Estates management deals are becoming increasingly sophisticated as trusts continue to strive for increased efficiency. Now, a new type of model which involves transferring the estate across into a wholly-owned subsidiary company is emerging.
Savings and efficiency are near the top of nearly every list for NHS professionals, and new ways of maximising the efficiency of the estates portfolio are increasingly on the agenda. This is hardly surprising, given the NHS owns a total of 6.9 million hectares in England. Nor is it surprising that it’s possible to make savings by administering the portfolio more efficiently, since traditionally the management has been a mix of in-house teams and assorted contracts with external bodies.
Rising maintenance costs
The impetus for this most recent drive is the report by Lord Carter of Cole for the Department of Health, published in February 2016, ‘Operational productivity and performance in English NHS acute hospitals: Unwarranted variations . This pointed out that ‘the occupied floor area of the NHS is around 25 million 48 m2…and the cost of running these facilities is over £8 billion per annum and these costs are rising [with]... significant variation across acute trusts’.
The widest variation is the amount of space which is not occupied by patients, which ranges from 12 per cent to 69 per cent. There are also opportunities to reduce energy consumption, and to make efficiencies in areas like patient food services. The report recommends that all trust estates and facilities departments should operate ‘at or above the benchmarks for [their] operational management’ by April 2017, usually with a plan to operate with a maximum of 35 per cent of non-clinical floor space and 2.5 per cent of unoccupied or under-used space, to be delivered by April 2020. Carter estimates that up to £1 billion could be saved if all trusts were able to move to the median benchmark of their peers’.
Beyond PFIs
To achieve these efficiencies, trusts are looking at new contractual arrangements. Up till now, the main option has been private finance initiatives (PFIs), but many trusts and foundations are keen to find alternatives. One move has been to ‘strategic estates partnerships’ (SEPs), whereby NHS trusts join forces with private-sector firms to form jointly-owned companies that are responsible for running entire estates. These split the responsibility and risk between the trust and the JV partner, so that they reduce some of the financial and service risks that PFIs can bring. Yet this approach crucially still involves paying and sharing gains with the private sector partner.
Now, a new type of outsourcing is being developed whereby trusts can develop the estate without the need to pay a third-party private sector partner. The outsourcing involves transferring the estate across into a wholly-owned subsidiary company. “These are only now possible because of recent changes in legislation that have enabled NHS foundation trusts to transfer their legal rights in operational property,” explains Proudlock. “Each one is very much a bespoke product, but broadly speaking the foundation trust sets up a wholly-owned subsidiary company. The estates workforce works for the company and any profits are ploughed back into the trust.”
“There are real commercial drivers, and savings that can be made,” adds Louise Watson-Jones, Legal Director at DAC Beachcroft. “The wholly owned subsidiary company can generate income – and third-party income as well; and it can also transform the experience for patients and staff who use the trust's estate.”
Logistics
“There are two main pillars,” says Anne Crofts, Partner at DAC Beachcroft. “One is the model itself – the workforce and the way in which services are provided. The other is around making optimal use of the NHS estates.”
The estate’s facilities services staff, and potentially others from areas providing support functions, are transferred across to the company under TUPE (Transfer of Undertakings (Protection of Employment) regulations. This company then provides a fully-managed serviced estate to the trust, which also gets some of the associated tax efficiencies. “In essence, the Trust’s estates staff run the hospital and do the maintenance as before,” says Proudlock.
“However, the targets which are included in the model around the maintenance of the estate should ideally give the estates team a more prominent voice within the trust and the increased focus on the estate should help to drive improvements and increase revenue. The slight devolution of power from the trust also means that the company could be used as a neat vehicle for delivering estates services across the new STP regions.”
The other ‘pillar’ is the potential for using the company to maximise the trust assets in terms of capital build, extensions and other developments. “For instance, if a foundation trust wanted to do a development on surplus land, it could use this company to do so,” explains Croft. As a semi-autonomous entity, it has the remit to focus on this whole area – and thus go from cost-efficiency to generating real income for the Foundation Trust out of space that is not used for clinical purposes.
Investing in the sector
This isn’t the only benefit that comes from setting up a company on these terms. In addition to the staff who are TUPEd over the company can take on new employees on different terms and conditions.
“By moving the estates function into a company that focuses solely on the trust’s estates strategy and capital build, the aim is that it starts to attract private sector experience into the company. Surveyors with specialist agency skills, for example, wouldn’t necessarily be attracted to an estates role within the NHS but if you have a company looking at the more commercial estates function, it starts to attract that expertise, which again could help drive up revenue and capital receipts,” says Proudlock. “Similarly, you may start to deliver home-grown expertise in areas like leasing and capital development.”
This way, there’s the potential for keeping and building on capacity skills, property and management skills, within the NHS rather than buying them in from outside, Crofts points out. “Having this company model may mean it’s possible to deliver services to other trusts and potentially other public service organisations.”
Robust governance
Unsurprisingly, setting up a company of this type does require expert input of a different type: not only in terms of establishing the company's occupational rights and transferring staff, but also to ensure that the financial arrangements (including insurance) and documentation are all as they should be.
It is also absolutely crucial to have robust governance in place, Crofts explains. “These are separate legal entities, and it is important to have mechanisms for managing any potential conflicts of interest as well as the health and safety aspects, and the other corporate services and assistance that may be required by the company. This is particularly important because as these models develop they may involve multiple owners – and in that situation governance gets potentially more complex.”
It’s also crucial to establish the legal position, she adds. Because these companies are a wholly-owned subsidiary which remain under the strategic control of the NHS trust they fall under the ‘Teckal exemption’, which means the trust does not have to test the market before entering into a contract, but that does not clear up all potential grey areas. “As NHS trusts and FTs are subject to public procurement rules, they’re likely to want to bring the company within one of the procurement exemptions. On top of that, foundation trusts have broader powers to set up these companies than NHS trusts. That’s a discrepancy that is coming increasingly under the spotlight - we think there is a case for giving NHS Trusts equal freedom to participate in these vehicles with FTs",” says Crofts.
“Get advice early on and do a fairly thorough business case and analysis of the financial and qualitative potential benefits. Everyone’s starting from a different position, and you need to gauge how to operate the model and produce efficiencies. Some trusts have very different estates arrangements from others: some may have PFI contracts already (which are likely to preclude a company of this type) and some have a very diverse estate. The more stakeholders, the more complex it is.”
However, everyone involved is very clear that this is a model that more trusts should be considering. “It’s a way of achieving the Carter efficiencies and providing something dedicated to that aspect of the service,” Watson-Jones concludes quite simply. "Put like that, it’s well worth exploring."
