NHS Estates Report: what next?

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NHS Estates Report: what next?

Published 18 November 2019

NHS leaders and partners say that capital funding must come from a range of sources that provide efficient and flexible ways to maintain estates and plan for the future.

NHS leaders say that they want to play a significant role in developing a new capital and estates strategy for the NHS. Importantly, they say it needs to be a system in which the bane of most PFI schemes – that the NHS bears the crippling cost of underwriting private sector partners’ risk – is eliminated.

Richard Darch, Chief Executive at Archus, an advisory, investment and development company specialising in health and social care, is one of a number of NHS opinion formers who wants the NHS to be allowed to raise money from ‘Health muni-bonds’. These are an adaptation of local authority muni-bonds which were launched in 2017. “Working with local authorities it appears perfectly possible that a health muni-bond could be raised,” Darch says, “taking advantage of the expertise and structures that exist within the UK Municipal Bond Agency (which oversees local authority muni-bonds).

“Such an approach creates a financial discipline and engenders local ownership with constituent organisations in an STP geography, including local authorities, being jointly responsible for managing the repayments. Service transformation is easier to sell locally if people have visibility of the new developments that are required in their communities to support new service models, as well as some clarity on how they are to be funded.”

He calls for an end to the sale of NHS assets, so the land can be leveraged to generate regular income. “The Crown Estate has land and building assets of some £6 billion and generates a contribution to the exchequer of around £400 million a year. Of the £40 billion NHS estate, there is certainly a significant amount of surplus that could deliver an ongoing return if co-developed, rather than sold.

“Bond and leverage options could work in tandem,” he adds. “If you have an income stream being generated through land, that stream can help to capitalise a fund, or a bond, for other developments. If you look at how a lot of the large infrastructure funds operate, they will generate income from their assets which helps to capitalise other investments.”

PRIORITISATION

All contributors call for better strategic planning and horizon scanning at a local level, to ensure the right projects get priority, in line with the aims of the local STP and the wider NHS plan.

“Major projects will need to be prioritised as part of a national process,” says Darch, “and projects also prioritised locally within emerging Integrated Care Systems. This will create the visibility of a pipeline, and it is only when you have determined ‘what’ needs to be delivered that can you move on to the ‘how’ and the ‘who’.”

To put that prioritisation into context, Sir Robert gives the example of the minimum five-year timescale for building a new hospital: from planning, public consultation and design, to construction.

“There are 168 acute hospitals in the NHS. Assuming a lifespan of 50 years, we need at least three new starts each year, with more in the early years to catch up with the backlog. The historical annual allocation of £3.3 billion is less than half of what will be needed in the future if we are to keep up with international comparisons. Of course, it’s not just acute hospitals that need investment, we also have to redesign primary care and community services to meet the NHS LTP.”

Sir Robert also advocates a £10 billion capital budget to be funded with a third each from public funds, land sales and private finance. “Obviously the private third is now in question. I have argued that this could be found from pension funds and Lord Prior (the former Chair of NHS England) has suggested a £50 billion bond. These options need to be explored further.”

The capital settlement must be long term, he says, with regions being allocated indicative capital budgets. He also calls for an end to capital-to-revenue transfers, putting emphasis on aligning STP and estates strategies to match the goals of the LTP.

MORE FREEDOM

While he agrees there are “major bureaucratic barriers that trusts have to overcome to get their proposals considered and then executed”, Sir Robert says that on the other hand, “the centre criticises the poor quality of business cases prepared by trusts.

“I have argued that capital allocations should be regionalised with much greater devolution, but again the capacity and capability of trusts to develop these schemes has to be improved.” Price says that where appropriate trusts should set up estates management vehicles. He feels that Foundation Trusts must be allowed more freedom to “borrow, spend and deliver in line with what they have in their own financial envelope”.

He adds: “Allowing them to come back to the centre and say ‘our estate is crumbling around us and here is the investment we need to make, here is the business case that says why you should allow us to do that’.”

There is certainly the case to be made that some trusts with the capability and appetite to manage estates and developments across STP areas should be encouraged to do so.

However, Edwards cautions that the public accounting system doesn’t allow for total autonomy, as trusts are state-owned entities whose spending is part of the Public Sector Borrowing Requirement. He calls for the strategic view to deal with the massive geographical variation in the value of receipts from sales – a sale in central London, for example, would generate significantly more than a trust in north-east England. “There is a question of how far that profit should fall back to that one organisation.”

Spotswood is adamant that sources for NHS capital should come from public funds and joint ventures. “Organisations like AHH can generate between £5 million and £50 million for trusts, depending on how the land is used. This approach offers the public much better value and offers assurances to boards that organisations are not selling off the crown jewels. If we can combine the two, we can start to make some serious inroads into backlog maintenance, but also the provision of new facilities.”

Sir Robert’s suggestion in his 2016 report that a third of the required capital should come from private investment has seen little progress in the intervening years. The barrier to such investment appears to be the models that are used in letting land for NHS services.

Most clinical services leases are granted for 3-5 year terms with a break linked to the related service contract, to allow the service provider certainty that they will not have to pay the rent if they are not being paid to provide the service. As NHSPS have found, there will be little interest from investors in property with this kind of rental income stream. If the commissioner or the land-owning trust could guarantee the rent for 20 to 25 years, then this might open the door for more investment into clinical space.

We need to develop models that provide this kind of certainty to investors and allow NHS bodies to benefit from their covenant strength.

Click here to download ‘NHS Estates: Innovation and a sustainable future’ in full.

Authors

Anne Crofts

Anne Crofts

London - Walbrook

+44 (0)20 7894 6531

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