Income Generation – Charging and Trading

The challenge

The financial challenge to be faced by all public sector bodies is how to maintain services, and in some instances even increase them to meet increased demand, on the same or less money. One obvious response to reductions (in real terms at least) in the grant from Government, is to look for alternative sources of revenue. Leaving aside the politically unpalatable approach of raising the Council Tax, this means looking at what income the authority can generate from other sources, whether identifying additional areas where charges can be imposed or increased,  or looking to outright trading.

At present, the language from HM Treasury includes lots of aspirational statements largely directed at Central Government. It gives DfH and DCLG an excuse for cutting Block Grant further to take account of notional "efficiency savings" which HM Treasury believes that authorities should have been able to produce.

One area in which such potential savings have been identified is in shared services, in local authorities getting together to share anything from Chief Executives to Trading Standards Officers, evening out the workflow, avoiding duplication and increasing productivity. Where there are real savings available, financial cut-backs may be sufficient to push authorities into shared service projects. What is interesting is the way that shared services has become part of the mantra, with the Welsh Assembly Government having just given itself powers to direct individual local authorities to enter collaboration agreements for specified services, and DCLG being urged to follow suit.

But the practical experience of such shared services is one of fragility. In part, this is because local authority services are not standard, so each local authority will wish to secure the service level and delivery which it believes best suits its own area, requiring different provision for different authorities. So, unless Central Government is to over-ride local discretion to prescribe a universal service standard, such differences will remain. If this means that the promised savings are not delivered, shared services will continue to be vulnerable to local political differences.

Legal challenges and constraints

Ever since Parliament refused Charles the first the power to levy Ship Money without their approval, any form of charging or trading by a public authority has required express statutory authority. Such powers have been given only grudingly, where Parliament has been persauded that such charges are justified. The result is that both the NHS and local government have complex rules governing their ability to generate additional income.

For local authorities, the majority of core services such as domestic refuse collection must be provided free of charge. Individual statutes may have particular powers to charge, for example the power to charge for the use of Council leisure facilities. Some specific powers state that charges must not exceed the cost of providing the service, some exhort the providing authority to ensure that charges exceed cost, others provide that the providing authority may not charge any individual more than he or she can reasonably afford. Where there are no such specific charging powers, and where the authority is not required to provide the service, the authority may offer to provide such a discretionary service at a charge to the recipient. As a result, some local authorities have sought to define the minimum basic standard of services which the law requires them to provide, and then offer a menu of additional services which a local resident may choose to pay extra to receive. In addition, local authorities now have a power to undertake pure "trading" activities for profit, but have to do so through a company, to ensure that any profit is subject to tax on the same basis as a private sector enterprise.   

This approach of charging for anything over the statutory minimum service, which has been characterised as the "EasyJet" approach, is problematic where the legislation either fails to define the basic level of mandatory service or to define the authority's duty in relation to need (for example, the duty to provide a "comprehensive" library service or the duty to maintain a highway in a condition which is safe for the ordinary traffic which uses it). Many public protection services, such as Trading Standards, Child Care and Road Safety, are not amenable to such an approach. Less frequent refuse collection is directly reflected in increased fly-tipping. And where there can be genuine local choice, it can only be exercised collectively - for example, local communities may be prepared to pay for street lighting through the night, but cannot arrange that street lights are turned on as people approach them.

The NHS powers to charge are even more circumscribed, again arising only where Parliament expressly authorises such charges. Broadly speaking, all NHS bodies have a power to engage in commercial activities for the purpose of generating additional income, but not where it might get in the way of their core functions. There are a range of other specific constraints on what they can or cannot do for this purpose. NHS bodies do have the ability to form or invest in companies for the purposes of income generation, but will need specific DH consent to exercise the power (unless they are foundation trusts).

Foundation Trusts are subject to a "private patient income cap" - this means that they are contrained by the level of private patient income they received (as a percentage) in 2002/03. NHS bodies which have not yet become Foundation Trusts will still need to have regard to this cap. It is likely to be modified in the next Parliament, but it is not yet clear what constrains will remain. Conservative policy suggests a significantly greater freedom than would be available if the Labour Party were returned, and the Liberal Democrats seem to share the Labour party's more restrictive approach on this point. We can but hope that any change will address the uncertainty inherent in the current language around what is to be regarded as income derived from private patients. There is also some evidence that although the development of private patient work may give volume, NHS bodies are not good at the accounting to enable them to tell if the additional work actually produces a profit.

Accent on finding disposable assets.

Public authorities, and particularly local authorities are major landowners, frequently the largest landowners in their areas. So disposal of surplus property is seen as an easy means of generating extra cash. But the truth is that authorities have been selling off spare property for a couple of decades now, and only the difficult sites remain. Developers and chartered surveyors may jealously eye the fire station on Euston Road, and suggest that fire stations should be re-located to peripheral motoways and ringroads, but you cannot get the first fire appliance to a City Centre incident in four minutes, and the second appliance in eight minutes if they start from the M25. When Government has previously tried to force local authorities to dispose of land, as when the old Welsh Office created the Development Commission, staffed by private developers and agents, to root through local authority land records and recommend land which the Minister would order authorities to sell, it turned out that local authority land was either operational (i.e. covered in Council Houses and schools), commercial (i.e. business estates producing rents), useless (largely derelict land requiring expensive restoration) or bought for a specific purpose or project. The NHS has been through several similar exercises to limit the amount of unused estate it holds.

All public bodies should keep their land holdings under constant review, and seek to replace older, energy-hungry properties with newer facilities built to higher sustainability specifications, keeping pace with new residential and commercial development to provide services where services are required and accessible. Public access to services can be improved where local authorities, NHS bodies and central government services co-operate to provide shared facilities where service users can access a wider range of services, but such service improvements may come at a price, and should not be expected to produce huge cost savings.

Scrutiny Committees

There is a huge array of different public agencies which operate within each area, often providing services which ovelap or impact on each other, and frequently with little contact or co-ordination. So, when the Highway authority reduces street lighting, no-one calculates the extra cost to the Police from increased crime, or to the NHS Trust from more road accidents. So there is a lot of sense in the idea of identifying and seeking to co-ordinate the activities of the various public agencies, and local authorities are best placed to undertake the function through their existing Scrutiny function.

However, it does require a step-change in direction and resourcing, for Councillors to develop a real competence in the services of these various agencies, if their advice and recommendations are to carry any weight. One particular inhibitor is that Scrutiny Committees were created to hold the local authority's Executive to account, and so members of the Executive are precluded from being members of the Scrutiny Committee. This means that the more experienced managerial Councillors who form the Executive are limited in the role that they can play in such Scrutiny-based co-ordination of public agencies. But if such Executive members were admitted as members of Scrutiny Committees, as was mooted in a recent Consultation Paper from DCLG, such Committees would be disabled in holding their Executives to account.

Private patient care

Foundation Trusts will either, therefore, want to structure their private income so that they are not caught by the cap - which is becoming more difficult at present, wait, or look to income generation outside healthcare. One possible area which has not generally been well developed in the NHS is the scope to harness the inventiveness and entrepreneurial spirit of some of the technical and clinical staff, often working in collaboration with the local university to joint venture technical innovation.

Commissioners have a different set of problems; leaving aside PCT provider arms - see below - they have few marketable skills, and in any event the impact of their External Financing Limit may constrain their ability to embark on significant income generation.

Provider arms may have the best opportunities in the sense that they are unlikely to be constrained by the private patient cap. (Community Foundation Trusts do not seem currently to be the flavour of the month!) Whilst there are potential issues around the market for their skills there may well be possibilities in co-operation with the LA sector using the "Essex model" a company formed to sell services in the market for domiciliary care where patients have individual budgets.

The other income generation activity which the NHS can exploit is the back office services market where the NHS is already relatively advanced in shared services. Most operate on a co-operative basis but they are increasingly looking to bid for work outside their core area on a straight commercial basis.  For the NHS, the local authority market may be attractive, but they may also want to do this as a joint venture with a relevant local authority.

One final issue for NHS bodies is the extent to which charitable funds can be used for funding services or facilities. The scale of charitable donations to hospitals is very considerable, but the Charity Commission is keen to preserve the distinction between charitable and Treasury-funded activity. Any attempt to divert charitable funds to main-stream service provision is likely to reduce the level of charitable donations. But it is worth reminding Charitable Funds Committee that such funds are given to be applied for individual charity rather than just to be accumulated.   

Bevan Brittan can help….

We believe we are ideally placed to help all public sector bodies in meeting this challenge from our extensive knowledge of the potential constraints and the ways in which schemes can be structured so as to avoid the difficulties which can arise.  Our reach across both NHS and local government enables us to identify good practice across the sectors to share with you and to identify areas where co-ordinated planning and responses may be the best way forward.