In their Next Steps on the NHS Five Year Forward View document published earlier this year, NHS England set out how the multiple organisations that make up the NHS will work together to transform services. At the heart of this are the bold plans being developed in many local areas to change services, reconfigure hospitals and develop primary care.
But doing this effectively will mean investment in – or reform of – NHS property, as new services are developed to relieve pressure on hospitals and bring care closer to people’s homes. This is problematic for two main reasons.
First, many areas of the NHS have a major problem with backlog maintenance, meaning urgent repairs are needed to prevent injury and maintain safety. The cost of the high-risk backlog facing NHS organisations has increased from £378.5 million in 2013/14 to £962.5 million in 2016/17.
Second, there is very little public sector capital available for the NHS. It is a complex picture, but we know a large amount is already spoken for. What’s more, the NHS has been raiding its overall capital budget for some years now to transfer huge sums of money into revenue costs, masking the overall size of provider deficits. In 2016/17, £1.2 billion of spending was transferred from the Department for Health’s capital budget to its revenue budget.
Faced with these challenges, an important question for policy-makers is how to supplement the NHS’s capital resources in a cost-effective, straightforward way that avoids some of the pitfalls of previous attempts like the Private Finance Initiative (such as unfavourable financing deals and rigid contracts). This is not easy – enhancing NHS capital needs to comply with the complex rules about what constitutes a call on the Department of Health’s capital expenditure limit. Furthermore, some creative thinking is needed to ensure that capital tied up in poorly used or vacant estate is not simply sold off but made to work better for the NHS as a whole.
The current situation
There is a great deal of capital tied up in poorly used or vacant estate. Estimates vary, but in 2013 Monitor (now NHS Improvement) estimated that the opportunity of land disposal was at £7.5 billion. Analysis from the King’s Fund and the Health Foundation found that in 2014 just over 650 hectares of trust and foundation trust estate (around 910 football pitches) was surplus or potentially surplus, and suggested that around £700 million could be released from land that had already been declared surplus.
While there is a temptation to simply sell it and realise the gain, this is potentially short-sighted and could mean that valuable opportunities to create income streams, reconfigure services or support new methods for mobilising capital for other changes are missed. Nonetheless, there are some key issues that stand in the way of finding solutions.
Barriers to finding solutions
Public expenditure rules
The rules of NHS finances and public expenditure mean that many ways of generating capital, such as land sales and some types of external finance, risk being counted as part of the NHS capital budget. In these cases, the Treasury simply net these off against the Department of Health capital budget, meaning NHS organisations are not rewarded for taking control of their estate. This budget already makes some assumptions about the level of land sales.
Fragmentation of ownership
Responsibility for the estate sits in over 250 individual NHS organisations and a very large number of small primary care businesses. One of the recommendations of the Naylor review was to establish a powerful new NHS Property Board – bringing Community Health Partnerships and NHS Property Services (NHSPS) together – to help address this.
Lord Carter’s review of efficiency in hospitals observed significant variation in running costs across acute trusts, with the most expensive trusts spending around 3.8 times more on running costs per square metre than the least expensive trusts. This means that if clinical and administrative services can be delivered well using less space, there are financial benefits to the organisation.
The current ownership arrangements mean that there is no mechanism or incentive for trusts with additional space to provide that estate (or the funding from it) to other trusts with significant infrastructure needs. The system by which space vacated by tenants of NHSPS is frequently charged back to the CCG removes much of the incentive to rationalise space, and there is a transactional cost for what is just a complex circular flow of money.
Lack of skills and expertise
There is very little property development expertise anywhere in the NHS, and the ability to think strategically about how to maximise value has been removed over the years at both national and local level. The NHS has a history of poor property deals, for example, where private sector developers have taken almost all of the gain from acquiring planning permission for alternative use and redevelopment.
PFI and LIFT
The Private Finance Initiative (PFI) and its primary care equivalent, the Local Improvement Finance Trust Initiative (LIFT), did provide new buildings, some of which are well designed. But many lack flexibility and in some cases have high ongoing costs to the trust. There is some debate about how far this high cost reflects the upkeep of the building, and so it can be argued that this comparison is unfair to traditional NHS buildings that are often poorly maintained.
The facilities management and some other costs bundled into PFI and LIFT deals have also been criticised. In 2011, the National Audit Office found that “the long-term service commitments of PFI contracts and the trusts’ approach to managing the contracts has limited trusts’ ability to make efficiency savings from certain areas of the contract, and to drive continuous service improvement.”
The PFI brand is certainly damaged and as a result there is a wish to avoid PFI similar deals, even though, in the right context, managed well and carefully thought through, they can be successful. As my colleague John Appleby pointed out recently, the options for buying out PFI are very limited and this solution is fraught with complexity.
Business case and approval process
There has been a huge increase in the complexity of the business case requirements and the approval process undertaken by NHS England and NHS Improvement, with anything over £15 million now required to be seen by both NHS Improvement and the Department of Health. When they were first developed, the strategic outline case was expected to consist of a few pages. Documents now run to hundreds of pages and additional layers of approval and process have also been added over time, making the entire process burdensome and bureaucratic. It is not clear these have added much additional value.
The multiple layers of approval often take a very long time and decisions are often made by people with limited knowledge and expertise. They are also vulnerable to changes in personnel and are premised on a low trust model. There may be additional approvals where less conventional financing is used. Boards also have a role to play in the approval process, but given the complexity of the area, it is unclear how much expertise board members have to make informed decisions. Risk aversion and the avoidance of decision-making seem to be common.
These obstacles have led to a trend of structuring deals to be small enough or simple enough to avoid these approval processes resulting in sub-optimal and less cost-effective schemes.
How revenue is distributed
Every trust’s revenue is determined in the same or a similar manner through the tariff. The original rationale for this was to require each NHS trust to bear the consequences of its funding decisions, thereby encouraging them to optimise funding costs. However, a trust with a PFI project or a third-party development lease will have a markedly different cost of capital from one fortunate enough to access subsidised capital, either through ITFF (Independent Trust Financing Facility) debt or through public dividend capital. There is no adjustment for this differential in funding cost, which can spur a vicious circle where trusts are burdened by past decisions.
Apart from capital rationing required by a limited capital budget, trusts can also suffer from a ‘vicious cycle of affordability’ whereby operational efficiency is compromised, resulting in difficulty in attracting both clinical and managerial staff, for example. This can lead to piecemeal and un-strategic approaches.
Solutions and remaining issues
The recommendations of the Naylor review directly address some, but by no means all, of the issues identified above, in particular those around capability and leadership.
Capability and capacity
There is a need for investment in skills and capability. This is a core theme in the Naylor review, with half of its recommendations focused on this area. The national level needs to be strengthened and its skills improved. Again, the creation of the NHS Property Board will help but there also needs to be more local expertise. Local or STP-level capital planning expertise needs development as much of this has been lost in the last 20 years.
Naylor also recognises that cumbersome approval mechanisms need to be simplified and those responsible for them need to have the appropriate level of expertise and a clear remit. Procurement processes and expertise also require improvement.
Surplus property and the use of assets
Naylor recommends that “STPs should develop affordable estates and infrastructure plans, with an associated capital strategy”, but does not go into significant detail on the range of approaches that might achieve this, other than discuss the potential opportunity from land sales, including the ability to build more homes.
The NHS undoubtedly needs access to the receipts from the sale of surplus property where appropriate. But a more expert and commercial property function could also find more creative ways of using the whole property portfolio. This would help turn property into income in ways that mean the NHS could effectively have facilities provided at very low cost and subsidised by income streams from rental income on mixed-use developments.
There would be additional benefits for users and providers where these combine social care, health care, education and housing services. The opportunities to create income from unused space above many of the NHS’s single or two-story buildings are significant, and it may be possible to have clinical space and key worker housing virtually for free, and in some cases also have an income as well.
Different approaches to developing the estate
Internationally there is a move away from whole new hospital builds to campus-style developments delivered over time as care models change. New facilities can be delivered in a different way. Diagnostic equipment suppliers would be happy to engage in providing the building to ‘wrap around’ their technology and enter into a fully serviced lease – there are plenty of property developers and funds that will provide office accommodation on a simple lease.
Surplus land can be developed for residential purposes and the building of a step-down facility can be included in the levy to the residential developer. This would leave clean new-build facilities that could adopt a PFI/PF2 model or be funded by public capital if available.
Local government and local development
NHS organisations working more closely with local government offers them the opportunity to tap into more expertise, leading to realising better returns on sales, through getting planning permission gains prior to sale or getting better terms. This in turn can improve the opportunities for better estate utilisation and integration across the whole public sector.
Linking property and service planning to broader local economic development and housing improvements also offers the opportunity to gain access to bond finance and other wider sources of capital funding. Local authorities have access to bodies that can consolidate schemes to make them more attractive to investors.
Creating local property funds that could manage a portfolio of property more flexibly could also unlock more redundant property, allow for savings from moving to more efficient and appropriate buildings, and be used to back bond issues.
The Localism Act of 2011 has helped promote a shift of power from the centre to local communities through five new combined authorities, local enterprise partnerships (LEPs) and city deals. There are a growing number of devolution deals that have given local authorities more levers to grow local economies by delegating responsibility for transportation, housing, skill development and training and, in some cases, health. These offer a set of new opportunities and the NHS needs to be more able to respond to them.
One of the difficulties for the bodies driving these developments locally is knowing who to engage with in the NHS. The evolution of STPs into ‘sustainability and transformation partnerships’, together with the expectation set out by Naylor that each STP should develop an affordable estates and infrastructure plan and capital strategy, offers an opportunity to address this.
Other funding approaches
New pools of capital, in addition to national funding or local land sales, are needed to support change. There are a number of property funds that can provide non-complex buildings such as office blocks, step-down facilities and even community and primary care facilities (most new-build primary care buildings are still funded and developed in this way). NHSPS is now charging commercial rent and could start taking occupancy risk – if it sells underused or unused property it could generate funds that could then be used to deliver new facilities. This could be managed within Property Services and outside of NHS capital processes to create the role of an active landlord, at least for primary care estate.
An important principle is that accounting treatments should not dictate funding approaches. It would be foolish and short-sighted to pursue poor value solutions simply because they can be engineered to be classified as off-balance sheet or outside the PFI process.
There is more to do to improve the incentives to local organisations to play their part in the wider health system. However, there is no easy way to do this: crude methods such as changing the cost of capital are not likely to be effective and may create unintended consequences.
The question of how to incentivise the pooling of the benefits of sales to benefit the wider system requires further attention. Proposals such as pooling the ownership and managing all NHS property would require primary legislation, and are explicitly not recommended by the Naylor review for that reason, and due to the risk of further distancing clinicians from engaging with estate strategies as enablers of quality care.
The most significant incentive for change recommended by Naylor is a ‘two-for-one’ offer where proceeds of local land sales are match-funded through national allocations. It is not clear how systems with few land sale opportunities but high capital needs would be supported, although there is recognition of the need to do so. Naylor also suggests that the development of accountable care organisations would at least drive local pooling of asset ownership.
It is clear that property is not just a quick source of cash – and indeed may not even be a source of cash at all – if there is not better expertise brought to bear within the NHS. Developing more capability and fostering more imaginative approaches to raising money and using the estate remain key priorities. Building or acquiring the expertise to do this is essential.
Edwards, N. (2017) "Capital planning and property in the NHS: lost opportunities" Nuffield Trust comment www.nuffieldtrust.org.uk/news-item/capital-planning-and-property-in-the-nhs-lost-opportunities