In the current climate we are all working together to make frontline workers, and their supporting organisations, operate to the best of their ability with the support that they deserve. It only takes a quick glance across the news or social media to see the monumental effort being put in by the entire country: Captain Tom Moore walking 100 lengths of his garden, countless cycling non-stop for 24 hours, and people and companies mucking in to make much-needed PPE to keep their fellow citizens safe.
Under such pressure, the decision to help the NHS on a better financial footing by writing off its £13.4 billion debt should be welcome. In the short term this is hugely beneficial across the NHS. However, it is only when you look to the small print surrounding this grand gesture that all is not as favourable as it seems and could actually end up costing the NHS millions in further payments back to the Government, as the Independent recently pointed out.
Looking at the detail
First, the presumption is that once the debt has gone, all Trusts will be able to meet the costs of providing services with the income they currently receive to avoid falling back into the very same position some find themselves in now. In all likelihood though, only a minority is likely to manage this.
Secondly, it has been proposed that this debt ‘write-off’ will in fact be paid back in the form of the Public Dividend Capital (PDC). The PDC is a form of long-term Government finance initially provided to NHS Trusts when first forming to enable the purchase of assets from the Secretary of State. In return a charge (or dividend) of 3.5% payable twice a year is required to be paid back, which represents the Department of Health’s equity interest in defined public assets across the NHS. This is calculated on the value of the Trust’s assets.
It is not yet known how the PDC will be amended to incorporate this move, with some suggesting it could be lowered. It is particularly important to note that the 3.5% PDC charge is higher than the typical 1.5% interest charged on loans and therefore Trusts could potentially pay more through PDC than repaying the loans if no changes are made.
RICS guidance and the role of property
Property clearly plays a vital role in calculating the level of this charge each year, and without delving into too fine a detail, the higher the value of a Trust’s assets, the higher the overall PDC charge for the financial year in addition to other daily running costs. Therefore, if a Trust doesn’t have the cash reserves to soak up this additional cost they will find themselves in a worse position, or in a worst-case scenario running reduced services for patients.
In 2019 the RICS published an update to the RICS UK Guidance Note Depreciated Replacement Cost Method of Valuation for Financial Reporting, 1st Edition, effective as at February 2019 to provide further clarity to the valuation approach to ensure greater consistency between all valuers and reduce the prospect of poor practice or valuers adopting unrealistic assumptions. Depreciated Replacement Cost valuations typically comprise a large proportion of healthcare estates valuations and the updated Guidance Note created heightened audit scrutiny to ensure compliance and transparency.
The increased PDC charge will no doubt mean asset valuations for financial reporting of healthcare assets will come under further scrutiny by all parties involved, including Trusts, auditors and valuers.
However, it is essential for the valuation community to maintain its independence (as noted by Montagu Evans Head of Valuation, Gary Howes, in May 2020) when helping clients work through the impact of these changes and to provide reliable and robust valuations.
The short and long term implications
In the short term, quality of data and information will be more important than ever to ensure that valuations can be as detailed and as accurate as possible, reflecting the situation on the ground and consistency from year to year to help Trusts manage their finances. Valuers’ interaction and relationships with not only finance teams but estates teams as well will be paramount to ensure data is free flowing and interpreted correctly. This is beneficial for all parties involved, and should further enable Trusts to build a robust database of their assets, which many currently lack.
Then in the long term, a clear estates strategy is vital to help inform valuation approach and strategy over the years. This will help avoid potential annual sporadic increases or decreases to assist in maintaining a consistent PDC charge, in turn improving Trusts’ ability to financially plan going forward.