House of Commons - Public Accounts

Select Committee on Public Accounts Sixty-First Report

SIXTY-FIRST REPORT

The Committee of Public Accounts has agreed to the following Report:

THE MANAGEMENT OF SURPLUS PROPERTY BY TRUSTS IN THE NHS IN ENGLAND

INTRODUCTION AND LIST OF CONCLUSIONS AND RECOMMENDATIONS

1. The NHS in England owns one of the largest estates in Europe. It was valued in 2000 at £23 billion in terms of the cost of replacing the assets as they stand today, or at £76 billion if they were replaced to meet modern standards.[1] NHS Trusts own 95 per cent by value of all land and property held by NHS bodies[2] and in the three years to March 2003 they have estimated that sales of surplus land and buildings could exceed £700 million at existing use value.[3]

2. Policy leadership and guidance on managing the NHS estate is provided by NHS Estates, an executive agency of the Department of Health formed in 1991.[4] It is also responsible for the disposal of the 'retained estate'. This comprises properties whose ownership was not transferred to NHS Trusts as they were created in the early to mid 1990s, and deemed not to be essential to longer term NHS delivery. In April 2001, NHS Estates formally commenced pursuit of a Public Private Partnership to sell the majority of remaining properties, valued at some £400 million in the retained estate.[5]

3. Based on a Report by the Comptroller and Auditor General,[6]we looked at how well the NHS has identified surplus estate, while ensuring future NHS needs are safeguarded, whether the NHS obtains best value from sales, and disposal of the retained estate.

4. Our main conclusions and recommendations are as follows:

Given the price of land, especially in London, and shortages of accommodation for nurses and other essential workers, too aggressive a disposals policy risks high costs in the future as operational needs change. Estates strategies should therefore pay particular attention to the longer term operational and accommodation needs of the NHS and the wider public sector, and should also consider other options, including leasing the land or buildings.

In developing and updating their estate strategies, Trusts need a clear view of what estate they are likely to need to deliver services. At April 2001 only 28 per cent of Trusts had developed estates strategies to "exemplar standards". The Department and NHS Estates should ensure that all Trusts, including the new Primary Care Trusts, have such strategies in place by the end of 2002.

Where property has development potential, it should normally be sold with the benefit of planning permission. The case of Napsbury Hospital, where the value with planning permission was £66 million compared to £10 million without, amply demonstrates this point. NHS Trusts therefore need to ensure that they maintain good contact with local authorities, both to ensure that health care needs are reflected in local development plans, and that they maintain effective relationships with local planners.

5. Our more specific conclusions and recommendations are as follows:

(ii) A key factor in getting the best price for disposals is having up to date and accurate valuations. On average the sale prices achieved by the NHS exceeded valuations by 32 per cent, and some of the largest differences arose when Trusts did not update valuations. The Department should ensure that valuations are revised in all cases where there is a material change after marketing or if the sale is delayed. They should also make it the norm that clawback is included in all sales where there is potential for development at a later date.

(iii) The limited information available to us so far provides insufficient assurance as to the benefits of the planned sale of most of the remaining "retained estate", under a Public Private Partnership deal, and whether the arrangements will achieve an appropriate balance of risk transfer to the private sector. We will look at this deal, which is due to be completed this autumn, on the basis of a further report planned by the Comptroller and Auditor General.

(iv) Following the planned sale of most of the retained estate and NHS Estates' trading arm under a Public Private Partnership deal, the role of NHS Estates will be to offer guidance, support and expertise to the NHS. This role may however be insufficient to justify a separate Agency at arms length from the Department. The Department should look again at the cost effectiveness of their plans.

IDENTIFYING SURPLUS ESTATE WHILE ENSURING FUTURE NHS NEEDS ARE SAFEGUARDED

6. The NHS estate in England includes a wide range of land and properties, such as hospitals, clinics, and administrative and residential buildings. Turnover in property assets can arise from changes in patterns of healthcare provision, modernisation and technological advance.

7. In the three years to 1999-2000 NHS Trusts reported receipts from sales of property of some £380 million. A revaluation of assets showed that, in April 2000, NHS bodies held some 1,000 non-operational sites with an estimated open market value of some £912 million (of which £258 million were held by NHS Trusts). In the three years to March 2003 NHS Trusts estimated that sales of surplus land and buildings could exceed £700 million at existing use value. The types of property involved are shown in Figure 1.[7]

Figure 1: Types of property NHS Trusts plan to sell between 2000-01 and 2002-03 as a proportion of total estimated existing use value of £700m.

8. The Department told us that they oversaw the NHS estate through an overall estates strategy. This looked at assessing what the NHS needed to deliver its services, bringing assets up to good utilisation and high quality so that the estate was fit for purpose and did not have a high maintenance bill. On disposals, the strategy was to retain the core and dispose only of land and property which could no longer be used effectively. Over two thirds of the disposals had been associated with the policy of increasing care in the community and disposing of mental institutions. In this case, even if a 30 year policy of 'Care in the Community' were to be reversed, those sites would not be reused as the NHS would build a different sort of asylum. The Department assured us that the price of a site was not a factor in considering whether to dispose of it.[8]

9. NHS Trusts own 95 per cent by value of all land and property held by NHS bodies. Each trust is required to have an estates strategy, and research by the Comptroller and Auditor General found that where one was in place disposals were significantly higher. For example, if Trusts without estate strategies had been able to match the higher rate of disposals of Trusts with them, sales of £116 million might have been brought forward in the three years to March 2000. Moreover, if Trusts without exemplar strategies matched the rate of property disposal of those with them, sales of £102 million would be brought forward in the three years to March 2003.[9]

10. In December 1999, NHS Estates issued revised guidance as an aid to Trusts in developing "exemplar" estate strategies. By April 2001, 82 per cent of Trusts had a strategy in place, and there would have been more but for the organisational changes taking place in the NHS, for example the creation of Primary Care Trusts and the reduction in the number of NHS Trusts. Of these, only 28 per cent of the strategies met "exemplar standards", but most expected to meet these standards by the end of 2002. A strong incentive is that investment plans will not be approved unless there is an estates strategy.

11. The Department see the management of the NHS estate as very much the responsibility and role of NHS Trusts, and it is important to ensure that Trusts have the expertise and that their Boards in particular understand the issues. NHS Estates will provide help and support, and will review performance with strategic health authorities and ensure that Trusts review their asset base annually. In addition, chief executives of Trusts now have to sign a controls assurance statement each year to say how they have handled significant infrastructure, accountancy and probity issues including estates.[10]

12. Disposals planned by NHS Trusts in 2000-01 to 2002-03 include 7 per cent open land and 13 per cent of "other land and buildings". The Department told us that each Trust's estate strategy should consider whether land might be required to carry out its health care functions in the future, looking 5 years ahead. Strategies should also address issues such as the location of hospitals and the costs and difficulty of travel by patients, and the case for leasing land rather than disposal. For example, for some residential accommodation the NHS may retain the long term leasehold of the land. There were also cases such as the University College London Hospital, where land had been bought through compulsory purchase. The Department had also been looking with the Department of Transport, Local Government and the Regions at how health bodies could be more involved in planning decisions, so that when a development plan is put forward by a local authority, health issues are included so that the NHS can allocate land for its future purposes.[11]

13. We explored one case looked at by the Comptroller and Auditor General of the sale of an unused nurse's home in Lambeth, which had accommodation for 240 nurses. The Guy's and St Thomas NHS Trust declared the property surplus and sold it for £3.8 million rather than refurbish it, which would have cost £4 million. We asked why, at a time when nurses could not afford to live in London. The Department told us that the nursing home had not been used since 1993 after fire damage, was in a poor state of repair and was not popular with staff due to its location. The Trust had submitted a separate business case to refurbish the General Lying-in Hospital, with office accommodation and 40-70 residential units, part-funded by the sale of the property in Lambeth. In addition, The Guy's & St Thomas' Charitable Foundation was shortly to appoint a partner to make a further 407 units of key worker accommodation available adjacent to the St Thomas' site.[12]

14. Before selling surplus properties, vendors are required to check with the Property Advisers to the Civil Estate (now part of the Office of Government Commerce), to see whether there is a wider public sector need for the land or property. The Comptroller and Auditor General found that compliance was patchy, and he recommended better notification procedures. The Department told us that it was now proposing to introduce a clearing house, with NHS Estates, for larger properties of interest to other government departments. Discussions would also continue to take place with local authorities to see whether they needed the land, for example for educational purposes.[13]

OBTAINING BEST VALUE FROM SALES OF SURPLUS ESTATE

15. Having identified surplus estate, Treasury guidance is that it should be sold within 3 years. We looked at whether the incentives used to encourage Trusts to dispose of surplus estate protected the public interest and whether Trusts got the best prices.

(a) Whether incentives to sell surplus estate protect the public interest

16. Trusts have three main incentives to dispose of surplus estate. The first is to reduce running costs, for example maintenance. Second, Trusts can retain some of the proceeds of sales for re-investment locally. Third, they make savings on capital charges, comprising depreciation and an interest charge attached to all property assets. However, a major review of the management of NHS estate, Sold on Health,[14] recognised that depreciation charges on surplus estate were usually low because it was coming to the end of its useful life, and that rather than retaining proceeds within a Trust, projects in the local health economy might have greater priority.[15]

17. Trusts are allowed to retain the first £1 million of any sale for re-investment without the Department's authority, although the investment should be based on a business case. Following Sold on Health, however, the Department are introducing "earned autonomy freedoms" to allow top-performing Trusts to retain the first £5 million of receipts from property sales. If Trusts are failing, and where private sector managers are brought in, any proceeds will still be re-invested in the NHS. If sales net more than these thresholds, the surplus is available for use within the local health economy, subject to submission of a business case to the Department. From 2002-03 management of the NHS capital programme will move to 28 Strategic Health Authorities. This will allow proceeds from sales above the thresholds to be available for local reinvestment within these redrawn boundaries.[16]

(b) Getting the right price for properties that are sold

18. The C&AG found that NHS Trusts and their agents strove to maximise competition, in accordance with NHS Estates' guidance, achieving prices in most sales which comfortably exceeded valuations. Most sales—90 per cent—are made competitively, sometimes through auctions. This provides assurance that the market has been tested.[17]

19. An important factor in getting the best price is having accurate and up to date valuations. Valuations by the District Valuation Office are also a safeguard against corruption. However, the Comptroller and Auditor General found that prices obtained met or exceeded valuations in 95 per cent of cases, and on average exceeded valuations by 32 per cent. The Department assured us that they required valuations of all property disposals, but that these could be affected by a variety of factors. Following the Comptroller and Auditor General's report, they are looking, prior to marketing, at having a range of valuations dependent on what opportunities there are for the estate. If planning consent is granted or there is another material change during marketing, they will carry out another valuation. Finally, if marketing takes longer than six months, they will do another valuation as well.[18] Where there is potential for further development at a later date, the NHS introduces clawback into the transaction. NHS Trusts negotiated clawback in almost 50 per cent of sales by value in sales between 1997-98 and 1999-2000.[19] Where there are preferred bidders from other parts of the public sector, they have the right to buy the land at the District Valuer's valuation.[20]

20. Planning permission can dramatically affect the value of surplus NHS property. A major site, such as an old mental asylum set in its own substantial grounds, and involving both heritage and Green Belt issues, might have a negligible or even negative value without planning permission, but might be worth many millions with it, for example for residential schemes.

21. NHS Estates' guidance advises that, where a property has potential for development, it should normally be sold with the benefit of planning permission for the alternative use. In negotiating planning consents and related planning obligations, applicants must take account of the statutory planning environment, particularly local development plans and national policies. This puts a premium on the effective handling of land-use planning issues with local authority planning departments. However, the Comptroller and Auditor General found wide variation in involvement between NHS Trusts and local planning authorities. Over a third of NHS Trusts created prior to the preparation of the relevant local authority development plan (and therefore assumed able to participate in its formulation) indicated that they had not been involved in the formal consultation process.[21]

22. A prime example of the value of gaining permission planning is Napsbury Hospital. Without planning permission the site would have been worth £10 million but with it was valued at £66 million. However, planning permission was only achieved after a protracted appeal and considerable cost, which the Department put at £1.1 million, of which they recovered £300,000. This case emphasises the need for close liaison with local authorities. NHS Estates were putting good practice on their website, and had prepared guidance for local authority officers and NHS Trusts about the relationship between NHS modernisation and local authority development plans.[22]

DISPOSAL OF THE RETAINED ESTATE

23. When NHS Trusts were set up in the early to mid 1990s, properties that were surplus or soon to be surplus were not transferred to them; instead they were held by NHS Estates in the so called "retained estate". At its peak, in 1994-95, the retained estate was valued at £1.2 billion. Since then, NHS Estate has conducted a major programme of annual disposals. In total £1.2 billion of surplus estate has been sold, exceeding targets set by the Department and at April 2001 the balance remaining was valued at £600 million, (Figure 2). Since then a further £200 million has been sold.[23]

Figure 2: NHS Estates' disposal programme in the retained estate has met successive annual targets

24. The retained estate had taken some time to sell, mainly because some properties had been occupied by Trusts in the short and medium term. NHS Estates have an incentive to dispose of the estate as quickly as possible, because maintenance costs are around £35 million a year.[24]

25. The remaining retained estate is now subject to a one-off sale through a Public Private Partnership, expected to be operative in 2002-03. This had been outlined in Sold on Health and was supported by an independent option appraisal. The options considered were:

the status quo;

a one-off sale with a single up front payment;

a one-off sale through a joint venture with an initial payment plus future payments when development value was realised; and

a combination of the first and third options, which was the one preferred.

26. The preferred approach also envisaged that the public private partnership would take over NHS Estates trading arm "Inventures", which offers paid services including advice and support for NHS Trusts and other health clients including bespoke consultancy, property and project services, training and technical guidance.[25]

27. The Department have placed land and property requiring development work into a joint venture. The private sector is taking part in a competitive process and the selected partner will make an upfront payment and further payments (clawback) linked to the maximisation of the development value of a property. The private sector partner will provide development funding and share the risk, for example the cost and risk of obtaining planning consent. At the same time, NHS Estates will continue to dispose of land and property where development potential has already been achieved. Offers were due to be received in May from four short-listed consortia and completion of the sale is programmed for Autumn 2002.[26]

28. The proposed public private partnership raises a question mark over the future of NHS Estates. Following the quinquennial review of NHS Estates, it will retain its policy lead and role in the provision of guidance to NHS Trusts. The Department said it was important to retain central expertise within the NHS, and NHS Estates will be working closely with NHS organisations on important estates matters, such as the design of operating theatres, and how to meet standards for environmental cleanliness.[27]

1 Qs 145-150 Back

2 C&AG's Report, para 1.4 Back

3 ibid, para 1.4 and Figure 2 Back

4 ibid, paras 1.10-1.12 Back

5 ibid, paras 1.5-1.7 Back

6 C&AG's Report The Management of Surplus Property by Trusts in the NHS in England (HC687, Session 2001-02) Back

7 C&AG's Report, para 1.4 and Figure 2 Back

8 Qs 14, 35, 40, 52-56, 122-127, 151-153 Back

9 C&AG's Report, para 2.7 Back

10 C&AG's Report, paras 2.5, 2.9; Qs 3-6, 13-17, 30-33, 118-121, 192-193 Back

11 C&AG's Report, paras 2.27-2.32; Qs 34-40, 71, 127, 229-231 Back

12 Qs 181-188; Note by the Department of Health at Q181; Ev 24 Back