Annual State of the NHSScotland Assets and Facilities Report for 2012

5.0 Future asset investment requirements

Capital investment in assets in NHSScotland has more than trebled in recent years from £132.5 million in 2003/4 to £493.6 million in 2011/12. This investment programme has also been supplemented by the use of revenue finance for large infrastructure projects where, in the same period, over £500m of additional investment has been made. Much of this investment has focussed on procuring new, modern facilities to support the delivery of 21^st Century Healthcare. However, the analysis of the current condition and performance of assets shown in this report indicates that a focus for future investment in assets is needed to:

• Maximise benefits and improve the experience of healthcare for patients
• Improve performance in terms of effectiveness and efficiency
• Mitigate risks to ensure that operational assets are safe and reliable in use.

Given the pressure on capital and revenue resources in the short to medium term, future investment in assets will need to focus on:

• Eradicating high and significant risk backlog
• Modernising and updating assets to ensure that they are "fit for purpose" and functionally suitable for the emerging new healthcare delivery models
• Investment in lifecycle replacement/maintenance to extend asset lives and reduce the build up of future backlog
• Improving performance through invest to save projects that embrace new technology, innovative service models and partnership working.

5.1 Investment to reduce estate backlog

Whilst there has been a significant reduction (£62 million) in NHSScotland's base backlog maintenance expenditure requirement since 2011 the level of outstanding backlog of £948 million remains high. However, as described earlier in this report, backlog is most likely to be addressed over the next 5 years through a combination of:

• Estate rationalisation and disposal of older properties avoiding the need for expenditure on backlog
• Replacing older properties with new facilities and avoiding the need for expenditure on backlog
• Incorporating backlog works within major modernisation and refurbishment projects
• Undertaking specific projects to target the high and significant backlog
• Incorporating backlog work within operational repair and cyclical maintenance

Whilst it is essential that high and significant risk backlog is addressed as a matter of priority, it is not practical or affordable to address all backlog over the short term (5 years).

Boards have estimated (based on their PAMS) that over the next 5 years backlog will be addressed through:

• Estate rationalisation and disposal of older properties avoiding the need for expenditure on backlog of £175 million
• Estate replacement through capital and revenue funded schemes together with other refurbishment/upgrading schemes which targeted expenditure on high and significant backlog will reduce the backlog by £256 over the next 5 years. This includes the impact of some of the current major capital schemes being completed over this period (South Glasgow) and expenditure targeted on backlog of circa £50 million per annum.

The chart below shows the impact of these approaches to addressing backlog.

The chart shows that the Board's plans will enable high risk backlog to be eradicated within 2 years and significant risk backlog within 4 years. It will also reduce low and moderate risk backlog by £90 million over the 5 year period. The remaining low and moderate risk backlog will continue to be addressed beyond the current 5 year planning period through a similar approach.

5.2 Investment required to replace estate assets

There will always be a need to replace buildings which have reached the end of their operational life and are functionally unsuitable for the delivery of modern healthcare services. Whilst major refurbishment is always considered as an option for these buildings, it is often uneconomic to bring them up to modern standards and replacement is the only viable option.

Approximately 26% of the existing estate is already over 50 years old and a further 29% is already between 30 and 50 years old (and will therefore, be over 50 years within the next 20 years). Therefore, a possible approach to identifying the future replacement investment requirement is to assume that around 50% of the existing estate will need to be replaced over the next 40 years. At current day new build construction costs this would equate to approximately £10 billion and therefore, in broad terms an annual investment of £250 million per annum over the next 40 years. This provides an initial view of a future investment requirement and it is recognised that further work is needed to develop a detailed investment plan based on a thorough examination of other options such as refurbishment/remodelling of existing buildings

5.3 Investment required to replace vehicle assets

As described earlier in this report, many of the NHSScotland vehicles are leased and therefore, the replacement cost of these vehicles is effectively included within the annual leasing costs. However, substantial vehicle assets remain owned, particularly those of the Scottish Ambulance Service and NHS National Services Scotland. These owned vehicle assets are estimated to have a current day replacement cost of around £75 million. These vehicle assets have relatively short lives and fleet managers advise that a realistic replacement programme would be 7 years. Therefore, in broad terms an annual investment of around £11 million per annum is required for vehicles. This estimate is broadly in line with a recently approved business case for Scottish Ambulance Service vehicle replacement which was for £35 million investment over four years.

5.4 Investment required to replace medical equipment assets

The NHSScotland medical equipment assets are estimated to have a current day replacement cost of approximately £450 million. Again, asset lives tend to be relatively short given the rapid advances in technology. The NHSScotland National Imaging Equipment Group advises that asset lives vary between 5 and 11 years depending on the particular piece of equipment. Therefore, taking a mid-point life of 8 years, the annual investment for equipment replacement would be around £57 million per annum (based on current day costs). However, there is some concern that a backlog of equipment replacement has built up which could increase this annual investment requirement for replacement of equipment. Further work is planned to establish more robust replacement costs for next year's report.

5.5 Investment required in IM&T assets.

IM&T assets have been examined as two groups:

• Infrastructure (cabling networks, servers etc.)
• Desktop and mobile equipment

The estimated present day replacement cost of the infrastructure is £125 million Again, there is some concern that there is a build up of infrastructure backlog due to the rapid increase in the use of end user IM&T equipment which has now outgrown the capacity of the infrastructure. Hence there is an urgent need to review the investment needed to replace some of this infrastructure. The present day replacement cost of the desktop and mobile equipment is estimated to be £85 million. Given the issue on infrastructure backlog and the relatively short life of desktop and mobile equipment, the annual investment in infrastructure and equipment is estimated to be around £40 million per annum over the next five years.

5.6 Summary of asset investment requirements

The combined asset investment requirement of circa £400 million per annum is shown in the chart below. Although presented as a single investment amount, in practice some of the capital requirement may be funded through revenue schemes such as hub and leasing arrangement.

In broad terms(within 10%) this £400 million per annum estimated future asset investment requirement will be met from the NHSScotland LDP Infrastructure Investment Programme as shown in the table below.

	2012-13 £000s	2013-14 £000s	2014-15 £000s	2015-16 £000s	2016-17 £000s	Total over next 5 years
Statutory compliance and backlog maintenance :
SAFR Estimated Future Investment Requirement	51,000	51,000	51,000	51,000	51,000	255,000
LDP Statutory compliance and backlog maintenance expenditure	49,975	70,939	70,816	69,769	69,742	331,241
Difference:	-1,025	19,939	19,816	18,769	18,742	76,241
Replacement of the existing estate:
SAFR Estimated Future Investment Requirement	250,000	250,000	250,000	250,000	250,000	1,250,000
LDP expenditure:	452,682	382,596	181,842	64,859	71,540	1,153,519
Difference:	202,682	132,596	-68,158	-185,141	-178,460	-96,481
Medical Equipment:
SAFR Estimated Future Investment Requirement	57,000	57,000	57,000	57,000	57,000	285,000
LDP Expenditure	49,271	45,792	49,263	51,745	63,752	259,822
Difference:	-7,729	-11,208	-7,737	-5,255	6,752	-25,178
Vehicles:
SAFR Estimated Future Investment Requirement	10,000	10,000	10,000	10,000	10,000	50,000
LDP Expenditure	11,227	11,428	7,532	9,125	9,025	48,337
Difference:	1,227	1,428	-2,468	-875	-975	-1,663
IM&T:
SAFR Estimated Future Investment Requirement	41,000	41,000	41,000	41,000	41,000	205,000
LDP Expenditure	17,460	13,007	15,171	16,000	14,001	75,639
Difference:	-23,540	-27,994	-25,829	-25,000	-26,999	-129,362
Total Estimated Future Investment Requirement from 2012 SAFR	409,000	409,000	409,000	409,000	409,000	2,045,000
Total LDP Expenditure	580,614	523,761	324,624	211,498	228,060	1,868,557
Difference	171,614	114,761	-84,376	-197,502	-180,940	-176,443

In addition to the investment requirements identified above there is expected to be further investment required to implement the recommendations of the Soft FM Review (see Annex H). Similarly, there is expected to be some investment required as a result of implementing the Zero Waste Plan and the Waste Regulations 2012 (see Annex D).

5.7 The balance of investment between assets

In the past, the estate has accounted for the majority of investment in NHSScotland assets. The results from the earlier analysis of future asset investment requirements, together with the annual costs of asset ownership and associated FM services are shown in the table below. This table clearly shows that, without change, estate assets could account for around 78% of future annual capital and revenue expenditure on assets.

	Future Investment £ millions per annum
	Estate	Vehicles, Medical Equipment and IM&T	Total
Annual Cost of ownership and associated FM services	637	159	796
Future Investment requirements per annum	301	109	410
Total	938	268	1206
Percentage of total investment	78%	22%	100%

New technology, new drugs and emerging innovative service delivery models may mean that there will be less reliance in the future on estate assets to deliver healthcare and progressively more reliance on the other assets (medical equipment, IM&T and vehicles). This would be broadly in line with services increasingly being provided in people's homes and in local settings using peripatetic teams, portable equipment and mobile computing to deliver services. Hence, as Boards develop their PAMS they need to evaluate the relative impact of re-balancing the investment in assets away from the estate and towards the other assets. This re-allocation of future investment has the potential to have a transformational impact on the investment in other assets. This is clearly shown in the table below which examines two potential scenarios for re-allocation of asset investment.

Scenario		Future Investment £ millions per annum
		Estate	Vehicles, Medical Equipment and IM&T	Total
1	Current allocation of asset investment	938	268	1206
2	Re allocate 5% of estate investment to other assets	891	315	1206
3	Re allocate 10% of estate investment to other assets	844	362	1206

The table shows that a 5% and 10% re-allocation of estate investment enables investment in the other assets to increase by 18% (£47m) and 36% (£94m) respectively.

This potential for re-balancing investment across the asset groups presents a key challenge for NHSScotland over the next few years. Clearly, the case for changing the balancing in investment needs to be carefully evaluated in terms of benefits, costs and risks and will be different for each Board depending on local service models and current asset structures/performance. Boards should be examining the relative impact of changing the balance of investment across assets as part of their PAMS. An advantageous scenario could be one which invests in properties with a clearly defined long term need, disinvests from those that don't and uses the difference to improve the quality and performance of service delivery through investing in other assets.

The table that follows provides an indicative illustration of the impact of a 5% re-allocation of future investment away from the estate to other assets.

Investment re-allocation scenario		Estimated Total Future Annual Investment Requirement £m	Value of a 5% re-allocation of future estate investment £m	Impact on the estate to achieve this re-allocation of investment
Re-allocate 5% of future estate investment of £938 m (capital and revenue)	Annual cost of estate and associated FM services	637	32	Will require a 5% (220,000 sq.m) reduction in the size of the estate
	Backlog future investment requirement	50	3	Will require rationalisation and disposal of 7,500 sq.m of estate to avoid the need for expenditure on backlog
	Future investment in Estate replacement	250	12.5	Will require the capital expenditure on replacing the existing estate to be reduced by £12.5 m - roughly equivalent to 2500 sq.m of acute estate
	Total	938	47

The table clearly shows that the impact of re-allocating investment from the estate to other assets groups is significant and will be challenging.

5.8 Key messages

The analysis of future asset investment requirements described in this section of the report has identified a number of key messages for Boards in terms of developing their future PAMS:

1. Estate rationalisation leading to disposal of surplus properties has the potential to:

a. Reduced future backlog
b. Lower future operational costs (property maintenance, energy, cleaning etc)
c. Reduced future investment requirements for estate replacement,

2. Estate rationalisation is a key tool for addressing backlog since it avoids increasing the base backlog cost by VAT, fees, contingencies etc. The alternative approach of direct investment in eradicating backlog is costly and unlikely to be affordable.

3. Almost 70% of annual future expenditure is associated with the day to day estate and FM services costs (£637 million per annum). Therefore, it is essential to focus on improving the performance on these services (reference Section 6: Potential for Performance Improvement).

4. A rigorous analysis of the impact of rebalancing of future investment between different asset groups should be an integral part of the development of Boards' PAMS. Relatively small changes in estate investment can have a large impact on the investment in other assets.