have to file accounts under the new rules, it does not necessarily mean they will have to face consequences in the form of capital charges. Traditionally, the Office for National Statistics would use the European System of Accounts (ESA) basis to judge national debt levels and the signs are that even after the introduction of the new standards, the statisticians will continue to use the European rules (in particular, a standard called ESA95) to compile public borrowing figures. In other words, as far as departmental budgets are concerned, Lift will remain off the balance sheet.
"While IFRS was indicating that most of these projects would sit on balance sheet, ESA95 is more similar to the old FRS5 test used under UK GAAP and it should be relatively simple to structure a deal to achieve an off-balance-sheet position," says Stewart Rolls of KPMG. "This means that the departmental budgets should be less capitalconstrained, as [many] projects, including Lift and many estates joint ventures, will not count towards their limits."
For companies working in the Lift sector, the matter appears to be drawing to a conclusion. "I think it is largely resolved," says Bruce Walker, financial director of Ashley House, a member of the Express Lift framework. "The issue was kind of a circular one – it is really a money-ground because the NHS gets funded by the Treasury anyway," he adds. "When this first came to light a lot of us scratched our head and said, ‘What does this mean?’ – because surely there will be a way to fix it if it is going in and out of the same pocket."
The Treasury appears to have found its solution but it is clear that the whole situation has caused friction in the industry. "It was a problem because, like all these things, there was no clarity as to whether it was on or off balance sheet and the problem was people didn’t want to make decisions until they had clarity," says Walker. "They may well have done the project anyway, but they might have done it under different lease terms."
Indeed, one company director claims that confusion over the new accounting rules led to a situation where construction on a Lift project was halted until the trust could find an IFRS friendly contract. "It is no longer a lease-plus agreement, like most Lift schemes, but it was one as a land retained agreement because of these very reasons," he complains. "Of course that caused a huge delay because it was the same scheme but they had to go away and effectively rewrite the documentation and it caused probably three months’ delay, which is highly frustrating."
But now that the time for nimble accounting appears to have passed, just what sort of state is Lift in anyway? A quick look at Express Lift shows the programme yet to get out of the starting blocks, with only one health trust, Cumbria, indicating it will bring forward a scheme. Some suggest that the financial crisis is making trusts think twice.
The credit margins that lenders are charging over the underlying rate of interest has increased more than threefold since mid-2007, from roughly 0.8 per cent to around 2.8 per cent. Therefore the current swap rate that Lift companies are able to secure has also jumped significantly, meaning that the average cost of senior debt has risen by around 25 per cent over two years. Given that there is no immediate easing of those conditions in sight, trusts may well be reconsidering the affordability of planned schemes.
But even if lending conditions have cast a shadow over the first few months of Express Lift, the traditional Lift programme has enjoyed a year of expansion. Established in 2003, Lift has perennially been criticised as a slow mover. But since the spring of 2008 the programme has seen some £148m in primary and social care investment through new projects. Indeed, despite the poor market conditions, the year 2008-09 was Lift’s biggest yet in terms of the value of schemes signed, with the smaller size of its deals allowing it to dodge the worst of the slowdown in PFI.
The Lift Council’s Chris Whitehouse is optimistic that the programme has come through the nadir of the funding problems and is ready for further expansion. "It is still certainly the case that you have to work hard to get the money, but schemes aren’t being stalled by a lack of private sector finance," he says. "We have a regular member survey and we have been asking our members precisely what they think the impact [of the recession] has been. They are still clearly of the view that finance can be achieved – it is not as easy as it was in the previous environment. But where funds are necessary to proceed with the project they are identifying them. Banks are still overpricing the risk, but not in a way that in itself will stop Lift deals going forward."
Nevertheless, Whitehouse is not as relaxed as his private sector counterparts over the future impact of IFRS. While those who follow the Treasury’s every twitch and turn appear to be convinced there will be no further fallout for Lift, there is still a lot of confusion at the ground level over the practicalities of dealing with the accounting changes. "As far as the Lift Council is concerned, the position remains the same," he says. "We want to see clarity because it will remove uncertainty, but we can’t give guidance to PCTs – they need to hear for it themselves from the department."