By Claire O’Shaughnessy and James Millar

Deloitte-uk-nhs-transform-its-estate

The NHS is transforming how it delivers its services, but one key aspect to enabling this is the need for significant investment in its Estate. According to Sir Robert Naylor’s report last year, the NHS Estate ranges from world class to poorly utilised and not fit for purpose.1 Moreover, Sir Robert estimated that capital requirements could amount to around £10bn. This investment cannot be delivered through public sector funding alone. However, the Chancellor’s announcement in Budget 2018 that there will be no more Private Finance Initiative (PFI)/Private Finance 2 (PF2) Projects, this cuts off a historically well used option for enabling capital investment in the NHS.2 So what next? There are a myriad of potential solutions, and it will require a combination of traditional and innovative approaches to ensure Estates play their part in the transformation of the NHS.

What is Capital Departmental Expenditure Limit (CDEL), and why is it such a problem?

Over the last few years we have been approached by an increasing number of NHS organisations who think they have identified a perfect solution to fund capital investment into the NHS. In reality, there has been (and still is) no shortage of private sector and third party interest in investing in the NHS, whether it be funding from a local authority or through a joint venture. It’s no wonder we often feel like the ‘prophet of doom’ when we ask the question ‘have you considered the CDEL implications?’

The Capital Departmental Expenditure Limit (CDEL) is the amount the Department of Health and Social Care (DHSC) has budgeted for in relation to Capital Spend. The key issue that many do not initially understand with CDEL is it’s not the source of finance that’s important, it’s how it is spent. For example, a Foundation Trust borrowing money from a local authority or the private sector (as it is entitled to do) and then spending on a Capital investment will count against DHSC CDEL.

PFI/PF2 projects were the key alternative approach to delivering major capital investment to the NHS throughout the 90’s and 00’s without impacting on the level of CDEL available for other projects.

So how are we helping clients realise their capital investment plans? First and foremost, we ask our clients to be clear on what they want to achieve in regards to their strategy before deciding how to fund and deliver it.

A clear and cohesive estates strategy

Being clear as to how your clinical and non-clinical service provision will be delivered should be the first priority, and developing an estates strategy that enables the delivery of this should follow. STPs are becoming an increasingly important locus for estates planning: allowing a system level perspective, facilitating discussion about the connectivity between the primary / community and acute strategies, and bringing together commissioners, providers, property companies and local authorities.

Waves of the £2.6bn of capital funding announced in last year’s Budget are being allocated through STPs, and we are seeing this promote more collaboration around STP estates strategies. However, levels of maturity are mixed, and financial incentives often discourage co-operation. We also find some partnerships have a collective strategy, and others are no more than the sum of their parts.

Funding and Delivery Models

The use of mixed funding solutions is going to be crucial to the transformation of the NHS Estate. Better use of surplus land, the proposed Regional Health Infrastructure Companies (‘RHIC’)3, joint venture partnerships and working more closely with other areas of the public and the third sectors will all need to play a part to enable access to additional funding resources.

The figure below identifies funding routes and the potential delivery routes for capital projects, with some key questions to consider before deciding which route to take.

   Deloitte-uk-funding-and-delivery-models

Traditional public sector funding and delivery approach

The use of central funding, surplus cash, charitable donations and land sale receipts will always be the cheapest source of finance for NHS Capital investment. Making use of existing procurement routes will in turn be the quickest delivery route.

NHS organisations need to consider their ability to deliver larger, more complex projects or programmes and whether benefits can be achieved by working with the private sector. They should also consider how much risk and control they are willing to transfer. For example, the commercial viability of land disposal for Homes for NHS Staff will be impacted by the level of demand risk transferred to the purchaser (as could be the accounting treatment of the transaction).

If CDEL is an issue, organisations will need to consider a different solution, although part funding a Project through cash, donations or land can still be used to reduce the overall cost of finance in addition to reducing the CDEL impact.

PFI/PF2 is dead, long live PF3?

Much was made of the Chancellor’s announcement that PFI/PF2 would no longer be used going forward. In actual fact, it has in recent years become a very small part of how infrastructure is delivered in this country and in particular in the health sector.

Much less was made of the Chancellor’s comments that he ‘remains committed to the use of public-private partnership where it delivers value for the taxpayer’ – this does indicate tacit recognition that the public sector will not be able to deliver all its infrastructure on its own.

Alternative structures already exist, such as the Local Improvement Finance Trusts (‘LIFT’), Non-Profit Distributing model (‘NPD’) and the Hub model. The latest model currently awaiting formal sign off from DHSC and HM Treasury is the Regional Infrastructure Health Companies (‘RHIC’) model.

A key attraction to these alternative structures is they potentially offer an opportunity to deliver capital investment without having a CDEL impact. However, proving value for money still remains key.

The third sector

The public has an affinity for the NHS, and there are in excess of 250 NHS Charities which hold assets of around £1 billion. Numerous other health related charities have even larger pots of funds. Historically, charities have been a source of funding for equipment purchases and, in some instances, have provided contributions to larger capital investments. There are now opportunities to consider whether charitable funds could be used in alternative ways to augment private sector investment to generate long term returns to charities, which in the end may flow back into the NHS. However, it is clear that investment is needed as soon as possible.

Deloitte-uk-claire-o-shaughnessy

Claire O’Shaughnessy - DirectorUK Public Sector Health – Real Estate

Claire advises on estates strategy and implementation in the public sector, including in health. She led the team providing analytical input to Sir Robert Naylor’s review of the NHS estate and has supported STPs to develop their estates strategy, as well as advising Trusts on individual projects and service efficiency. Claire’s background is surplus public sector land disposal for housing, which she led at the Homes and Communities Agency.

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Deloitte-uk-james-millar

James Millar - Assistant Director, UK Public Sector Health – Health, Economic, Restructuring and Transactions Restructuring

James is a member of Deloitte’s Public Sector Health Advisory Team. He has led on the delivery, restructuring and termination of a number of Health PFI schemes. James also has significant experience in Mergers and Acquisitions, business cases and investment appraisal within the Health sector and wider Public Sector. He is currently working with a number of organisations to develop innovative capital funding solutions for their infrastructure requirements.

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1 https://www.gov.uk/government/publications/nhs-property-and-estates-naylor-review/
2 https://www.gov.uk/government/publications/budget-2018-documents
3 https://strategicestates.hsj.co.uk/i2i/kc/file/1911/download

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