Joint Capital Resource Plan

June 2023

1. Introduction

1.1. Source of funding – principles

The sources of capital funding are primarily ‘operating capital’ and ‘public dividend capital’ (‘PDC’).

Operating capital is determined by a national formula and based on levels of depreciation and backlog maintenance adjusted for system prior year surpluses. Operating capital is notified at a system level, and it is for systems to decide how that operating capital envelope is used.  Systems cannot exceed their operating capital envelope in a given financial year and cannot roll forward any underspend. Operating capital is funded through depreciation (i.e., cash held at organisational level).

PDC is driven by national priorities (e.g., currently diagnostics, elective recovery and IT) and is awarded to systems on a targeted, project-specific basis.  PDC is funded through additional cash, but a cost of borrowing is applied to any PDC awarded.

1.2. Capital Plan 2023/24

The total current planned capital expenditure for Surrey Heartlands Health and Care Partnership (‘SHICS’) in 2023/24 is £122.2m.  This is split by funding type between operating capital of £81.5m (including a £1.7m ICB allocation for GP IT) plus confirmed PDC of £40.7m.  Key areas of spend by programme in 20223/24 are shown in figure 1.

Figure 1: SHICS capital spend by programme 2023/24

• Surgery build (RSH) £16.0m (13%)
• CDC Diagnostics £12.2m (10%)
• Elective Centre (ASPH) £9.5m (8%)
• ACU Unit £22.0m (18%)
• Medical Equipment £10.4m (8%)
• IT £11.6m (10%)
• Estates incl GPIT £40.5m (33%)

The four significant capital infrastructure projects in the 2023/24 plan are as follows:

1. Abraham Cowley Unit (ACU) is a 64-bed mental health hospital new build in North West Surrey owned by Surrey and Borders Mental Health Partnership Trust (‘SABP’). The total cost of the build is £59.0m of which £47.6m is met through national PDC money (‘Eradication of Dormitory Accommodation’ scheme) with the remainder being met through system operating capital. The build is due to complete early in 2024/25 with £22.0m planned to be spent in 2023/24.
2. Surgical Centre is an expansion of existing theatre capacity at Royal Surrey Hospital (‘RSH’) designed to increase throughput and meet future elective surgical demand, particular relating to cancer.  The expansion of theatre capacity at RSH is separately funded through a bespoke adjustment to the operating capital envelope (total bespoke adjustment is £25m over two years). The surgery build is due to complete early in 2024/25 with £16.0m planned expenditure in 2023/24
3. The Elective Centre is an expansion of existing theatre capacity at Ashford and St Peters Hospital (‘ASPH’) designed to increase throughput and productivity for higher volume / lower complexity procedures and be an elective centre of excellence for SHICS. The build is funded through a regional PDC allocation (i.e., it is incremental to operating capital envelope) and is due to complete in 2023/24 with the total cost of £9.5m being incurred in 2023/24.
4. Community Diagnostic Centres (‘CDCs’ - various sites).  The system has been awarded £27.0m to fund three multi-year builds for community diagnostics hubs at Woking (North West Surrey), Milford (Guildford and Waverley) and Caterham Dene (East Surrey). Work on the hubs at Milford and Woking started in 2022/23 with Caterham Dean due to start in 2023/24.  The hubs are funded through PDC as part of a national programme to move diagnostic capacity away from acute hospital sites into community hubs.  The total expenditure on the three CDCs in 2023/24 is currently planned to be £8.1m across the three sites.

Each of the above programmes has an approved business case and an identified source of funding. In aggregate the above infrastructure builds represent £55.6m (45%) of the total planned capital spend in 2023/24.

The remaining £66.2m relates to asset replacement and ongoing estate investment at the five providers (‘Medical Equipment’, ‘Estates and Plant and Machinery’, and ‘IT’ in Figure 1). Of the total Estate and Plant and Machinery investment of £40.5m, £18.2m (45%) relates to safety-critical essential backlog maintenance.

Other investments include fleet investment South East Ambulance Trust (SECAMB) (£6.4m) and the redevelopment of the St Luke’s building at RSH (£3.5m). The majority of the medical equipment expenditure is straight replacement for existing equipment with the replacement of a radiology treatment machine (‘LINACS’) being the most significant.

1.3. Business Cases and bids in progress

Bids totalling £13.0m have been submitted to NHSE region as part of Urgent and Emergency Care (UEC) capacity expansion programme. These bids are pending a decision at 31 March 2023.

An indicative envelope of £14.0m has been allocated to SHICS for replacement endoscopy suites – business cases have been submitted against these indicative envelopes and these business cases are pending outcome at 31 March 2023.

Both the UEC and ‘Endoscopy Capital’ are incremental to the £122.2m plan (neither have been confirmed, and are therefore excluded from the plan, pending any award)

1.4. How does the 2023/24 Capital Plan compare to prior years?

The plan 2023/24 of £122.2m compares to prior year expenditure is shown in figure 2.

Figure 2 – SHICS total capital spend year-on-year

2020/21 (Act)                       PDC £56.6m         Operating Capital £67.5m
2021/22 (Act)                       PDC £58.4m         Operating Capital £95.9m
2022/23 (FOT)                     PDC £107.3m       Operating Capital £37.8m
2023/24 (Plan)                     PDC £81.5m         Operating Capital £40.6m

The year-on-year decrease is partly attributable to a change in the operating capital allocation formula at national level (described below) as well as the fact that not all PDC or regional allocations have been confirmed at the timing of presenting the 2023/24 plan.

2. Assumed Sources of Funding

2.1. Capital Envelope 2023/24

In 2023/24, excluding bespoke adjustments, SHICs operating capital envelope is £71.8m (including a £3.8m ‘performance allocation’ which is assumed for planning purposes).  On a like for like basis, this compares to £82.9m in 2022/23. The year-on-year decrease in envelope is largely attributable to the change in the national funding formula which means that any surplus adjustments to system operating capital envelopes are based on more recent financial performance – this change in approach is less favourable for SHICS when compared to the previous methodology.

The current operating capital funding assumption is shown in table 1.

Table 1: SHICS operating capital envelope

2023/24 SHICS Capital Allocation	£m
2023/24 Operating Capital Allocation	66,298
Indicative Prior Year Revenue	3,761
Total confirmed	70,059
ICB	1,744
Total confirmed including ICB	71,803
Bespoke Adjustments Anticipated in Plan
Double Crewed Ambulance (SECAMB)	2,852
Surgery Build (RSH)	10,000
Assumed funding (operating capital)	84,655

PDC is assumed in plans as confirmed by national or regional teams.

2.2. Allocation of Capital Envelope

As described above, operating capital is notified at a system level and it for systems to decide how that operating capital envelope is used. Prior to the 2023/24 planning round, the system operating capital envelope had been moulded around individual organisational plans – if the plan values exceeded the overall allowable ICS envelope, then decisions were made on a case-by-case basis to delay or reprofile programmes of work so that the system did not exceed the notified envelope in any given year.   

In the context of the demand on the operating capital envelope being significantly greater than available quantum for 2023/24, for the 2023/24 planning cycle it was agreed to allocate the capital to partner organisations based on depreciation and amortisation values, as being the best proxy for the cost of asset replacement and renewals. This would ensure that a proportion of operating capital was ringfenced for critical safety and asset replacement with any remaining element of the operating capital envelope being subject available for additional investment against a set of system prioritisation criteria.

The depreciation values for 2023/24 total £61.6m which means that ~90% of the total operating envelope is effectively ringfenced for providers to fund estate maintenance and replacement of medical equipment.  Once phasing adjustments for the surgical build at RSH are factored into the 2023/24 plan, an unallocated amount of £2.7m system capital remains. A process for prioritising this capital (or whether it held as contingency against the key programmes described above) is pending at 31 March 2023.

3. Ongoing scheme progression

3.1. ACU (SABP)

The rebuild of the Trusts 64 bed North West Surrey inpatient provision, which is part funded by the dormitory eradication project, has an estimated capital costs of £59.0m. The build for this project started in 2022/23 and is forecast for completion in early 2023/24. The build is progressing well towards forecast timelines, with slight delays reported in connection with site utilities potentially causing a six-week delay.

3.2. CDC

Capital for CDC developments (total £27.0m) was awarded in 2022/23 on a multi-year basis.  Primarily as a result of other operational pressures and as well as sourcing and procurement challenges, delays have been experienced on all CDC developments.  Whilst most of the ‘Year One’ (2022/23) capital expenditure has been incurred as originally planned some of the planned expenditure (at Milford and Woking) has slipped. Given any 2022/23 underspend cannot be rolled forward, there is a potential pressure on operating capital in 2023/24 and beyond as a result of the delay.

3.3. Surgery Build (RSH) and Elective Centre (ASPH)

Both programmes have been in the design phase in 2022/23. The majority of the ‘build’ activity for both programmes will take place in 2023/24.

4. Key Risks and Mitigations

4.1. Key infrastructure projects

The pressure on operating capital (and in particular the year-on-year reduction due to the change in allocation method) means that critical infrastructure programmes are delayed or stopped. Examples of programmes that have been delayed as a result of operating capital being oversubscribed include digital / IT programmes (SABP), ‘Make Ready Centres’ (SECAMB - some elements pushed back to 2025/26) and wider estate improvement programmes (all trusts)

The mitigation against this risk is a reliance on local organisational decision making to ensure that the capital available is deployed to best use (i.e., with patient and clinical safety as overriding)

4.2. Cost inflation

Cost inflation in the supply chain means that projects signed off or funded to a certain amount at a point in time have become more expensive or unaffordable due to higher prices and less favourable market conditions.

Costs of capital inflation are borne by the system.  Some projects have reduced in scope as a result of inflationary pressures (example Elective Centre at ASPH) and some projects have kept to original scope, but the additional cost has had to be funded through the operating capital envelope which is already stretched (E.g. ACU)

No additional funding is available therefore the mitigation is either a reduction in scope of the original programme or the scope is maintained and the available spend for other projects is reduced.

5. Prioritisation of Capital

5.1. System prioritisation process

Priority has been given to maintaining existing provider estate and infrastructure by allocating available system capital resource based on depreciation and amortisation costs at each partner organisation (described above – section ‘Assumed Sources of Funding’).  This approach leaves little or no capital available for system prioritisation or strategic investment (in 2023/24 £2.7m is left over).  SHICS is developing a process to assess and prioritise any available capital – the process was not yet finalised at 31 March 2023.