There are trusts developing innovative schemes, such as joint ventures and Limited Liability Partnerships, to raise funds for capital projects.
For all the apparently bad news, there is evidence of innovation. Sir Robert points to his old workplace: "The nearly £300 million phase 4 development currently under construction at UCLH – cancer, day surgery and proton beam therapy – is funded partially by the Treasury, trust cash, the UCLH Charity and a long-term lease for two private floors to the private sector."
University Hospital Southampton NHS Foundation Trust has a three-year capital plan which will draw on some £75 million from surpluses, plus £50 million from sources including Department of Health projects, the National Institute for Health Research, Southampton University, the hospital's own charity and the Murray Parish Trust which raises money for children's emergency services across the south of England.
Bagnall is proud of his work to date. He says the trust has built a new radiotherapy linear accelerator bunker, set in motion a £15 million replacement programme for ageing linear accelerators, and built a new cancer immunotherapy research centre which is playing a role in the recent breakthrough in the treatment of melanoma. The trust has almost finished building a new urology day unit and a general intensive care unit with 32 beds – up from the current 25 beds.
In 2013 the trust formed a strategic estates partnership joint venture with Prime PLC which has resulted in a new front entrance for the hospital. The trust receives rental income from the retail units, but much of the income is used to offset the building costs.
"The old entrance from the '80s looked very tired and not fit for purpose," says Bagnall. "Now there is plenty of space, plenty of facilities, a Marks & Spencer, WH Smith, Costa, Subway etc. It's a way of realising a commercial interest, but it's also important for patients and visitors: they can sit down, relax and not worry about where they can get a sandwich. It's also enabled us to build a new 800-space multi-storey car park, so there is now adequate space for patients, visitors and staff."
REDUCING FINANCIAL RISK
Spotswood is another advocate of joint ventures, where the NHS does not carry significant financial risk: "Five years ago my (then) organisation had some surplus land and we were approached by AHH to form a joint venture vehicle, in which AHH would guarantee the trust a return equivalent to the open market value of that land, but with potential for a far higher return.
"AHH built an 80-bed nursing home and a range of assisted living accommodation which it then sold. It did all of that at its cost. The trust put in no capital or other finance. The end-product was that the trust received a 50% share of the profits."
Summing up one AHH model, he says "There is no risk to the trust. It continues to own its land, it puts it into a joint venture vehicle and we fund the design, planning, construction and sale of the properties and share dividends and profits on a 50:50 basis. It can be either a revenue stream or a capital receipt – we orientate it towards what the trust feels will be most effective for them."
AHH also offers shared ownership schemes to last-time buyers where purchasers buy 50% and rent the other 50% at a government set interest rate of 3%. "We take that interest stream and sell it on to a major institution, such as a pension fund, which generates a further significant tranche of income, which again we split 50:50 with trusts, so they gain in a number of ways."
AHH is working with NHSPS to create value from some of the more moribund elements of the community estate: "In purchasing sites directly from NHSPS we have sought to develop principally for older persons' shared ownership. For other sites we have sought an NHS partner to work with, for example key worker housing. This is in the early stages," Spotswood says.
For many investors the possibility of also leveraging an NHS covenant over a, say, 30-40-year period is attractive. Although adding NHS facilities to a development can add complexities from a procurement law perspective, Spotswood believes it can help to maximise the investment potential.
FREEDOM AND FLEXIBILITY
According to Price, trusts like his own with outstanding Care Quality Commission ratings have more bargaining power with NHSI. Famously the trust went to Northumberland County Council to raise funds to buy out the PFI at Hexham Hospital. "When we did the PFI buy-out we went through all sorts of hurdles, as the centre had concerns about the fact that we had obtained cash from outside the 'NHS family' – which is what Foundation Trust status allowed us to do. In buying out the PFI, we have more than demonstrated that we have saved money, plus some."
The trust has created Northumbria Healthcare Facilities Management Limited (NHFML), a wholly-owned subsidiary that delivers estates facilities and infrastructure across the trust. The subsidiary vehicle also built the pioneering emergency care hospital at Cramlington to the same 'PFI' spec, says Price. "Using this model enables all 'new' estates to be fully life-cycled, so we can maintain that standard in a long-term, ring-fenced budget."
As a separate vehicle, NHFML provides the ability "to deliver a PFI standard contract without the ball and chain of the PFI debt, because we are not charging the interest rate of a PFI," says Price. "The only shareholder NHFML is answerable to is the trust, and it knocks out the whole process of paying dividends to a separate investor entity – the dividends come back to the trust and into frontline healthcare."
Price also advocates joint working with local authorities including sharing back office services. His trust's procurement team sits within Northumberland County Council and all the capital works that are put out to tender are managed through a joint team. "The council's chief executive is an executive director of the trust," he adds. "That helps us to work on common projects. It ticks a lot of boxes in the locality with the council, GPs and the community."
NHFML is also working with partners further afield, setting up a limited liability partnership (LLP) with both North Tees & Hartlepool NHS FT and York Teaching Hospitals NHS FT, where the LLPs provide a full range of estates and facilities services together with project management for capital investments.
Of course, since NHFML was established, the new guidance from NHSI requires the business case or proposal to be submitted to NHSI before it can start to operate. This was following concerns that some trusts were seeking to utilise wholly-owned subsidiaries primarily as a means of recovering VAT, rather than achieving the wider commercial benefits which Price describes. The fact that all proposals for new corporate structures and changes to existing ones are now subject to NHSI scrutiny, needs to be factored into the timescales for any new proposal and causes concern to some that it will lead to significant delays for even relatively minor schemes. The original 2018 Guidance did say that NHSI would review it after 12 months (in November 2019) to see if it is still "appropriate and proportionate".
The bar remains even higher for non- Foundation Trusts who do not share the same "freedoms" as Foundation Trusts. Non-Foundation Trusts can only participate in subsidiary companies for income generation purposes, meaning generating additional income from non-NHS activities. While this could include income derived from estates projects, any such scheme requires the consent of the Secretary of State.
The regulatory hurdles which NHS Trusts must navigate have increased since Robert Naylor's 2016 report. But for those trusts, especially Foundation Trusts, who have already enjoyed or can see the potential returns of a successful JV partnership, utilising the established mechanism of a limited liability company or partnership remains an attractive option.
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