Capital ideas

The NHS in England has been selling off its surplus land and buildings for decades, largely in a piecemeal fashion. But the continuing bite of austerity, the Carter efficiency and productivity review and moves to remodel care pathways have given it fresh impetus. And, after years of nudging the service to sell surplus estate, the Department of Health and Social Care will now incentivise disposals.

The health service is one of the largest landowners in the UK. The Carter review says reducing unwarranted variation in estates use could save the NHS £1bn a year. By April 2020, all trusts should have a maximum of 2.5% unoccupied or under-used space, it said.

As well as reducing revenue costs, selling off surplus property can release capital to reinvest in the buildings and equipment the NHS will need as it moves care out of hospitals and into community settings.

Last year, a Department review of the NHS estate, led by Sir Robert Naylor, looked at under-used or unoccupied property, concluding that the NHS could dispose of this surplus estate and gain up to £2.7bn in capital receipts – perhaps more if sold with the benefit of planning permission.

Responding to the report last month, the government set out its capital funding strategy. It agreed with many of the Naylor recommendations, though it believes the NHS could receive £3.3bn from disposals over the next five years.

The Naylor report estimated £10bn will be needed over the next five years to meet new capital needs and catch up with the maintenance backlog. If disposals raise £3.3bn, the balance of almost £7bn will be made up of £3.9bn announced in last year’s Budgets plus private capital.

The £3.5bn capital funding over five years announced in November’s Budget, plus more than £400m in the spring Budget last year, will be allocated to a number of programmes. These include £2.6bn to support sustainability and transformation partnership (STP) estates transformation plans; £700m for critical maintenance and to help trust turnaround plans; and £200m to support efficiency programmes.

With public funding already on the table, the spotlight has been thrown onto sale of unneeded property. The government is planning changes in the NHS capital framework to incentivise both the disposal of surplus assets and the use of receipts to support local service transformation. At the same time, NHS property owners are being urged to examine the possibility of redeveloping surplus estate to provide accommodation for staff.

STPs will have a major role to play. They should produce and agree a prioritised capital investment plan. The government says that STPs will only be allowed to access capital if estates transformation is given high priority at executive level; if they can demonstrate they are pursuing all the value for money opportunities they can to generate capital funds; and if they are reducing running costs by improving estates utilisation and tacking backlog maintenance.

STPs will have to develop plans to dispose of surplus land and have clear plans for reinvesting the receipts before they can access the £3.9bn of available public capital. STPs will have to agree local targets for disposals. The government says it wishes to maximise the surplus land disposal over the next two years and if sufficient progress is not made it will consider changing capital charges or other mechanisms. STPs will be required to submit revised estate plans, including disposals, during 2018/19 and before receiving central funding.

Though receipts from the sale of provider land or estate are generally retained by the trust, Naylor called for this policy to be clarified. The government response makes clear that NHS organisations will be allowed to retain capital receipts from land sales as long as the funds are reinvested into the NHS estate for local priorities and STP strategies.

King’s Fund chief analyst Siva Anandaciva (pictured) welcomes the additional funding in the last Budget. But he doubts whether the NHS will see the full £10bn promised this Parliament, and whether all parts of the country will benefit from the funding.

‘There is no doubt the Treasury retains a strong desire for the NHS to sell land it no longer needs or uses to provide savings for the taxpayer,’ he says. ‘But that desire has been there since at least the 2015 Comprehensive Spending Review and yet we have not seen significant increases in the sale of land – showing just how difficult it is to get NHS land sales completed quickly in a way that delivers real value for the taxpayer. If a large chunk of the NHS’s future capital funding depends on significant land sales, there are real doubts on whether we will actually see this funding materialise in the life of this Parliament.’

He questions whether the emphasis on selling land limits the NHS’s ability to pursue more creative land leasing options that might deliver better return in the long run.

Nuffield Trust senior fellow Helen Buckingham says there may be issues associated with selling surplus NHS estate. ‘If you go out to the market with the aim of selling £3bn of property, there is a risk you could depress property prices. The NHS needs to think carefully about how its assets are disposed of to get the best value. Part of doing that is thinking about the balance between maximising value and maximising public support for what you want to do. One thing that’s hinted at in the Naylor review, and more strongly in the government response, is using some of the estate for housing for NHS staff.’

She suggests NHS bodies may get best value by retaining land or property, and redeveloping it in partnership with other public sector organisations as well as the private sector.

The government has declined to implement the Naylor recommendation that receipts from disposals be matched with an equivalent amount of public funding. This may be because some areas will benefit more from retaining receipts than others. The report said London STPs could realise 57% (more than £1bn) of the risk-adjusted potential receipts in the acute sector.

Ms Buckingham says the new Strategic Property Board, which will oversee delivery of the Naylor recommendations, could be important in joining up the work of national bodies. And she believes the potential disparity in capital receipts could be one of the first things the board will examine. ‘It seems unfair that due to an accident of history either you don’t have assets to sell or you have assets that will not generate receipts of the level you need.’

Mr Anandaciva insists there must be a clear strategy on how funding will be distributed. ‘On the one hand you might allow areas that can sell surplus land to use that as their primary means of raising capital. This would allow parts
of the country without that option to have greater calls on public or private funding. But it will be more complicated than that as all these sources of funding come with different risks and different likelihoods of materialising – all it would take is for a few private deals or land sales to fall through before the clamour for public funding swamps the available amounts the Treasury has set aside over the next five years.’

Bridging arrangements

The government says trusts often postpone sales until they need the funds. To speed up the delivery of capital schemes, the government will introduce new bridging arrangements, allowing trusts to ‘bank’ receipts with the Department, and then draw them back, with interest, when needed to fund agreed STP priorities.

While this could create a useful pool of funds that the Department can then distribute to capital schemes that are ready to go – much like a bank uses customer savings to lend to others – experts question the government’s belief that trusts hold back sales. The property market blows hot and cold, making it difficult for trusts to predict whether their surplus land or buildings will sell at a time of their choosing for the amount they expect, they say. And, holding onto a property without marking it for sale risks falling foul of accounting rules that would force a revaluation – potentially reducing the paper ‘profit’.

The government says it will scrap rules that require trusts to pay half the profits from the sale of former primary care trust estate to the Department. It acknowledges this discouraged disposal – the change applies to all sales requiring these overage payments since 1 April 2017.

The third strand of funding – private finance – could prove problematic. Though it did not reach an overall value-for-money conclusion, a recent National Audit Office report on the private finance initiative (PFI) and PF2 found no evidence that privately financed buildings led to greater operational efficiency. There were benefits – being off-balance sheet in government accounts, potentially higher maintenance standards and bringing capital investment when funding is limited – but the NAO said some costs were higher and the deals reduced trusts’ flexibility on the use of buildings.

However, ministers believe private funding, through LIFT (Local Investment Finance Trust), PF2 and other public-private partnerships, has a role to play in providing an alternative source of capital. It points in particular to the part played by LIFT schemes in building primary care facilities – over the last 14 years, LIFT has raised £2.5bn for capital investment, secured with £100m of public sector investment.

Though some commentators doubt whether significant amounts of private funding will be found, Ms Buckingham sees a role for private finance. ‘Whether the £10bn figure for capital need is accurate or not,
it’s clear the requirement will be in excess of what the government can provide,’ she says.

‘The big challenge for the NHS is not access to private finance, but being able to service the revenue costs whatever form the finance takes.’

She warns the Treasury must increase the capital departmental expenditure limit (CDEL) in line with the amount of private finance attracted by the NHS or it risks restraining the available capital.

The health service needs capital funding to transform services and, although the government has allocated some funding, there are questions over how the service will find the full amount required.