A Capitally Constrained NHS: Difficult decisions to be made?

November 29, 2018

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by Neil Woodings Partner, Corporate Finance

Email +44 (0)7976 726691

by John Stewart Senior Associate, Corporate Finance

Email +44 (0)7730 596737

In 2017, Sir Robert Naylor’s review of NHS Property and Estates showed us the scale of the challenge facing NHS Trusts, with 43% of the estate over 30 years old and 18% pre-dating the formation of the NHS in 1948. We know that the world-class NHS service is, in some instances, hindered by an estate which is not fit for purpose and does not support the delivery of modern medicine. In addition to estate needs, Trusts are actively looking to implement new IT systems to support transformation and integration of their organisations. With this context, it is not surprising that we are seeing NHS Trusts vying for funding to redevelop their estate and create sustainable transformation.

Sir Naylor’s review estimates that £10bn of capital investment is required to deliver a fit for purpose NHS estate. It was originally envisaged that the public purse, land sales and private capital would roughly fund a third of this investment each. However, with the mechanics related to reinvestment of land sale receipts complex, and the Chancellor’s budget announcement cutting any new Private Finance Initiative (PFI)/PF2 schemes, the question remains as to where the much needed investment will come from?

NHS Trusts will look to the 2019 Spending Review for additional capital support to be allocated, but there is by no means certainty that further capital will be assigned to the health system. With this uncertainty, difficult decisions around investment may need to be made at a central level if additional public capital is not made available, particularly in the context of the 2018 Autumn Budget announcements.

While the Chancellor’s Budget signalled the end for any new PFI/PF2 schemes, it was confirmed that government would continue to utilise private funding models for infrastructure which represented value for money (VFM) for the taxpayer and greater contractual flexibility, things for which PFI was heavily criticised. Development of new emerging models in the health sector, such as the Regional Health Infrastructure Company (RHIC) programme, are progressing to address at least a portion of the capital need.

If the Spending Review does not deliver more capital funding for the NHS, a combination of innovative new private funding mechanisms, and an increased focus on sales of the diminishing surplus land in the NHS may have to come to the forefront. While we focus here on the health system, it must be noted that capital oversubscription is not a uniquely health sector specific issue, and while health specific new mechanisms may be developed, a cross-sector private funding model representing robust VFM may be in the offing.

With NHS estate requiring urgent and significant investment, alternative sources of capital will need to be explored or difficult decisions will have to be made at a central level. The 2019 Spending Review may provide the health system with the answers, or perhaps a refocused and refined private funding solution, with VFM at its core, is going to help plug the NHS’s funding shortfall. In the meantime, NHS Trusts will continue to deliver their high-quality services from their current estate, eagerly awaiting answers.

by Neil Woodings Partner, Corporate Finance

Email +44 (0)7976 726691

by John Stewart Senior Associate, Corporate Finance

Email +44 (0)7730 596737