The valuation of NHS hospitals under capital charging

Heald, David and Scott, David A. (1996) The valuation of NHS hospitals under capital charging. Journal of Property Research, 13 (4), 261-273. (doi:10.1080/095999196368817).

Abstract

Capital charging occurs when public or quasi-public providers of public services must explicitly pay for their capital through the mechanism of an annual charge based upon the value of assets used in service provision. The rationale is that no longer treating capital as a ‘free good’ will lead to improvements in productive efficiency. Attempts to make public sector financial management more closely approximate private sector models inevitably encounter the twin problems of measuring public sector output and valuing public sector capital. For asset valuation, use has been made in the National Health Service (NHS) of depreciated replacement cost (DRC), making the assumption that existing assets will be replaced on a like-for-like basis, rather than valuing with reference to the modern equivalent asset. Four interrelated technical problems with DRC in the NHS are distinguished, all suggesting overvaluation: it cannot safely be assumed that a building is worth the sum of its component parts; hospitals consist of different vintages of buildings, of markedly different suitabilities for current healthcare provision; the configuration of buildings on particular sites can dramatically affect rationalization possibilities; and there are profound difficulties within the DRC framework of determining what constitutes capital expenditure. Further complications arise from the fact that a growing proportion of hospital buildings is architecturally listed, and from the new policy commitment to expand the role of privately financed assets (which fall outside the capital charging system).

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Contributors

Author: David A. Scott

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