Traditional NHS capital spending on new buildings may have fallen but health service reforms and financial pressures are creating different opportunities for contractors in the sector.
- Structural revolution
- The dawn of ProCure22
- Private sector rises
- Next five years
- Specialising offers opportunities
- Fresh thinking on NHS backlog
- Joint venture co interest grows
- SEP deals emerge
- First Strategic Estate Partnerships in action
The healthcare market for construction work has endured a painful few years, as austerity and radical reform has tested the NHS, the UK’s most cherished public service.
Despite a Treasury ringfence drawn around the NHS’s circa £100bn budget, its financial state has deteriorated, the government spending watchdog warned last month.
A £2bn blackhole predicted to open up in the NHS budget next year could widen to £9bn by 2018/19, the National Audit Office stated.
Contractors have in turn seen healthcare output fall from a high of £5.9bn in 2008 to just £3.5bn in 2011/12 and £3.2bn in 2013/14, according to AMA Research, which tracks construction healthcare activity.
Total capital spending by the NHS has also fallen, hitting £4.4bn in 2013/14.
These austerity years have at the same time witnessed a radical transformation of NHS structures.
Power to commission general hospital healthcare has been put in the hands of some 200 GP-led ‘clinical commissioning groups’, while decisions on primary care and specialist health spending are now made by NHS England, a huge and influential government agency.
Increasing numbers of public hospitals are also gaining greater autonomy from Whitehall as they morph into foundation trusts, a status that frees them to accrue and spend some of their own surpluses.
While most hospitals own and manage their own estates, government reforms saw the wholesale transfer of some 2,000 healthcare centres and 700 office blocks to NHS Property Services, another new agency, which is gradually getting up to speed with its complex £3bn portfolio.
So where might the opportunities lie in this radically reformed NHS?
And with no sign of a return to high public spending in the second half of this decade, how will construction firms find work in this reformed healthcare landscape?
Previously reliable routes for securing jobs have dried up over the past few years. The government’s reincarnated private finance initiative programme, PF2, has barely got off the ground.
Of the three original projects coming to market via the new programme, only one fully PF2-compliant bid has been agreed: a £353m hospital rebuild project by Sandwell and West Birmingham Hospitals Trust.
A Laing O’Rourke-Interserve joint venture is battling with Carillion to win the scheme. Final bids are due to be entered in April 2015, with the preferred bidder selected in September 2015.
A further £429m deal described as bearing “many aspects of PF2” was agreed last year at Royal Liverpool and Broadgreen University Hospitals Trust.
The Royal National Orthopaedic Hospital in Stanmore, north London, abandoned its bid for a part on the PF2 programme this year, having got down to two bidders and received planning permission for the £84m scheme.
Similarly, the output of the LIFT public private partnership scheme, which has invested £2bn in primary and community care buildings since 2001, will see its construction pipeline dwindle to just £183m over the next two or so years, according to AMA Research.
The dawn of ProCure22
Much construction work in primary care is now funded by third-party developers or GPs themselves, its researchers found.
One procurement route through which work still flows is the NHS construction framework that began life as ProCure21, now approaching its third incarnation – ProCure22.
NHS organisations have invested some £1.8bn in work through this route between 2011/12 and 2014/15.
Its second and current guise, ProCure21+, is seen as the “most cost-effective way of procuring healthcare services in the current economic crisis”, according to an AMA Research report in August, LIFT and P21 in Healthcare Construction 2014-2016.
“It is likely that P21+ rather than PFI will remain the preferred procurement route for a lot of trusts over the short to medium term,” it adds.
Galliford Try became one of the six principal supply chain partners on ProCure21+ when it acquired Miller Construction in July.
Becoming a supply chain manager means that, as well as being responsible for dividing up work among its supply chain, a contractor can also carry out some of that work itself. In Galliford Try’s case, it took on £170m of work from the £1.7bn of projects it managed.
Its director of health Andrew Cartwright says firms with experience of the first framework had picked up even more.
“We were new to the framework; others had an established pedigree, which enabled them to take a bigger proportion.”
Private sector rises
While the healthcare market has “eased a little”, Mr Cartwright says he had seen “some movement”, particularly among private healthcare providers.
The government’s reforms are widely expected to give private firms greater access to NHS contracts.
Galliford Try is bidding to build two hospitals for BUPA, Mr Cartwright added. “The private work could supplement public sector, which hasn’t come through because of the efficiency savings.”
The tender for P22 is expected to be posted in OJEU next year and go live in 2016, when its predecessor ends.
One contractor hoping to secure a place on P22 is Simons, a firm which made it onto the P21 framework but not P21+.
“That framework [P21] was very good for us,” says the firm’s project director for healthcare Miles Thomas.
“It created a really good workstream of quality projects at recognised margins. And you didn’t have to competitively tender in the marketplace.”
Mr Thomas describes conditions throughout the recession as “tough” but notes a “recent upturn”. His firm focuses on specialist work, such as facilities for mental health or children’s services – a less competitive end of the market.
Despite missing out on ProCure21+, Simons secured work through other routes, such as OJEU including a £25m extension of Sheffield Children’s Hospital. “We are keen to get back on the new framework,” Mr Thomas says.
Next five years
So what kind of construction work is likely in the future? One way to trace the immediate trajectory of NHS business is its Five Year Forward View, a paper put together and published in October by NHS England and other key healthcare agencies.
In presenting options to close the impending hole in NHS finances, it points towards two glimmers of light for constructors.
The paper calls for an early injection of investment to “rapidly” transform outmoded NHS facilities into ones able to accommodate new “care models”. It puts the value of underused NHS buildings at £7.5bn.
It also points to a major shake-up of the public healthcare estate, including large-scale sell-offs of unneeded land.
NHS England chief executive Simons Stevens, who is largely credited with taking the lead on the Forward View, has even convinced the chancellor to find £1.1bn to realise his vision over the next parliamentary period. Some of this cash is likely to be earmarked for capital projects, CN understands.
Construction consultants and contractors seem encouraged by these messages; they appear to herald an acceleration of the current health policy trajectory.
This, roughly, seeks to shift services out of hospitals when better delivered in the community; convert leftover space into primary care or social care facilities; and concentrate highly specialised healthcare in flagship hospitals.
Roger Pulham, director of healthcare at consultancy Gleeds, says the proposal in Forward View to shift services closer to patients’ homes has been going on for the “best part” of 25 years.
“The priorities may have waxed and waned and there is still an immense amount of work to do,” he adds.
According to Gleeds, only around 3,000 of the 7,500 GP surgeries in the NHS are modern enough to meet the ambitions of the Forward View.
“What that translates into is an investment programme if the Forward View runs its full course of £6bn to £8bn of capital investment,” Mr Pulham says.
Specialising offers opportunities
Gleeds also envisages an opportunity for construction in the concentration of specialist services at major hospitals. “These centres of excellence will have substantially additional investment,” Mr Pulham adds.
“This will create pressure on their capacity and a need for additional space, which may have to be constructed.”
The concentration of specialist healthcare in regional and sub-regional centres has knock-on effects for general hospitals, according to Gleeds.
“[They] will find themselves under pressure, as they have less activity and income,” Mr Pulham says. “But it isn’t all doom and gloom. [These transfers] will create redundant space in prime locations.”
Vacated spaces could give way to housing estates, new GP practices or community services to care for patients after discharge. “All this too could generate work for the construction industry,” Mr Pulham adds.
The Forward View also points to the potential of boosting efficiency in the healthcare estate as a means of easing financial pressure on the NHS.
This emphasis on efficiency is welcomed by Conor Ellis, head of health at consultancy EC Harris, which keeps tabs on NHS performance in estate management.
His research points to a £4bn backlog for large maintenance work, £1.5bn of which is rated as ‘high’ or ‘significant’. “[This] isn’t being matched by investment in capital,” Mr Ellis adds.
Fresh thinking on NHS backlog
Following years of austerity and with no prospect of substantial extra investment, Mr Ellis says the NHS and construction industry must seek new ways to tackle the backlog.
“People were struggling five years ago to deal with this efficiency improvement; many of those are still struggling now. We need to do something differently.”
The NHS struggles to make significant inroads into boosting estate efficiency, Mr Ellis says, because of its pervasive “piecemeal” approach.
“The prevalent culture among directors of finance and estate management is to look at dealing with the very worst aspects of the estate as piecemeal projects to reduce the very worst risk and ease their cashflow,” he says.
“A more strategic approach is needed, which would involve valuation of the asset longer term.” Mr Ellis points to “strategic estate partnerships” as a model that could help trusts to take a longer-term view.
Under the SEP model, hospital trusts establish joint venture companies with private firms to run agreed aspects of estate and facilities management.
Under the NHS reforms, hospital foundation trusts are masters of their own assets, so there is greater incentive to optimise their revenue – which may mean selling off land for homes, using their land to build care homes, or even retail and leisure centres.
As ownership is split 50/50, both public and private partners share risk and profit equally. Crucially for contractors, their role as a partner does not stop them from picking up jobs generated by the SEP.
Joint venture co interest grows
Rosemary Jago, a partner at Bevan Brittan, which advises both trusts and contractors on SEPs, identifies several reasons for the growing interest in SEPs.
Besides the advent of new models of care and changes in technology, she points to a lack of capital to invest in “large and diverse” NHS estates.
“Many trusts are left with estate that is not always fit for purpose, is not aligned with the optimal model of care, is not sufficiently flexible and, in many cases, includes surplus estate,” she says.
“Tackling these issues requires staff resource, capital investment and commercialisation skills, such as property development and management skills.
“These are not always available to trusts or foundation trusts, which understandably wish to focus on their core business of providing care.”
According to Ms Jago, one of the key benefits of SEPs is their capacity to flex with trusts’ needs.
They can create opportunities for construction or facilities management work for contractor partners and the groups to which they belong.
Securing work through these “secondary procurements” is possible as long as trust partners are satisfied that potential conflict of interest are managed and their partners’ involvement does not give them an unfair advantage, Ms Jago says.
SEP deals emerge
So far a handful of SEPs have come to the market, but there are an increasing number in the pipeline as hospitals look to make the most of their estates.
One of the early winners in the new Strategic Partnership Approach is Ryhurst, a division of contractor Rydon originally established to serve the now-ailing PFI market.
Ryhurst is the joint partner of a well-established SEP with Lancashire Care NHS Foundation Trust called Red Rose Corporate Service.
Ryhurst has now won three of the six of the Strategic Estate Partnerships that have been tendered through the OJEU, the latest one being the Isle of Wight Hospital Trust.
The agreement will see Ryhurst deliver a wide-ranging estates strategy that supports the trust in delivering patient care over a 15-year period, with an option to extend for a further five years.
It has also secured the Cheshire & Wirral Partnership NHS Foundation SEP.
As a former hospital chief executive, Ryhurst managing director Stephen Collinson says the SEP model can help trusts better exploit their estates in ways envisaged by the Forward View.
“A trust will say, ‘We could do that ourselves’” Mr Collinson says. “My response would be, ‘Why haven’t you?’ Most of the time they don’t.” (see box)
With a big blackhole looming on the NHS’s horizon and no significant capital budget bail-out predicted, the perennial push for greater efficiency in the healthcare estate could soon become a pressing need.
The tough years ahead for the NHS may well spell extra work for the construction industry as trusts are forced by their financial situations to reshape and exploit their estates’ potential.
Unless they do, the NHS could for the first time fall into the red, a prospect none of the new players overseeing the reformed health service would want to allow.
First Strategic Estate Partnerships in action
Ryhurst and Lancashire Care NHS Foundation Trust formed the first full estates partnership in England in October 2010.
The partnership was established to support the trust’s clinical strategy through smart asset management as well as opening up new ways of securing funding for capital projects.
The 50/50 joint venture partnership (JVP) encompasses Lancashire Care’s full estate of more than 150 trust-owned sites.
Lancashire Care NHS Foundation Trust project director Alistair Rose says: “Our estate is quite large and diverse, hosting the provision of mental healthcare services throughout Lancashire, within some 156,000 sq m of space across 200 buildings.
“The partnership we established is about far more than just buildings. It provides us the opportunity to look at what we want to achieve as a whole.
“Looking at the trust’s estate in this all-inclusive way enables you to consider all the components that make it work, including the hard and soft facilities management, utilisation of space and disposal of surplus land.
“Aside from The Harbour inpatient unit opening next year, we have reduced the number of buildings we occupy. Many of our staff do not need an office all of the time.
“The partnership gives us access to a team who combine private sector acumen with innovative and flexible solutions for our estate.
“At the same time, it’s non-exclusive. We can source funding elsewhere if that’s what we wish to do, ensuring we always get best value. This keeps everyone on their toes.
“It is this level of control and flexibility that the partnership with Ryhurst brings that could not be achieved with other mechanisms such as PFI.
“The savings we have made have been considerable and have been ploughed straight back into clinical services.”
Ryhurst managing director Stephen Collinson says: “This model focuses on maximising returns from existing facilities to help the NHS to best deliver its clinical strategy.
“Viewing the estate as a whole and working in partnership to share risk and reward focuses attention on making decisions in the best interests of the trust.
“To achieve this, our partnerships focus on operational estates and space and facilities management to exploit returns from infrastructure assets, creating new facilities only if needed.
“It’s also about dealing with other issues common in NHS estates, including backlog maintenance, refurbishment, space utilisation and surplus land disposal.
“For any new buildings, RRCS or its partners can obtain funding for the project and the JVP can take responsibility for managing construction works, related activity and maintenance.
“On completion of any new facilities, the trust is able to rent the fully serviced space from the JVP.
Some of our combined achievements include almost £2m of savings across estates, hard and soft FM service areas, a 50 per cent reduction in consultancy costs and a 39 per cent increase in the effective use of several of the trust’s existing corporate and clinical facilities.