Always a “but” – private finance for NHS funding

Matt Custance Matt Custance

This is the third article in a series on how to fund capital projects in the NHS (spoiler – the answer is the capital budget). It follows on from my first article: “The NHS needs more capital, not unicorns”.

In that article, I argued that the NHS only has two realistic options to generate capital to pay for projects – the capital budget and surplus estate. The second article “So you think you have a scheme? – Sizing up your unicorn” explored in detail how to assess a scheme to see if it can create an exception to this. It presented little hope of success. And of course, since then, government has formally cancelled Project Phoenix, the last potentially Government-sponsored route to private capital, at least in England. So, this article tries to make up for this glum outlook by presenting a couple of rays of light – ways you might be able to get private capital for some types of projects.

So - what are the options?

Do you have a money spinner?

For some NHS organisations, there are going to be developments which generate income for you – not from you, for you. Things like life sciences campuses which might generate rental income from pharma or devices companies, accommodation for key workers who pay rent, retail developments, care homes and hotels. The thing here is that these developments are not “for” the NHS organisation – your trust doesn’t use them, but it might be a good strategic move to have them nearby. In that case, you would hope that the income stream from these developments will, over time, cover their development costs. So, we are talking about a deal where you may be able to provide the site and then generate capital or income from the project. In that case, you might have a money spinner and other options then open up:

  • You might be able to take some ownership under limited circumstances, invest the land into a development JV, for example
  • You might sell the site in with some options to share in the development upside.  

This could generate capital receipts, which you could then apply to other projects. Or it might generate a longer term income stream, which might underwrite your affordability case for another project. This is, in some ways, just realising surplus estate, but it is doing so in a targeted way which delivers benefits to the trust beyond the capital receipt.

Are the assets to be used by a non-NHS institution?

STPs and ICSs are often looking at community health and care provision, from GP services to allied health care to care facilities. These services will often not be delivered by an NHS body but by a group of GPs or by a private or not-for-profit entity. If these non-NHS bodies are able to agree to occupy it (usually via a lease), the project might never need to involve an NHS financing commitment and, therefore, stay off balance sheet.

Can you take advantage of flexible space?

I’m hesitant to mention the next one because it’s only a partial solution, it probably only works when your need for space is likely to change significantly over time and it likely won’t work outside metropolitan areas. It involves building flexible space.  

It’s becoming widely accepted in the NHS that we don’t tend to plan well for changes in the use of clinical and non-clinical space over time. So, increasingly designers are being asked to plan for open space, which can be converted between different types of clinical use and to non-clinical use. The logical extension to this would be to encourage nearby development, which health facilities could expand in or out of, over time. For example, you could enter into a short (say five-year) lease of a space (built and owned by a private developer). If you are paying a reasonable rent for that space, you would hope that the value of that lease over five years is considerably lower than the construction cost of the building. Therefore, the leased asset/liability (which is only for five years of occupation) should also be smaller than the value of the facility, reducing but not eliminating the capital spend that makes its way onto the Trust’s accounts. 

This would, however, put the Trust at the mercy of market adjustments to leases over time – and at risk of losing the space at the end of the lease. For the developer, it would mean taking a longer term occupancy risk, which probably means it could only work in a metropolitan area with consistent demand for space.  

This kind of thing might also work in reverse, where a Trust builds a flexible space that it perhaps doesn’t need now and reduces the capital impact of that by leasing out some or all of it for an initial period, which might then off-set the capital expenditure by creating a lease receivable that would improve the affordability of the project and, therefore, the business case for it.  

There you have it - a few of ways in which your Trust might be able to act as a catalyst for privately funded development that benefits you and maybe helps you get the new space you need. So, what do you think? Have I missed something? Is there a terrific new idea that can help the NHS get capital without selling estate or drawing down on the DHSC capital budget? Contributions welcome! It would be great to write a fourth part “The hidden unicorn unmasked!”