Strengthening the NHS, not selling it out

Published date: October 2024

Smart partnerships with institutional investors make the effective transformation of NHS infrastructure possible without compromising the core values at the heart of our healthcare system.

In our recent publication, Deliver or delay? The escalating cost of inaction on NHS estates, we explored the challenges stifling trust leaders’ ability to upgrade and transform healthcare infrastructure. From operational pressures to the volatility of the global economy, we uncovered that delays to essential infrastructure projects increase trust costs and risks.

Central to the paralysis of health and care expansion and investment in modern facilities are three fundamental barriers:

A vast and increasing public funding shortfall.
The impact of Capital Departmental Expenditure Limits (CDEL) constraining spending on capital projects.
Remote bureaucratic business case oversight and approval processes.

The Institute for Fiscal Studies (IFS) describes historical NHS funding patterns as a ‘famine-and-feast’ approach to capital funding that makes it more challenging to plan and deliver investment in the NHS estate effectively. ¹

Against these challenges, NHS trusts no longer have the capacity to deliver what they once could. The capital needed to address the rising maintenance backlog of existing estate of £13.8 billion ² simply doesn’t exist. As service demands on the NHS only increase, a pathway to progress must be found to tackle deteriorating infrastructure and relieve the pressure on our strained healthcare system.

£7.7bn

£12.5bn

NHS capital budgets must nearly double from £7.7bn to £12.5bn just to clear the building repairs backlog and overhaul existing facilities to enable greater productivity and faster patient care.

While delivering improvements to hospital estates is one part of the solution, the second essential step involves strengthening and expanding out-of-hospital services, including primary care and living facilities for older people; a move backed by Lord Darzi in his recent report on the state of the NHS and in the sentiments of Sir Keir Starmer who has called for our health service to ‘reform or die’. ³ The King’s Fund also argues that this level of reform to a 20th century health service model is vital to meet the needs of 21st century patients, who, despite living longer, are increasingly suffering from chronic conditions that demand ongoing care and support. ⁴

But, how do you fund this level of health and care investment when national budgets are already stretched to breaking point?

The association between institutional investment and the NHS has often been rejected on ideological grounds, met, more often than not, with scepticism and concern. However, in the face of failing solutions, a funding blackhole, and new approaches that have proven successful, perspectives are shifting. Institutional investment in UK infrastructure is increasingly considered the foundation of a healthier society and economy.

Both the previous Conservative government and the newly elected Labour government have championed and sought to streamline the investment of UK pension funds into infrastructure to boost UK growth and fuel a stronger economy. The government’s newly created National Wealth Fund ⁵ and the Chancellor’s exploration into pension reform to consolidate UK pension funds both point towards a strengthening of this aspiration and a revised approach towards public-private partnerships.

This report aims to break down some frequently misunderstood truths about public-private partnerships and highlight how institutional investment unlocks potential for health and care providers without jeopardising the values underpinning our healthcare system.

The problems of the NHS don’t end with a change of government. ’ ⁶

Stephen Dorrell
Former Secretary of State for Health and Social Care

01 New government, same challenges

First among the actions of a newly elected Labour government was a review of the NHS operationally and financially and its performance. The recent independent review by Lord Darzi highlighted the critical condition of the NHS today, ⁷ revealing some worrying statistics:

1 million people waiting for mental health services (April 2024).
10% of all patients now wait more than 12 or more hours in A&E.
GP patient satisfaction is at its lowest ever level.
Higher cancer mortality rates in the UK than other countries.

The report also revealed the impact of a £37 billion shortfall in capital investment, after the UK failed to match peer countries’ levels of capital investment in the 2010s, that could have prevented the maintenance backlog, and delivered infrastructure, technology and equipment that would have modernised the health service. Following the publication of this report, Sir Keir Starmer issued a stark warning — that there would be ‘no more money without reform’.

Health Secretary Wes Streeting has previously thrown his backing behind the short-term use of private care to clear NHS backlogs, arguing the case for pragmatism over purity. ⁸ While this approach may alleviate some of the current pressures, it doesn’t address the complex structural and operational challenges that threaten the long-term future of the NHS.

With those challenges only growing, those within healthcare anticipate that the relationship between the private sector and public sector will expand further to deliver more significant reform within the NHS, driving forward institutional investment in healthcare. ⁹

We need to think outside the box when it comes to solving this double whammy of under-strain public finances and an NHS estate in desperate need of renewal. ’ ¹⁰

Julian Hartley
Head of NHS Providers

02 Unlocking potential with institutional investment

In recent years, there has been a growing appetite for investments in operational assets, such as healthcare facilities, student housing or living facilities for older people. A recent survey of investors supports this upswing in activity in the wake of global economic volatility, with 80% anticipating that investment activity would increase in 2024. ¹¹ This shift has been buoyed by government backing for institutional investment to expand acute and primary health and care services.

Several factors are driving an increase in investor confidence:

Firstly, as healthcare needs become more complex, a stable demand for healthcare services is only anticipated to grow. This makes the NHS a relatively safe investment, less susceptible to the impacts of economic downturns than other industries.
Investors looking for stable returns will seek out lower-risk investment opportunities. Because the NHS is backed and funded by the government, this significantly lowers the risk of default for investors, as history has shown the government will intervene in the event of the financial failure of a trust.
In a volatile real estate market, traditional investments may no longer hold the appeal they once did for investors operating with more caution. With its stable demand and potential for growth, operational health assets have become a more attractive option for investors while uncovering new possibilities for trusts paralysed by financial challenges.

80%

of healthcare investors expect increased investment activity in 2024.

Potential NHS investors – who are they?

UK pension funds and retirement annuities

Annuity and pension funds seek secure, long-term investments that deliver stable returns that fund retirement income. Often managed by well-known insurance companies or financial institutions, these funds prioritise safe, stable, long-term returns.

Infrastructure funds and property investors

These funds and investment trusts invest in existing, operational assets or new development projects to improve infrastructure and essential services that support the economy and improve major facilities that benefit the masses. This includes other property investors focusing on commercial schemes or development projects.

Sovereign investors

These investors are a government’s investment arm, managing government capital to support a country’s growth. In addition to working to support that nation's financial future, they also make strategic investments in projects that help to create jobs, support specific industries and boost the economy both at home and abroad.

Debt providers

Banks or private lenders looking to make a secure return on investment by collecting interest on the loans they provide. As financial institutions increasingly seek to meet environmental, social and governance (ESG) targets, debt providers can offer more favourable loan terms for projects that deliver positive environmental and social impacts.

03 Same source, different routes

One of the public misconceptions about government funding of hospital expansion is that the money for these projects comes directly from tax revenue. The reality is that the majority of taxpayer funding through general taxation and National Insurance contributions go toward the day-to-day running costs of the NHS – 95%, in fact. ¹²

How is the NHS budget spent?

5% (£9.9 billion)

NHS capital spending budget (buildings, equipment, etc.)

95% (£171.8 billion)

Day-to-day budgets (salaries, medicine, etc.)

For the funding of major NHS infrastructure projects, such as new hospitals and primary care facilities, the government will typically use a combination of financing methods. With NHS capital capacity no longer able to address the maintenance backlog and demands of many trusts, the government has to take out loans to finance these major capital projects.

To explain this in the simplest of terms, using government gilts, the government can borrow money in the form of a long-term loan with interest from institutional investors, like pension funds, insurance companies and asset managers. By borrowing in this way, the government can spread the costs of a project over the bond’s lifetime and avoid raising funds through increased taxation.

Once this point is understood, one simple fact emerges: regardless of the funding method, whether it’s government borrowing or direct investment from institutions, the ultimate source of capital for these projects is essentially the same: the savings and investments of the public.

Let's be clear: the NHS is a national treasure, and its core principles of universal care are the bedrock of our healthcare system. However, the challenges it faces are undeniable. That's where institutional investment can be a powerful ally. When we propose these partnerships, we’re not talking about privatisation — we’re talking about collaboration that is a force for good. ’

Leighton Chumbley
Chief Executive, Prime plc

Leighton Chumbley, Chief Executive, Prime Plc

Debunking myths or misconceptions about the origins of capital for NHS infrastructure projects is more important than ever, given the pressures facing our healthcare service. Greater understanding leads to a more nuanced perspective on institutional investors, potentially replacing apprehension with mutual trust — opening the door to vital progress.

Prime’s extensive track record of successful partnerships with health and care providers highlights the potential of a funder capital approach, leveraging institutional investment, to overcome challenges where traditional methods have fallen short or been hampered by serious delay.

The funder capital route can facilitate the delivery of projects that can proceed at a local level and have local discretion and approvals where access to national capital is either unavailable, not appropriate, or very slow. Working within these approvals and CDEL capacity, the funder capital route facilitates faster access to capital and, in turn, the pace of project delivery. With fewer hold-ups, health and care providers can better mitigate the rising costs of project delay, as explored previously in Deliver or delay? The escalating cost of inaction on NHS estates.

NHS trusts need forward-thinking and innovative solutions to meet future healthcare demands. With lots of capital ready to invest, the funder capital route is a mutually beneficial partnership that helps trusts shape their estates for the future in the way they feel is best.