Identify sources of funding

This section describes sources of funding for GP-led and PCT-led schemes. Many sources of finance e.g. third party developers are available to both GP and PCT-led commissioners. Most funding for GP-led schemes is available via PCTs under the terms of the 'Directions'.

General background

There are several sources of funding for primary and social care premises that are commonly used together to ensure that projects are affordable.

For GP-led projects these include:

• reimbursement of borrowing costs (formerly known as 'cost rent') – available via the PCT and under the terms of the 'Directions'
• notional/actual rent – available via the PCT and under the terms of the 'Directions' (with capital investment paid for by a third party developer or other private landlord)
• savings from practice-based commissioning (PBC) activities – available via the PCT and under the terms of the 'Directions'
• section 106 or other planning gain agreements – available via the PCT and under the terms of the 'Directions'
• premises growth funds – available via the PCT until 2007 and under the terms of the 'Directions'
• other parts of the PCT's unified budget (other than premises growth funds) – available via the PCT and under the terms of the 'Directions'
• capital from disposal of existing assets such as land or buildings
• grants (including European sources, Neighbourhood Renewal Funds, SureStart, Single Regeneration Budget etc)
• NHS trusts (secondary care providers)
• NHS LIFT companies

PCT-led projects can also access these sources of funding. However, reimbursement of borrowing costs, notional/actual rents and savings from PBC activities can only be used by PCTs on behalf and with the agreement of the GP practice concerned and only for the element of the project that is used by the practice concerned. In both GP-led and PCT-led projects it is possible to sell part of a new development for non-NHS use e.g. housing or recreational facilities in order to cross subsidise the rest of the development. However, in most cases, additional space or facilities within primary and social care premises not used for NHS purposes is just rented out. Examples include cafes, library areas, voluntary sector rooms and alternative medicine rooms. It is also often possible to negotiate a premium from a pharmacist who leases space within a new surgery development.

Section 106 or other planning gain agreements

Funding can be sought through discussions with the local council's planning departments if schemes are being developed as part of larger developments such as for new housing estates. Often this funding will come in the form of free or reduced priced land, which a property developer is required to give to the council in exchange for planning permission.

NHS LIFT companies

These are public private partnerships with a private sector company being the majority shareholder. Their purpose is to build and/or refurbish primary care premises and rent these out to GPs or PCTs on a lease basis (as well as to other parties such as chemists, opticians and dentists).

GP-led schemes

For GP-led schemes it is important for the GPs to decide, in advance of the project getting underway, whether they wish to own or lease their new premises. The pros and cons of leasing versus owning can be summarised as follows:

Owning Meaning GPs taking the role of investor and developer. The pros of this are that:

• As GPs effectively have the interest rate on their loans reimbursed, they represent a safe and reliable type of borrower for banks and can, therefore, negotiate very competitive lending rates.
• Capital gains tax (CGT) tapering relief reduces CGT to only 10% for a 40% taxpayer. This type of tax relief is only applicable to business premises making investment in surgery premises more attractive than investment in domestic premises.
• The practice can directly control the design process.
• Any commercial opportunities (such as rental income from a pharmacist) can be enjoyed solely by the GP partners.
• Future extensions can be quickly approved by agreement within the GP partnership.

The cons of owning are that:

• The partnership will have to take a very large loan to finance the project.
• The value of investments can go up as well as down i.e. current market rent can be reduced, and/or property values can fall, leading to negative equity.
• Partnership disputes or splits can lead to complications of ownership.
• Full responsibility for procuring premises falls to GPs and staff, which will be time consuming.
• This is not a core function of a GP practice so there may be a steep learning curve, and thus a heavy reliance on professional advisers (who will be taking little, if any, financial risk).
• It is highly unlikely that there will be any short-term financial benefits.
• There are a number of other risks and responsibilities of ownership (as with domestic premises).

Leasing The pros of leasing are:

• There are a number of professional companies in the market who have proven that they can deliver buildings within a rental level that can be fully reimbursed.
• A good deal of the work in procuring land and property can be passed to the developer.
• It takes away responsibility and a substantial part of the cash flow cost in relation to the initial development activities, and there is no capital to repay.

The cons of leasing are:

• In the case of leasing a new build, the issue of having 'all your eggs in one basket' in that the developer will usually be responsible for the full procurement process and if there is a minor dispute this could effect the whole contract.
• There is a possibility of a shortfall in rent reimbursement since the rules governing this vary across the country (although this can be minimised through a clause in the lease).
• New partners may not wish to take on the liability of a previous tenant, thus making it difficult for partners to escape liability on retirement (although again this risk can be minimised through a clause in the rent).
• Future developments will need landlord approval, and the GPs will have less direct control over building issues than they would as owners.

For GP-led projects the main source of funding is likely to be current market rent or actual lease rent. As these funds come from cash limited (discretionary) PCT resources, there is normally competition to obtain them. However, most PCTs will see real increases in their budgets over the period 2005-7 so the extra money should be available in a PCT's baseline budget. Ultimately, the availability of these funds will depend on whether the PCT views estates as a priority. A list of items supplied as fixtures and fittings within new developments, together with usual sources of funding for these items, is provided by the Valuation Office (see downloadable document for details). Local conditions will determine the exact nature of the equipment and the specialist design features required, as well as the most appropriate funding mechanisms. For small improvements to existing GP premises improvement grants are available from the PCT's premises growth funds (as detailed in the 'Directions 2004').

Strategic capital

All PCTs have small capital budget allocations for PCT-led premises developments. Normally these budgets are used to address backlog maintenance issues or for minor improvements and/or refurbishments. They are rarely used for new projects. The DH also distributes modernisation capital, which PCTs are invited to bid for on an ad-hoc basis. This may be used for PCT-led schemes or the PCT may pass on the funds to GPs for GP-led schemes. The type of business case required in order to secure funding and whether it is drawn up by the PCT or GP practice will depend on the nature of the scheme. These are special one-off funds allocated on an occasional basis.