EXECUTIVE SUMMARY

2. In addition to the funding set aside for health and disability services, DHBs will also have substantial assets and liabilities to manage - those assets and liabilities that will be transferred from the Hospital and Health Services (HHSs) and any new capital investments that they may make. Because DHBs will have a wider role and interests than HHSs, their capital investment objectives are also likely to be broader.

3. In general, DHBs should be able to undertake investments in new fixed assets (such as facilities and equipment), make provisions for this and raise finance, and manage existing assets including working capital maintain. This means that there need to be two key disciplines:
   1. DHBs must ensure that internal funding arrangements with their own provider arms are fully costed and sustainable

   2. DHBs must have the accountabilities and incentives to aim for the organisational and financial success (including financial viability) of their provider arms.

4. For major reinvestment and redevelopments, DHBs are likely to need additional Crown support, when those investments are in excess of what can be undertaken from their normal cash flows and financial resources. The nature of major capital investment is such that the provision made by DHBs (or HHSs in the past) over time - accrued depreciation - is unlikely to give access to sufficient finances to replace all existing assets. This will be particularly true for DHBs that have inherited old assets that are depreciated on the basis of historical cost. Population growth and technological changes may also have an impact on the required rate and level of investment. I therefore recommend that Crown capital finance be made available to DHBs.

5. The Crown, as the owner of DHBs, will face residual risks from DHB investment and other balance sheet decisions. There is an inherent 'tension' between the need to manage these risks and the Government's aim to move DHBs to a state of autonomy. I therefore recommend that DHBs be given a set of accountabilities and incentives that promote good capital investment planning, good balance sheet management (including achievement of agreed financial targets), which also involves Ministers through approving annual and strategic plans, monitoring performance and in making key capital investment decisions by approving business cases for investments requiring the Crown's support and for all other "significant" capital investments.

6. the Minister of Finance's approval should continue to be sought, in addition to that of the Minister of Health, for capital investment and financing decisions by the Crown. The mechanisms for implementing this approval will be considered as a part of the report back on the role of the Minister of Finance. The Government, as owner of the DHBs, should have the right to withdraw capital (e.g. reduce net assets by withdrawing funds).

7. DHBs should also be required to pay a capital charge on their "net assets" (i.e. on the investment that NZ taxpayers make in DHBs, or 'Crown equity') at a rate that is reviewed annually and in accordance with rules established in the Schedule to the Act. The capital charge makes sure that:
   1. DHBs recognise the cost of capital in their investment and financing decisions. There is a cost to the Government in providing capital to DHBs because it must either borrow or raise taxes to provide the equity

   2. DHBs do not have an incentive to favour their own provider-arm rather than using other community providers, such as Maori provider organisations. If Crown capital were to be 'free' to DHBs, the DHBs' providers would appear to have lower costs. It would be costly for the Crown to compensate community providers to place them on an equivalent basis

   3. DHBs do not over-build hospital capacity, or over-invest in assets. That risk is greater if Crown capital were to be 'free'. While it is recommended the Government support significant investments, Government is unlikely to have the capacity or level of information to review in detail all capital plans to fully mitigate the risk of over investment. The capital charge also encourages the wise use of assets and disposal of surplus assets.

   4. 'free capital' is not used to fund any operating deficits, which would remove much of the sanctions if DHBs run deficits

8. Capital charges are currently applied elsewhere in the public sector for similar reasons.

9. To give effect to Cabinet's decision that assets and liabilities be transferred to DHBs [CAB (00) M 2/4 refers] I recommend that Hospital and Health Service (HHS) assets and liabilities be transferred on the basis of audited financial statements. Further advice will be provided on the transfer of HHS debts. Some DHB boards might question whether the book values at which assets are transferred represents fair value. However, HHS boards are required to ensure that their balance sheets reflect fair value on a going-concern basis.

10. Therefore asset revaluation (and consequent balance sheet refinancing) should only be undertaken if necessary on a case-by-case basis for DHBs if 'outlier' HHSs have significant valuation issues. This avoids the very substantial costs and time of a full sector revaluation that is unlikely to lead to better information. Most of HFA's working capital may also need to be transferred to allow DHBs to manage their funding responsibility and officials will undertake work to determine this as part of the DHB establishment project.

BACKGROUND

11. Cabinet has decided that:
    1. current Hospital and Health Services, their assets, liabilities and services will be part of the District Health Boards (DHBs)

    2. DHBs will exercise prudent management of Crown-owned assets

    3. DHBs will be established as statutory corporations [CAB (00) M 2/4 and M11/1a(3) refer].

The Crown's Role in Capital Investment as the Owner of DHBs

12. The Crown has ultimate ownership of a significant investment in the assets that will be transferred from the HHSs. The continuation of this ownership interest represents a long-term commitment to public health provision that means the Crown retains certain responsibilities and obligations, including the need to ensure DHBs have adequate financial resources for capital investment.

NEED AND SCOPE FOR DHBs TO MAKE CAPITAL INVESTMENTS

13. DHBs will need to be empowered in legislation to invest in capital, to borrow, and undertake other balance sheet management functions for the effective and efficient funding and provision of public health and disability support services.

14. What DHBs invest in will be influenced by what services DHBs wish to provide and/or fund, and this is related to the Government's strategies for health and disability as well as local strategies, such as initiatives to better integrate primary and secondary/tertiary services. With DHBs, therefore, the scope of investment may become broader than that of HHSs, creating additional demands for capital investment finance.

15. In addition, some DHBs will make capital investments to provide regional or tertiary services and capacity. DHB funding arrangements and accountabilities must ensure that DHBs do not build too much or too little capacity.

16. DHB boards will be accountable for DHB investment and asset management decisions. But such decisions will also pose 'residual risks' to the Crown. This paper sets out a framework that gives DHBs accountabilities and incentives to minimise the risks in a manner that gives DHBs autonomy, but also ensures that Ministers' support is obtained for key decisions.

17. As part of its overall health sector objectives the Government will expect DHBs to ensure that
    1. capital investment is consistent with the Government's strategic objectives and policies for public health services provision

    2. investment planning is responsive to evolving population needs and changing service delivery expectations and priorities

    3. capital investment gives the highest benefits (especially improved health services and sustainability), recognising the cost of capital

    4. capital asset capability and capacity meet the requirements of health and disability support services funded through DHBs within budget

    5. asset management policies and strategies are consistent with Government expectations

    6. compliance with nationwide quality and clinical safety standards and legislative requirements

    7. services have the flexibility and capacity to meet seasonal needs and an ability to respond to 'crisis' requirements

    8. there is an optimal balance between minimising the fiscal risks to the Crown (as owner) and meeting community needs and circumstances.

Footnote(s):

1

Capital investments are defined to include the building of new health facilities and hospitals, upgrading of facilities, investment in information technology and investment in equipment and plant as required to deliver health and disability services.