Exploring new ways

The continuing pressure on NHS finances is not likely to abate in the near term. The coming Comprehensive Spending Review (CSR), to be announced later in the year by whoever is Chancellor of the Exchequer by then, will not continue the rapid increases in NHS spending since 2000. Indeed the Prime Minister was trapped into talking of NHS cuts not so long ago though it probably won’t mean cuts in real terms.
    
The demand, however, for health care is probably infinite in scope. And the prices of sophisticated medical equipment always seem to outstrip inflation. So funding is going to be in short supply, relative to the needs of the NHS.

Asset finance     
I’d like to explore one source of funding that in my opinion does not get the attention it deserves: asset finance, funding through leasing and related products. It currently provides around half a billion pounds a year of funding to NHS Trusts, according to the NHS Purchasing and Supplies Agency.  Though none of us would mind getting that sum of money in our current accounts, it’s pretty small beer by NHS standards.
    
But the asset finance industry in the UK is a major source of investment funding in the UK. Members of the Finance & Leasing Association, which represents UK-based providers, provided £27.5 billion of new finance in 2006 to the business sector and UK public services, representing 30 per cent of all fixed capital investment in the UK in 2006 (excluding real property).
    
That suggests that the NHS could make much more use of asset finance, if it is an appropriate source of funding. So what are its benefits to the NHS of using asset finance?

Benefits
First, it’s versatile. Asset finance is used in the NHS to acquire a very wide range of assets, from ambulances through IT to highly sophisticated medical equipment and much more besides.

Second, it alleviates the pressure on a Trust’s cash flow. Surveys across the years have showed that this is probably the key advantage of asset finance in all markets, both in the public services and the private sector. Repayments are spaced out over time, in sharp contrast to purchase, where the financial hit comes as the asset is arriving at the Trust facility. The CSR will make that benefit even more tangible to NHS Trusts.

Flexible repayments
Next, it’s flexible. Asset finance can be delivered on terms that involve regular repayments. But only if that suits the customer and the asset. For example ‘balloon payments’ can be made – larger than monthly repayments in the rest of the contract. Typically these are made at the beginning or the end of contracts.
    
The period of the finance should reflect the use the Trust plans to make of the asset. If a Trust knows it needs an asset for significantly less than its economic life – or simply wants to offset the risk of holding onto an asset longer than the Trust might find it useful – asset finance can provide appropriate finance. Asset finance providers are well aware of the need to provide funding under operating leases to Trusts, and can help the Trust do that. Asset finance is increasingly provided with related services. You may want the finance tied to a given level of service provision. You may want on-line data on your IT hardware and software holdings. And there are a lot of other possibilities, which asset finance providers will probably want to finance. This is a well established model in motor finance, where you can get your car repaired while you’re in a meeting and your fleet maintained as part of the finance deal, and it’s spreading into asset finance.

Reducing risk
Using asset finance reduces asset risk, in a number of ways. There are particular advantages in relation to technology investments, and much of NHS investment seems to be technology-related.

It can be pretty frustrating to feel locked in when you know that there is a new technology or system that will do your task much better. Asset finance removes much of this risk, by allowing you to forecast how long you will use your new investment without being stuck to the bitter end if the market changes and new products come along. You can change your deal if that happens. You can, for example, take out a three year lease on some kit and change it after two years. You’ll have to have appropriate terms, and there may be a cost, but you will be able to make rational choices on cost and service quality, getting ‘technology refresh’ rather than having to stare balefully at a machine or software edition that you would like to donate to the Science Museum. You can access our industry’s re-marketing expertise, to ensure that you re-finance systems, or finance new systems, at appropriate times.

Inefficient use
More generally, there are asset management advantages to financing rather than buying an asset. If you purchase an asset, your organisation will become responsible for its life cycle management. We’re all familiar with assets that are bought and held for too long, producing inefficiencies in the organisation that uses them. The machine tool rusting in an engineering company used to be a symbol of the decline of British manufacturing, and you can bet the tool had been bought.
    
Finance providers will be in touch with you when they think you may wish to renew a class of assets, and help you through the renewal process. The finance provider will also take on responsibility for disposing of the asset, another specialised function you may see as a distraction from your core functions. As environmental regulation becomes stronger this is likely to become more important. The WEEE Regulation that has just come into force in the UK, for example, puts stringent conditions on disposing of IT at the end of its life.

Prospect of tailored services
It is important to be flexible about the management of risk. Increasingly asset finance providers will offer packages including the management of risks traditionally seen as in house monopolies. This means new kinds of contract, more precise service measures, closer collaboration between the finance provider and the customer. It offers the prospect of a service much more tailored to your organisation’s requirements, with your own role strategic and managerial.
    
I hope I’ve said enough to make asset finance an option at least worth considering. It won’t suit every case and every Trust, but it has attractions that, as financial pressures bite deeper into the NHS, will look increasingly attractive. I suggest you show around and talk to some providers. You can read a list of FLA Members a www.fla.org.uk .

For more information
Address: 2nd Floor Imperial House
15-19 Kingsway
London WC2B 6UN
Phone: 020 7836 6511
Fax: 020 7420 9600
Email: info@fla.org.uk

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