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Potential Measures to Encourage Provision of Nursing Home & Community Nursing Unit Facilities

Cost Benefit Analysis –Final Report 30th July 2015

Nursing Home & Community Nursing Unit Facilities Cost Benefit Analysis

TABLE OF CONTENTS

EXECUTIVE SUMMARY ............................................................................................... I

1. INTRODUCTION ................................................................................................. 1

2. PROJECT SCOPE, RATIONALE & JUSTIFICATION, OBJECTIVES ........................... 9

2.1 PROJECT SCOPE ............................................................................................ 9

2.2 RATIONALE & JUSTIFICATION .......................................................................... 9

2.3 PROJECT OBJECTIVES................................................................................... 11

3. FEASIBILITY STUDY .......................................................................................... 12

3.1 FEASIBILITY ................................................................................................ 12

3.2 OPTIONS & ALTERNATIVES ........................................................................... 12

3.3 CONSTRAINTS ............................................................................................ 17

4. EXCHEQUER CASHFLOW ANALYSIS ................................................................. 19

4.1 DEFINITION ............................................................................................... 19

4.2 CAPITAL COST ............................................................................................ 20

4.3 PURCHASE PRICE/OPPORTUNITY COST OF LAND .............................................. 21

4.4 FAIR DEAL & OTHER PAYMENTS ................................................................... 22

4.5 ADDITIONAL REVENUE COSTS ....................................................................... 25

4.6 LOSS OF TAX REVENUE & DEADWEIGHT LOSS .................................................. 27

4.7 PPP PAYMENTS ......................................................................................... 29

4.8 ADDITIONAL REVENUES TO THE EXCHEQUER FROM RESIDENT CHARGES .............. 30

4.9 REDUCED COSTS IN THE HEALTHCARE SYSTEM ................................................. 30

4.10 MARKET VALUE OF LAND & PROPERTY RELEASED ............................................ 31

4.11 RESIDUAL VALUE OF LAND & BUILDINGS ........................................................ 32

4.12 REDUCED HR COSTS ................................................................................... 32

4.13 RESULTS OF EXCHEQUER CASHFLOW ANALYSIS/FINANCIAL ANALYSIS .................. 32

5. ECONOMIC APPRAISAL .................................................................................... 35

5.1 DEFINITION ............................................................................................... 35

5.2 ADDITIONAL POLLUTION & CONGESTION ....................................................... 35

5.3 ADDITIONAL HEALTH BENEFITS ..................................................................... 36

5.4 SHADOW PRICE OF PUBLIC FUNDS................................................................. 37

5.5 BENEFITS FOR FAMILY/FRIENDS OF RESIDENTS ................................................ 37


5.6 CREDIT FOR REDUCED SHADOW PRICE OF CONSTRUCTION LABOUR .................... 39

5.7 SOCIOECONOMIC COST BENEFIT ANALYSIS ..................................................... 39

6. SCENARIO & SENSITIVITY ANALYSIS ................................................................ 42

6.1 SCENARIOS ................................................................................................ 42

6.2 HIGHER DISCOUNT RATE ............................................................................. 42

6.3 HIGHER CAPITAL EXPENDITURE ..................................................................... 43

6.4 LOWER BENEFITS ........................................................................................ 43

6.5 SHADOW PRICE OF CONSTRUCTION LABOUR = 100% ...................................... 44

6.6 CONCLUSIONS ............................................................................................ 44

APPENDIX: AECOM CAPITAL COST REVIEW ....................................................... 45

LIST OF TABLES TABLE 1.1: COSTS AND BENEFITS TO BE CONSIDERED ..................................................... 7

TABLE 2.1: NURSING HOME LONG- & SHORT-STAY BED SUPPLY MINUS DEMAND AT LHO

LEVEL, 2016-2036 ............................................................................................. 10

TABLE 2.2: CUMULATIVE NURSING HOME SUPPLY GAP AT LHO LEVEL, 2016-2036 ........... 11

TABLE 3.1: SPLIT OF NURSING HOMES BY BED NUMBERS, 2015 .................................... 14

TABLE 3.2: CAPACITY IMPLICATIONS OF THE CBA OPTIONS .......................................... 17

TABLE 4.1: COSTS AND BENEFITS TO BE CONSIDERED, EXCHEQUER CASHFLOW ANALYSIS ..... 19

TABLE 4.2: AECOM NURSING HOME CONSTRUCTION COST MODELS (EX VAT) ................ 20

TABLE 4.3: CAPEX IMPLICATIONS OF THE CBA OPTIONS .............................................. 21

TABLE 4.4: ASSUMPTIONS REGARDING SITES FOR PUBLIC SECTOR FACILITIES .................... 22

TABLE 4.5: EXCHEQUER CASHFLOW ANALYSIS/FINANCIAL APPRAISAL ............................. 33

TABLE 4.6: EXCHEQUER CASHFLOW ANALYSIS/FINANCIAL APPRAISAL – COST-EFFECTIVENESS

...................................................................................................................... 34

TABLE 5.1: COSTS AND BENEFITS TO BE CONSIDERED IN ECONOMIC CBA .......................... 35

TABLE 5.2: SOCIO-ECONOMIC COST BENEFIT ANALYSIS RESULTS ................................... 40

TABLE 6.1: SUMMARY OF SCENARIO ANALYSIS TESTS .................................................. 42

TABLE 6.2: CBA RESULTS, DISCOUNT RATE = 7.5% ..................................................... 43

TABLE 6.3: CBA RESULTS, UPFRONT CAPITAL EXPENDITURE 50% HIGHER ......................... 43

TABLE 6.4: CBA RESULTS – BENEFITS & SAVINGS 50% LOWER ..................................... 44

TABLE 6.5: CBA RESULTS – 100% SHADOW PRICE OF CONSTRUCTION LABOUR ................ 44


LIST OF FIGURES FIGURE 1.1: IDENTIFYING THE APPROPRIATE TYPE OF ANALYSIS ....................................... 2

FIGURE 4.1: EXCHEQUER CASHFLOW ANALYSIS/FINANCIAL APPRAISAL (NPV € MILLION) .... 33

FIGURE 5.1: SOCIO-ECONOMIC COST BENEFIT ANALYSIS RESULTS (NPV € MILLION)........... 40

This document was prepared by: DKM Economic Consultants Ltd., Office 6 Grand Canal Wharf, South Dock Road, Ringsend, Dublin 4, Ireland. Telephone: 00 353 1 6670372. Email: [email protected]. Website: www.dkm.ie This report has been produced for the Department of Health for the sole purpose of evaluation of Potential Measures to Encourage Provision of Nursing Home & Community Nursing Unit Facilities. No party other than the Department of Health shall be entitled to use or to rely upon the content of this report for any purpose whatsoever. The authors of this report shall have no liability in respect of any such use or reliance. This document is the copyright of DKM Economic Consultants. Any unauthorised reproduction or usage by any person other than the addressee is strictly prohibited.

ACKNOWLEDGEMENTS This project has benefitted from consultations with and inputs from a wide range of stakeholders, including the relevant sections of the Department of Health and HSE, domestic and overseas nursing home operators, Nursing Homes Ireland, the National Treatment Purchase Fund, domestic and overseas current and potential future investors, the main banks, the Departments of Finance and Public Expenditure & Reform, HIQA, the National Development Finance Agency and the Ireland Strategic Investment Fund, as well as a number of consultancy firms active in the sector. We also appreciate the valuable assistance and inputs of the project’s Steering Committee. Worthy of particular mention is the Committee Chairperson, Laura McGarrigle. Without these inputs this report would not have been possible. All remaining errors are the authors’ alone.

mailto:[email protected]

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EXECUTIVE SUMMARY

Introduction The team incorporating DKM, AECOM, RDJ and Rose McHugh (Former Head of

Corporate Finance in Merrion Capital) has been tasked by the Department of

Health to undertake a Cost Benefit Analysis (CBA) of options to address the

requirement for nursing home capacity, in compliance with the Department of

Public Expenditure & Reform’s (DPER) Public Spending Code. This represents the

4th part of a wider study, which has already addressed the questions:

(i) What are the current and future requirements for nursing home facilities for

the period 2015-2035 by geographic area and what is the likely gap in the

absence of additional measures to encourage provision?

(ii) What are the reasons for the current lack of investment in facilities and what

reasons have the most significant effect?

(iii) What are the potential policy options for addressing the problem and how do

the different options perform against key criteria?

Options for Analysis In carrying out a CBA of an investment project or programme, it is important to consider alternative means of delivering the sought-after benefits. The Public Spending Code requires that all realistic alternative ways of achieving the stated objectives are examined critically, and that in particular the “Do Nothing”/”Do Minimum” option be considered.

Part (iii) of the assignment listed above in effect generated a ‘long list’ of options,

which were subject to an informal Multi-Criteria Analysis (MCA), to generate a

short list of options to be subjected to CBA, as follows:

1. Counterfactual

“Continue as is” option.

Private sector will add 700 beds per annum in 2016 and 2017, and 400 per

annum thereafter. This implicitly assumes that there will be no reform of the

pricing model of the Fair Deal scheme or any other relevant policy.

The State continues to spend €20 million per annum, which will lead to a

reduction in capacity by 2020, with this loss of capacity gradually made good

as €20 million per annum continues to be spent thereafter.

A significant capacity deficit opens up over time under this option.

2. Direct Exchequer investment to bring the existing stock up to HIQA

infrastructural standards and to provide all necessary additional capacity

Private sector will be as in the counterfactual; implicitly assumes no reform

of the pricing model of the Fair Deal scheme.

3. Extension of the Employment and Investment Incentive Scheme (EIIS)

Public sector provision will remain stable, which will require additional public

investment, assumed to be delivered via extensions to existing facilities.

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Private sector will deliver the supply gap, incentivised by access to the EIIS,

an existing scheme which grants relief to investors at a rate of 75% of the

investment amount in year one and 25% in year four.

Implicitly assumes that the pricing model of the Fair Deal scheme is reformed

to provide all suppliers with a market return on their investment, assuming

investment is made efficiently and operations are conducted efficiently.

4. Accelerated capital allowances for expenditure on plant & machinery by

nursing home companies



Private sector will deliver the supply gap, incentivised by accelerated capital

allowances on investment in plant & machinery whereby, instead of being

applied over an eight year period, a one year allowance up to a capped

amount would be permitted.




5. Public Private Partnership

Private sector delivers additional capacity as per Do Minimum, and public

sector continues to spend €20 million per annum directly on its own facilities.

PPP is used to (i) make good the resultant public sector deficit, and (ii) deliver

all the additional required nursing home capacity.

The private partner builds and maintains the facilities and the public sector

operates them (possibly on public sector sites).

6. Private sector provides all additional nursing home facilities with the

assistance of a State fund

A revolving fund (akin to the Irish Strategic Investment Fund but lending at

lower than commercial interest rates) borrowed at sovereign rates and lent

on at a margin to cover risk and administration, to the private nursing home

sector.

Similar to the EIIS but with three important differences –

it would not be a tax-based scheme, and therefore would be potentially

less controversial and less of a burden on the taxpayer,

the timeframe could be longer than the minimum under EIIS, and

it could potentially be used for new nursing homes.






In reality, it is likely that the future network of Nursing Homes will be delivered

using a range of approaches, given the numbers involved and the range of

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circumstances. However, for tractability, we work on the basis that each of the

options above is mutually exclusive.

Exchequer Cashflow Analysis/Financial Analysis In the Exchequer Cashflow Analysis/Financial Analysis we are concerned with the

financial costs and benefits of the project to its promoter, the Exchequer. On the

cost side we incorporate:

the additional direct capital and revenue expenditure by the Exchequer on its

own facilities;

tax revenues foregone where these are relevant;

payments to PPP private partners, where relevant;

net payments to private nursing homes under the NHSS, but not the actual

expenditure by these nursing homes.

The main benefit is the avoidance of the usage of acute hospital capacity to cater

for a large proportion of the residents in question. Other benefits include:

contributions recoverable from residents of public nursing homes under the

Fair Deal Scheme,

repayments recoverable from residents (or their estates) of contributions

paid under the Ancillary State Support scheme,

reversion of land and buildings to the State at the end of PPP contracts,

where relevant.

The results of the Exchequer Cashflow Analysis are as follows. While Internal

Rates of Return and Benefit/Cost Ratios are also presented, Net Present Value

(NPV) is considered the best measure for comparing competing options.

Exchequer Cashflow Analysis/Financial Appraisal

Option NPV

€ Million

Internal

Rate of

Return

Benefit/

Cost Ratio

NPV

NPV Rank

1 Counterfactual/Do Minimum 10,494 656% 5.3 6

2 Direct Exchequer Provision 41,657 1093% 4.2 4

3 Extension of EIIS 44,038 1975% 6.7 3

4 Accelerated Capital Allowances 44,138 2085% 6.8 2

5 Public Private Partnership 41,182 1865% 4.2 5

6 State Fund 44,142 2102% 6.8 1

In financial terms all the options have a highly positive Net Present Value (NPV)

over the evaluation period, while Option 6 (“State Fund”) emerges as the most

positive. This reflects the fact that there is no cost to the State in operating the

fund, as it lends on the money at a margin to cover risk and administration, but

lower than commercial rates. It should be noted however that there is a question

mark over whether the borrowing for such a fund could be excluded from the

State balance sheet (i.e. would not be included in the State’s debt:GDP ratio). It is

also fair to point out that the differences in NPV between options 3, 4 and 6, and

between options 2 and 5, are modest. With regard to the latter, PPP does have

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benefits in terms of impact on the State balance sheet, which are not taken into

account in the analysis.

A positive financial return for the Exchequer is unusual for health-related projects,

but is driven by the estimated savings in the acute hospital system. Savings grow

rapidly over time to very large sums, given the cost of accommodating residents

elsewhere in the healthcare system, and the large numbers of residents involved.

A key message to take from this is that, based on the expected savings elsewhere

in the healthcare system, the roll-out of adequate nursing home capacity is highly

worthwhile financially, whatever the configuration of the service.

More important than the Exchequer Cashflow analysis is the socio-economic

analysis, which takes into account the broader socio-economic costs and benefits.

Socio-Economic Analysis In the Exchequer Cashflow/Financial Analysis we were concerned with the

financial costs and benefits of the project to its promoter, i.e. the Exchequer. The

economic appraisal takes these figures and includes the external/unpaid for costs

and benefits of the project, evaluated from the perspective of society as a whole,

including shadow prices (true economic costs of resources), and the social cost of

capital. The results of this analysis are presented in the following table:

Socio-Economic Cost Benefit Analysis Results

Option NPV

€ Million

Internal

Rate of

Return

Benefit/

Cost Ratio

NPV Rank






6 State Fund 40,596 2444% 8.4 1

As with the Exchequer Cashflow analysis, under the socioeconomic CBA all

options deliver a highly positive NPV, and thus are considered worthwhile from a

socioeconomic point of view. Option 6 – “State Fund” - once again delivers the

highest return, based on our estimates. Again, the differences in NPV between

options 3, 4 and 6, and between options 2 and 5, are modest.

It is important to note that with Options 3, 4 and 6 we see reform of the pricing

model of the Fair Deal scheme to enable private operators to earn a return on

efficient investment as the main means by which the private sector will deliver

the required capacity, with the EIIS, accelerated capital allowances and State

Fund assisting in this regard. Another consideration is that there is no guarantee

with these options that the required additional capacity will be delivered, as

opposed to Options 2 and 5. However, the private sector has been the main

source of new capacity in recent years, and during the last decade was adding

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capacity at a rate more than adequate to meet future requirements as estimated

in this study.

It is worth keeping in mind also that the benefits for residents and their families

(as opposed to the Exchequer) of accommodation in nursing homes instead of

elsewhere in the healthcare system, as well as benefits for users of the acute

hospital system due to freed-up acute system capacity, have only been

qualitatively assessed and this further enhances the worthwhileness of the

project.

In our scenario analysis we tested the robustness of the above results to

significantly more negative outturns than the base case, including cost of capital

50% higher, capex 50% higher and benefits 50% lower. All the options are robust

to these more negative scenarios. The analysis gives comfort around the

robustness of our results. Option 6 remains the preferred option throughout.

Based on our analysis, this is a highly worthwhile project, which generates a

significantly positive return for both the Exchequer and for society. We tested a

range of procurement options, all of which generated highly positive returns. In

reality it is likely that a range of approaches will be used to deliver the nursing

home system, and our analysis confirms that these other approaches all generate

positive returns.

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1. INTRODUCTION

1.1 BACKGROUND

The team incorporating DKM Economic Consultants, AECOM, RDJ Solicitors and

Rose McHugh (Former Head of Corporate Finance in Merrion Capital) has been

tasked by the Department of Health to undertake a Cost Benefit Analysis (CBA) of

options to address the requirement for nursing home capacity, looking forward to

2035, in compliance with the Department of Public Expenditure & Reform’s

(DPER) Public Spending Code1, as well as the Department of Finance Guidelines for

Tax Expenditure Evaluation2.

This represents the 4th part of a wider study, which has already addressed the

questions:

(i) What are the current and future requirements for nursing home facilities for

the period 2015-2035 by geographic area and what is the likely gap in the

absence of additional measures to encourage provision?

(ii) What are the reasons for the current lack of investment in facilities and what

reasons have the most significant effect?

(iii) What are the potential policy options for addressing the problem and how do

the different options perform against key criteria?

Part (iii) above in effect generated a ‘long list’ of options, which were subject to an

informal Multi-Criteria Analysis (MCA), to generate a short list of options to be

subjected to CBA.

1.2 PROJECT EVALUATION

1.2.1 Cost Effectiveness Analysis or Cost Benefit Analysis

Before proceeding, it is worthwhile discussing project appraisal for public

investment projects and health-related projects in particular. The Public Spending

Code lists a number of techniques, including CBA and Cost Effectiveness Analysis

(CEA), which it describes as “most applicable to healthcare, scientific and

educational projects where benefits can be difficult to evaluate.”3

The decision process as to which technique to use is summarised in the following

figure:

1 http://publicspendingcode.per.gov.ie/technical-references/ 2 http://www.budget.gov.ie/Budgets/2015/Documents/Tax_Expenditures_Oct14.pdf 3 Expenditure Planning, Appraisal & Evaluation in the Irish Public Service: Standard Rules & Procedures. http://publicspendingcode.per.gov.ie/wp-content/uploads/2012/09/The-VFm-Code-except-D-03-Print-Version.pdf

http://publicspendingcode.per.gov.ie/technical-references/

http://www.budget.gov.ie/Budgets/2015/Documents/Tax_Expenditures_Oct14.pdf

http://publicspendingcode.per.gov.ie/wp-content/uploads/2012/09/The-VFm-Code-except-D-03-Print-Version.pdf

http://publicspendingcode.per.gov.ie/wp-content/uploads/2012/09/The-VFm-Code-except-D-03-Print-Version.pdf

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Figure 1.1: IDENTIFYING THE APPROPRIATE TYPE OF ANALYSIS

Source: Public Spending Code.

The key question arising from the decision process is, therefore, can appropriate

shadow prices be established? As set out in the body of this report, it is possible

to use shadow prices for the current project, and thus we use the CBA technique.

However, it must be acknowledged that, with the exception of the Counterfactual,

all the options considered here are taken to deliver the same quality of output for

residents, therefore in most cases the differentiating factor will be cost.

1.2.2 Elements of CBA

In the discussion below we examine the elements of a CBA in more detail. The

general approach to carrying out such an analysis is prescribed in the Public

Spending Code. CBA is an analysis tool used generally for projects seeking public

funding, and attempts to identify the net socioeconomic benefit of a project. The

net socioeconomic benefit consists of:

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The additional value-added is made up of the additional income (profits + wages)

generated by the project, and can be considered the private return to the

resources (enterprise and labour) used in the project. It is generally classified into

three “effects”:

1. Direct effect – the additional income directly generated by the project itself.

If the project was a fully private hospital, charging the commercial price for

its services in a competitive environment, then the direct effect would

comprise the profits of the hospital plus its payroll4.

In a non-commercial hospital or other public service, the measurement of

value-added is less clear-cut5. Discussions with the National Accounts Section

of the CSO indicate that de facto they use payroll as a proxy for value-added

in public services (which implies profit/loss is zero).

2. Indirect effect – the additional income generated in Irish-based firms

supplying the project (and in Irish-based firms supplying those firms, and so

on). In the current case, the indirect impact would include the additional

income (profit and wages) of the firm that builds the hospital and of the firms

that supply the hospital with equipment, consumables, services etc., to the

extent that these firms are Irish-based.

3. Induced effect – the additional income generated in the economy through

the spending of the incomes from the direct and indirect effects. For

example, building workers and hospital staff spending their wages in the

locale, generating income for local businesses.

The direct and some indirect impacts are generally ascertainable from the project

promoter’s cost estimates, while the CSO’s Input-Output tables can be used to

estimate the balance of the indirect and the induced impacts of expenditure on

the project.

4 Another way of measuring value added in a commercial context is sales minus non-payroll costs minus depreciation of fixed assets. 5 The measurement of the economic output of public services is an issue that attracts much attention internationally, e.g. HMSO (2005) Atkinson Review final Report: Measurement of Government Output & Productivity for the National Accounts. Palgrave MacMillan.

4


The social opportunity cost of the resources used represents the cost to society

of using the enterprise and labour resources on this project. It is effectively their

value in the next best use, and is often referred to as the ‘shadow price’.

In a fully employed economy, it is generally taken that the shadow price of

resources used is 100%, i.e. it equals the market price. The rationale is that, in the

absence of the project, the resources could be put to an equally productive use

elsewhere in the economy. However, if there was unemployment in the

economy, then the price paid for labour by the project would be above the value

of its next best use – it would be appropriate to use a shadow price of less than

100%.

Construction activity in Ireland remains significantly below “pre-crash” levels,

despite recent improvements in the economy6. It is thus reasonable to assume

that the construction sector is currently not fully employed (i.e. has spare

capacity) and will not be for the period of construction for the project.

The Department of Finance CSF Evaluation Unit’s Proposed Working Rules for Cost

Benefit Analysis (1999)7 state that a minimum of 80%-100% should be applied as

the shadow price of construction resources, and that this should be defended

based on market conditions (see Section 5). The Rules also state that a sensitivity

analysis of a shadow wage of 100% should also be considered (see Section 6).

To be conservative, we work on the basis that the economy will recover by the

time the project becomes operational (i.e. post-construction). Thus we would use

a shadow price of labour of 100% for additional employment generated in new or

expanded nursing homes8.

Finally, where public funds are used, a shadow price greater than 100% is applied

to account for the distortionary effect of the taxes used to generate them

Consultation with the Central Expenditure Evaluation Unit (CEEU) of DPER

indicates using a rate of 130%9.

Externalities are benefits or costs that affect third parties who are not charged for

these benefits or compensated for these costs. In the current context we expand

6 Activity peaked in 2006-7, when, after 14 years of unbroken growth, the construction sector employed 272,500 people (Q2 2007, seasonally adjusted). By the first quarter of 2014, employment in construction had fallen to 102,300 (seasonally adjusted). Having peaked at around one-quarter of economic activity in 2006, the construction industry’s share of GNP declined to approximately6% in 2013. 7 Proposed Working Rules for Cost-Benefit Analysis prepared for the CSF Evaluation Unit in 1999, http://www.tcd.ie/Economics/msceps/courses/welfare%20economics/Working%20Rules%20CBA%20CSF%201999.pdf 8 We note that there is rarely significant unemployment in the health sector and that nurses, doctors and other health professionals are on the Department of Enterprise and Employment’s list of priority professions for immigration. 9 As articulated also in http://www.djei.ie/publications/strategicpolicy/2015/Technical_Annex_Evaluation_Methodology.pdf

http://www.tcd.ie/Economics/msceps/courses/welfare%20economics/Working%20Rules%20CBA%20CSF%201999.pdf

http://www.tcd.ie/Economics/msceps/courses/welfare%20economics/Working%20Rules%20CBA%20CSF%201999.pdf

http://www.djei.ie/publications/strategicpolicy/2015/Technical_Annex_Evaluation_Methodology.pdf


5


this heading to include unpaid-for benefits, and in particular the health benefits

to residents, to the degree they are not paid for by the beneficiaries. These

benefits could include increased quality of life from better clinical outcomes or

avoided suffering from reduced waiting lists. Strictly speaking these are consumer

surplus (see Box). However, it is easier to include them under an unpaid-

for/external heading in the current context, as it enables the alignment of internal

costs and benefits with financial appraisal.

Other relevant external benefits in the case of health investments would include

benefits to family and friends of residents from better health outcomes, as well as

reduced time costs in terms of visiting residents, time out from work, and so on.

The most familiar external costs are pollution, disruption and congestion, e.g.

emissions from the energy used to build and operate nursing homes, as well as

the increased traffic congestion during their construction and operation.

The introduction of a carbon tax and carbon trading has effectively internalised a

major element of the pollution costs. Congestion may arise during the

construction phase but would not be expected to be overbearing.

The costs and benefits of the proposed project must be measured vis à vis the

costs and benefits of the counterfactual, i.e. what would happen if this project did

not go ahead. The counterfactual is generally taken to be “Do Minimum”, i.e.

continue as is with the current level of public sector investment and policy set.

Consumer Surplus

Consumer Surplus represents the benefit (“utility” or “willingness-to-pay”) that

consumers of the good or service derive, over and above the price actually

paid. It is the mirror image of profit or “producer surplus”.

In a situation where the good or service is provided free, there is of course no

producer surplus (indeed there is a producer loss), but the entire benefit to

consumers represents consumer surplus. Measuring consumer

benefit/consumer surplus/willingness to pay (WTP) can be challenging as it is

usually not directly observable. This is more of an issue where the good or

service is provided free, as consumer surplus will be larger.

One approach is to value increased earnings due to better health, but this is

not considered satisfactory as it does not directly measure consumer benefits

(including for example the capacity to better enjoy leisure time), and unfairly

disadvantages those who are not in the labour force.

A more satisfactory approach is one that directly takes into account the utility

to consumers. In the case of medical interventions, techniques exist for

estimating increases in years of life (“Life Years”) and quality of life (“Quality-

Adjusted Life Years” or QALYs). A value is then placed on each year generated,

based on general societal values.

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At least one alternative option for achieving the same or similar goals as the

proposed project must also be considered. This is to ascertain whether the

proposed project is better than (a) existing arrangements, and (b) alternative

projects that could be undertaken.

Another important requirement is scenario/sensitivity analysis and risk analysis,

which assess the possibility of the outturn being more or less favourable than

expected. In the current context focus is understandably on the latter. Key issues

would be:

Capital cost being greater than expected;

Benefits (savings in the acute hospital system) being less than expected.

An Exchequer Cashflow Analysis is also required, which presents the actual

financial flows from the point of view of the Exchequer, effectively excluding

externalities, consumer surplus, shadow price adjustments, etc. It is equivalent to

a financial analysis in a commercial setting.

The CBA will deliver Exchequer Cashflow and Socio-economic outcomes, in the

form of:

Net Present Value;

Internal Rate of Return; and

Benefit Cost Ratio

The Exchequer Cashflow outcome represents the net money cost/benefit of the

project to the Exchequer, while the socio-economic outcome represents the net

benefit at a wider societal level. The latter is the key criterion, but in today’s

constrained Exchequer environment the former is also an important

consideration. Effectively, the Exchequer Cashflow Analysis is the starting point,

and externalities and shadow price adjustments are then added to complete the

CBA.

1.2.3 Costs & Benefits to be Considered

We set out the actual costs and benefits we propose to include in the analysis in

Table 1.1 overleaf.

1.2.4 Other Considerations

The treatment of VAT requires some discussion. The capital costs will attract VAT

at 13.5% (23% for fees and equipment), and the HSE cannot reclaim this VAT. The

same is true for VAT arising on revenue costs. However, the VAT flows back to the

Exchequer via the VAT returns of builders and other suppliers. Because of this it is

appropriate to only take into account costs net of VAT for CBA purposes.

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Table 1.1: COSTS AND BENEFITS TO BE CONSIDERED

Internal/Exchequer External/Unpaid for

Costs

For new/upgraded public facilities:

Capital costs net of VAT, less residual

value of buildings at the end of the

evaluation period.

Opportunity cost of land (net of residual

value of land at the end of the evaluation

period). Additional payroll & non-payroll

operating costs.

Fair Deal & other Exchequer payments for new capacity in private sector nursing homes.

Loss of tax revenue and Deadweight Loss.

Additional pollution & congestion costs from construction of new facilities.

Additional pollution & congestion costs from running new facilities.

Shadow price of public funds.

Benefits

Additional revenues to the Exchequer from

resident charges.

Reduced Costs elsewhere in healthcare system.

Market value of property released.

Reduced HR costs due to greater ease of

attracting and retaining staff because of

better work environment.

Additional health benefits to residents from improved/more appropriate facilities and delivery of care.

Benefits to those in need of acute hospital care in terms of accessing more timely treatment.

Reduced suffering/distress/disruption on the part of family and friends, and saved time, due to health benefits for residents and their being accommodated in more appropriate facilities.

Credit for reduced shadow price of construction labour.

The treatment of inflation must likewise be considered. In general, in CBA we

measure all monetary flows in today’s (2015) money, i.e. ignoring future inflation.

These are often referred to as ‘real’ prices, as opposed to ‘nominal’ prices, which

reflect increases due to inflation. The only exceptions are where we expect

inflation for particular future cashflows to differ significantly from average

inflation. A particular example is Payroll, where average wages can be expected to

grow ahead of inflation over the long run. This is usually cancelled out by

productivity improvements in the wider economy, but it is open to question

whether such improvements will materialise in the nursing home sector. It is the

norm to include modest increases in future real payroll costs in CBA in the health

sector.

Future flows of costs and benefits need to be discounted back to today’s values,

by use of a test discount rate. For the Exchequer Cashflow Analysis/financial

analysis and the Outline Business Case, a rate equivalent to the State’s real

borrowing cost (net of inflation) is used. The NDFA indicate that the estimated

cost of medium term Exchequer borrowing over a 10-20 year period at the

moment is 4.48%. Deducting inflation – which we assume to be 2% in the long

8


run reflecting the European Central Bank’s target inflation rate – gives the

real/net of inflation rate of 2.48%10.

For the socio-economic analysis the social discount rate (reflecting society’s time

preferences) is used. For this, the Public Spending Code currently recommends

5%, pending a re-estimation thereof, with testing for alternative rates11.

In summary, in the case of a public facility where for the most part outputs are

not commercially priced, a socioeconomic CBA is essentially concerned with

measuring:

Exchequer Cashflow

Analysis { The financial benefits minus financial costs

of the project, from the point of view of the

Exchequer.

Socio-economic CBA

{ plus

Unpaid for and external benefits, notably

health benefits (consumer surplus).

Adjustments for the shadow price of

construction labour and of public funds.

minus

External costs.

Cost measurement is usually reasonably straightforward, and the key task of CBAs

in the health sector is the valuation of the health benefits.

1.3 REPORT LAYOUT

This report applies these principles to the project. It is set out as follows12:

Section 2 defines the project rationale and scope, including project justification

and objectives.

Section 3 sets out a feasibility study, including the counterfactual and alternative

options, and the project constraints.

Section 4 presents the Exchequer Cashflow Analysis of the options.

Section 5 provides the economic appraisal of the options.

Section 6 undertakes the scenario and sensitivity analysis.

An Executive Summary is presented at the beginning of this document, which

summarises our findings.

10 http://www.per.gov.ie/project-discount-inflation-rates/ 11 http://www.per.gov.ie/project-discount-inflation-rates/ 12 In accordance with Chapter 7 of the Guide to Economic Appraisal: Carrying out a Cost Benefit Analysis http://publicspendingcode.per.gov.ie/wp-content/uploads/2012/08/D03-Guide-to-economic-appraisal-CBA-16-July.pdf

http://www.per.gov.ie/project-discount-inflation-rates/


http://publicspendingcode.per.gov.ie/wp-content/uploads/2012/08/D03-Guide-to-economic-appraisal-CBA-16-July.pdf

http://publicspendingcode.per.gov.ie/wp-content/uploads/2012/08/D03-Guide-to-economic-appraisal-CBA-16-July.pdf

9


2. PROJECT SCOPE, RATIONALE & JUSTIFICATION, OBJECTIVES

2.1 PROJECT SCOPE

The ‘project’ as defined for this report is the provision of sufficient nursing home

capacity in Ireland going forward to 2035, across the public, private and voluntary

sectors. In our analysis we have worked to the year 2036, as this coincides with

the Census of Population years and the CSO’s population forecasts.

Thus, for the purposes of the CBA, 2015 will be Year 1, 2016 will be Year 2 and

2036 will be Year 22.

2.2 RATIONALE & JUSTIFICATION

The supply gap analysis in Section 2 of the main report indicates that:

(i) The population aged 65 and over (‘65+’) will grow from 624,000 to 1.13

million between 2016 and 2036, an increase of over 80%.

(ii) On the basis that 4% of the 65+ population will require long term residential

nursing home care, and a further 0.85% will require various forms of short-

term care, this will lead to an increase in demand for long and short stay beds

of approximately 24,600 over the same time period.

(iii) In the absence of new policy initiatives, our model works on the basis that

700 net new beds will be added in 2016 and 2017, mostly in Dublin, and

thereafter 400 net new beds will be added to the national stock. All of this

additional capacity will be in the private sector, and will add some 90 net

new nursing homes over the period under consideration (assuming all

additional capacity will be in the form of 100-bed facilities and all homes will

run at a 95% occupancy rate).

(iv) On the basis that the public sector maintains its capacity at the current level,

but no more, there will be a supply gap of over 18,000 nursing home beds by

2036, including long and short term beds. This represents the sum of all the

supply deficits at LHO level, as demonstrated in Table 2.1 overleaf13. Table

2.2 overleaf then expresses this in terms of nursing homes (again assuming

all additional capacity will be in the form of 100-bed facilities and all homes

will run at a 95% occupancy rate). This indicates a deficit growing to 200 new

nursing homes across the country by 2036, in the absence of new policy

initiatives, but assuming no change in public sector capacity, on top of the 90

new homes that will be delivered.

13 In other words it is assumed that capacity surpluses in certain LHO areas will not be ‘transferable’ to meet deficiencies in other LHO areas. By and large this is reasonable, though there might be scope for transfer between some of the contiguous Dublin LHO areas.

10


The assumption of maintaining public sector capacity is an important one. It is

accepted that based on current levels of capital expenditure by the public sector

(€20 million per annum), this will not be achievable. The implications will be

explored further in Sections 4 and 5 of this CBA report. We will also relax the

assumption that all new capacity will be in the form of 100-bed facilities, in these

sections.

Table 2.1: NURSING HOME LONG- & SHORT-STAY BED SUPPLY MINUS DEMAND AT LHO

LEVEL, 2016-2036

LHO 2016 2021 2026 2031 2036

Dublin South Central -375 -419 -516 -653 -805

Dublin South East /Wicklow 700 397 48 -375 -755

Kildare West Wicklow / Dublin South West -289 -415 -594 -871 -1,047

Midlands -176 -476 -827 -1,219 -1,590

Dublin Mid Leinster Total -140 -912 -1,889 -3,118 -4,197

Cavan/Monaghan -71 -193 -327 -479 -649

Dublin North -122 22 -140 -335 -543

Dublin North Central 226 122 -0 -142 -291

Dublin North West -396 -298 -402 -532 -672

Louth -300 -423 -559 -712 -882

Meath -120 -345 -603 -925 -1,157

Dublin North East Total -782 -1,115 -2,032 -3,124 -4,195

Carlow/Kilkenny 2 -133 -283 -452 -630

Cork North 147 63 -27 -130 -243

Cork North Lee -454 -414 -452 -519 -608

Cork South Lee 23 -69 -159 -272 -403

Cork West 169 110 46 -26 -105

Kerry -19 -165 -326 -506 -703

South Tipperary -98 -200 -314 -441 -576

Waterford -106 -243 -396 -568 -750

Wexford -155 -310 -483 -677 -882

South Total -492 -1,358 -2,393 -3,593 -4,900

Donegal -261 -426 -609 -813 -1,041

Galway -21 -262 -520 -779 -1,105

MidWest -46 -422 -809 -1,206 -1,701

Mayo 116 -13 -152 -291 -465

Roscommon 153 94 31 -32 -112

Sligo/Leitrim/West Cavan -24 -121 -229 -349 -484

West Total -84 -1,150 -2,287 -3,470 -4,909

National Net Total -1,498 -4,535 -8,602 -13,305 -18,201

Sum of Deficits -3,033 -5,345 -8,727 -13,305 -18,201

Note: Columns may not add due to rounding

11


Table 2.2: CUMULATIVE NURSING HOME SUPPLY GAP AT LHO LEVEL, 2016-2036

LHO 2016 2021 2026 2031 2036

Dublin South Central -3.95 -4.41 -5.43 -6.87 -8.47 Dublin South East /Wicklow -3.95 -7.94 Kildare West Wicklow / Dublin South West -3.05 -4.37 -6.25 -9.17 -11.03 Midlands -1.85 -5.01 -8.70 -12.83 -16.73 Dublin Mid Leinster -8.84 -13.79 -20.39 -32.82 -44.17 Cavan/Monaghan -0.75 -2.03 -3.45 -5.04 -6.83 Dublin North -1.28 -1.47 -3.53 -5.72 Dublin North Central -1.49 -3.06 Dublin North West -4.17 -3.14 -4.23 -5.60 -7.07 Louth -3.16 -4.45 -5.89 -7.49 -9.29 Meath -1.26 -3.63 -6.35 -9.74 -12.18 Dublin North East -10.61 -13.25 -21.39 -32.89 -44.16 Carlow/Kilkenny -1.40 -2.98 -4.76 -6.64 Cork North -0.29 -1.37 -2.56 Cork North Lee -4.78 -4.36 -4.76 -5.46 -6.40 Cork South Lee -0.72 -1.68 -2.87 -4.24 Cork West -0.27 -1.10 Kerry -0.20 -1.74 -3.43 -5.33 -7.40 South Tipperary -1.03 -2.10 -3.30 -4.65 -6.06 Waterford -1.11 -2.55 -4.17 -5.98 -7.89 Wexford -1.63 -3.26 -5.09 -7.13 -9.29 South Total -8.76 -16.13 -25.68 -37.82 -51.58 Donegal -2.75 -4.48 -6.41 -8.55 -10.96 Galway -0.22 -2.75 -5.47 -8.20 -11.64 MidWest -0.48 -4.45 -8.52 -12.70 -17.91 Mayo -0.14 -1.60 -3.07 -4.90 Roscommon -0.34 -1.18 Sligo/Leitrim/West Cavan -0.25 -1.27 -2.41 -3.67 -5.09 West Total -3.71 -13.09 -24.40 -36.53 -51.67

Sum of Deficits -31.93 -56.26 -91.86 -140.06 -191.59

Note: Assumes all additional nursing home capacity will be in the form of new 100-bed facilities. Columns may not add due to rounding.

2.3 PROJECT OBJECTIVES

The overarching project objective is to identify the optimal policy or set of policies to address the deficit in nursing home capacity, going forward. Other relevant objectives include:

Retain a public sector presence in the sector, of approximately 20%.

Address the short term requirement to improve the public sector stock to meet HIQA infrastructural standards.

Have reference to the geographic aspects of the deficit, and how it is tackled.

12


3. FEASIBILITY STUDY

3.1 FEASIBILITY

The technical feasibility of this project would appear not to be in doubt:

nursing homes are not overly complex structures, notwithstanding the

increasing quality requirements imposed by HIQA in recent years;

several hundred are operational in Ireland at the moment, and a significant

further number are in the pipeline;

the timeframe for delivery of new homes is not excessive relative to the

timeframe under consideration here (over 20 years).

Some specific feasibility issues may arise, including:

A number of homes, primarily in the public sector, do not meet the HIQA

infrastructural standards relating to privacy and access, and refurbishment to

meet these standards is in some cases uneconomic, given the age and fabric of

the building (see Appendix A of the main report).

There may be questions over financial feasibility with respect to the public

stock of nursing homes, given the general Exchequer position. The public

sector continues to face a significant challenge to meet the HIQA

infrastructural standards.

Our consultations indicate that the minimum commercially feasible size of a

nursing home is likely to be approximately 60 beds (we assume that all new

nursing homes will be 100 bed facilities). Significant numbers of both private

and public nursing homes are smaller than this, in some cases significantly so.

For a proportion of these it may not be commercially viable, give the local

market, to increase capacity to achieve viability.

Political feasibility may be an issue in some cases, where the economically

optimal solution is to close some homes. Section 4 of this report sheds more light on the financial feasibility of the project, while Section 5 assesses the economic feasibility.

3.2 OPTIONS & ALTERNATIVES

In carrying out a CBA of a capital project, it is important to consider alternative means of delivering the sought-after benefits. The Public Spending Code requires that all realistic alternative ways of achieving the stated objectives are examined critically, and that in particular the “Do Nothing”/”Do Minimum” option be considered. In our analysis it is clear that there are two aspects to the problem of nursing home capacity:

1. Public nursing home capacity, and

2. Private nursing home capacity.

13


Each has very different issues. Notably the public sector, despite investment in its

built stock in recent years in a constrained Exchequer position, has found it

challenging to meet HIQA’s infrastructural standards. This situation is now coming

to a head, as HIQA has indicated that it may start imposing conditions on

registration, including a “no new admissions” policy on non-compliant homes14.

Also, it is clear that the cost of (i) providing nursing home capacity and (ii)

operating nursing homes, is significantly higher in the public sector than in the

private sector (see Box).

With regard to existing private sector capacity, our consultations point to an

inherent stability, reflecting recent investment in facilities in order to meet HIQA

infrastructural standards, coupled with the steady replacement of operators when

nursing homes come to the market.

14 By contrast, the private sector has been able to make more substantial progress in meeting HIQA infrastructural standards. Exchequer capital expenditure in recent years has been €15-20 million per annum. The recently published NHI Annual Private Nursing Home Survey 2014/2015 indicates an average of €84 million per annum by the private nursing home sector in the last three years. Given that the public sector represents approximately 25% of the total stock, these numbers indicate a somewhat higher level of investment in the private sector than in the public sector.

Box: Differences in the Cost of Public & Private Sector Provision

A number of reasons are identified as to why the cost of both nursing home capacity

and nursing home operations are higher in the public sector than in the private

sector.

With regard to capacity provision, reasons include:

Requirements to provide a greater degree of ancillary services, leading to

higher square meterage per bed;

A bias towards the upper end of equipping costs, closer to those of a hospital

than of a nursing home per se, because of requirements to provide a greater

level of operational flexibility (many public nursing home facilities share a

campus with other healthcare facilities).

With respect to operating costs, reasons include:

Skill mix – the private sector employs a higher proportion of Health Care

Assistants and a lower proportion of registered nurses.

Lower pay rates and conditions – the private sector pays lower rates than the

public sector.

Anecdotally, there has been a reluctance to rationalise public sector facilities

which have fallen below efficient activity levels, which has driven up average

costs in the public sector. The prospect of the imposition of “no new

admissions” requirements by HIQA will tend to add to this phenomenon.

Higher dependency levels of residents in the public sector than in the private sector. The Department of Health’s Long Term Activity Statistics 2013 (http://health.gov.ie/wp-content/uploads/2015/04/long_stay_2013.pdf) appear to corroborate this (p.23), although it must be acknowledged that this is not universally accepted by the private sector.

http://health.gov.ie/wp-content/uploads/2015/04/long_stay_2013.pdf

14


That said, there may be areas of the country currently served by smaller private

nursing homes, which need to expand in order to reach efficient scale, but either -

(a) lack equity to invest in increased capacity, due to low Fair Deal rates and/or

having already invested to meet rising standards in recent years, and/or

(b) are in areas where the market cannot justify the larger size.

Consultations as part of this study indicate that the minimum efficient nursing

home size, given the regulatory requirements now in effect in the sector, appears

to be approximately 60 beds, though some consultees are of the opinion that it is

higher. HIQA data indicates that the range of nursing home sizes in Ireland

currently is as follows:

Table 3.1: SPLIT OF NURSING HOMES BY BED NUMBERS, 2015

1-40 40-60 60-80 80-100 101+ Total

Private 158 164 68 18 20 428

HSE & Section.38 69 23 9 12 16 129

Section 39 3 2 2 1 1 9

Welfare Homes 9 2

11 Grand Total 239 191 79 31 37 577

%age Split 41% 33% 14% 5% 6% 100%

Source: Public Bed Register April 2015 and NHI Private Beds 2014 and HIQA, May 2015.

This suggests that there may be some areas where existing private capacity is

under stress.

In terms of translating the foregoing into a range of possible solutions, a set of

options was developed to upgrade the existing public sector stock to meet HIQA

infrastructural standards, and deliver the required additional capacity, comprising

public and private sector approaches. . These options were subjected to an

informal MCA (see Section 4 of the overall report), and were reduced to a shortlist

of options incorporating both issues, which went forward to CBA, as follows:

1. Counterfactual

“Continue as is” option.

Under this option, private sector will add 700 beds per annum in 2016 and

2017, and 400 per annum thereafter. This implicitly assumes that there will

be no reform of the pricing model of the Fair Deal scheme or any other

relevant policy.

Assumes the State continues to spend €20 million per annum throughout the

period under review, which will, in the course of time, lead to a reduction in

capacity as a proportion of public facilities fail to meet HIQA infrastructural

standards and stop admitting new residents. HSE Estates indicates “another

49 units and 2,776 long stay beds (will be) non compliant in 2020.”

15


We assume that the subsequent €20 million per annum capex by the public

sector will make good this loss of capacity by the end of the period under

review, i.e. 203615.

2. Direct Exchequer investment to bring the existing stock up to HIQA

infrastructural standards and to provide all necessary additional capacity

Private sector will be as in counterfactual; implicitly assumes no reform of

the pricing model of the Fair Deal scheme.

Public sector will make good its current deficit (via extensions to existing

facilities) and provide all new required capacity, through direct procurement.

3. Extension of the Employment and Investment Incentive Scheme (EIIS)

This option implicitly assumes that the pricing model of the Fair Deal scheme

is reformed to provide all suppliers with a market return on their investment,

assuming investment is made efficiently and operations are conducted

efficiently.

This along with the policy change incorporated in the option (i.e. extending

the EIIS), will deliver the required capacity over the course of the timeframe

we are looking at. The EIIS is an existing scheme which grants relief to

investors at a rate of 75% of the investment amount in year one and 25% in

year four.

Likewise for this option, public sector provision will remain stable, which will

require additional public investment to meet HIQA infrastructural standards,

assumed to be delivered via extensions to existing facilities.

We assume that the EIIS will run until 202016.

Cost to the State versus benefit to the private operator is an issue to be

investigated as is potential deadweight loss.

4. Accelerated capital allowances for expenditure on plant and machinery by

nursing home companies

This option involves accelerating existing allowances in respect of plant and

machinery so that, instead of being applied over an eight year period, the

benefits could be claimed in Year one up to a capped amount.

As for Option 3, this option implicitly assumes reform of the Fair Deal pricing

model and that public sector provision will remain stable, with similar

consequences.

Accelerated capital allowances can be seen as compensation for non-

recoverability of VAT in the sector (reform of VAT regulations are seen as

impractical).

The benefit to the private operator is in terms of timing

Potential deadweight loss is an issue.

15 AECOM costings (discussed in more detail in subsequent sections) indicate that the €20 million per annum would more than recover this shortfall by 2036, but it can be expected that less expensive works would be undertaken initially and more expensive works undertaken in later years. 16 Note the maximum EIIS funds that a company can raise in any one year are €5 million, subject to a lifetime maximum of €15 million. Where the necessary investment exceeds €5 million we assume that the investment takes place over more than one year.

16



Private sector delivers additional capacity as per Do Minimum, and public

sector continues to spend €20 million per annum directly on its own facilities.

PPP is used to (i) make good the resultant public sector deficit, and (ii) deliver

all the additional required nursing home capacity, i.e. the deficit as per Table

2.1.

Under the PPP the private partner builds and maintains the facilities and the

public sector operates them (possibly on public sector sites).

There will be a premium over private sector costs for buildings in PPP,

compensated by lower FM costs and better maintenance standards.

6. Private sector provides all additional nursing home facilities with the

assistance of a State fund

This would be a revolving fund (akin to the Irish Strategic Investment Fund

but lending at lower than commercial interest rates) set up by the

Government and operated by the NTMA or similar, borrowed at sovereign

rates and lent on at a margin to cover risk and administration, to the private

nursing home sector.

The term could be reflective of nursing homes’ usual timeframe to earn a

return on capital. It could potentially be restricted to smaller nursing homes

that have difficulty raising finance/equity, to enable them to reach the

efficient operational level.

As for Option 3, this option implicitly assumes reform of the Fair Deal pricing

model and that public sector provision will remain stable, with similar

consequences.

The fund is similar to the EIIS but with three important differences –

it would not be a tax-based scheme, and therefore would be potentially

less controversial and less of a burden on the taxpayer,

the timeframe could be longer than the minimum under EIIS,

it could be designed to meet other policy requirements, such as targeting

at particular parts of the country where deficits have been identified, and

it could potentially be used for new nursing homes.

Depending on structure it could potentially be excluded from the calculation

of the State’s debt:GDP ratio, although this point requires further

investigation, and is beyond the scope of the current study.

Each option has implications for how capacity will be delivered in the future, as

presented in the table overleaf.


model of the Fair Deal scheme, to enable private operators to earn a return on

efficient investment, as the main means by which the private sector will deliver






17



in this study.

In reality, it is likely that the future network of Nursing Homes will be delivered

using a range of approaches, given the numbers involved and the range of

circumstances. However, for tractability, we work on the basis that each of the

options above is mutually exclusive.

Table 3.2: CAPACITY IMPLICATIONS OF THE CBA OPTIONS

Option Public Sector Stock Private Sector Stock Overall Implication

1. Counterfactual/Do Minimum

Public sector will lose approximately 2,800 long stay beds net by 2020. This is gradually made good over the period to 2036 as €20 million per annum continues to be spent.

Private sector provides net additional 700 beds in 2016 and 2017, and 400 per annum thereafter.

Capacity shortfall as per Tables 2.1 and 2.2, plus the loss of public sector capacity by 2020 (gradually made good).

2. Direct Exchequer Provision

Public sector will maintain its current capacity plus fill capacity shortfall as per Tables 2.1 and 2.2.


Capacity grows to meet shortfall, depending mainly on public sector.

3 Extension of EIIS Public sector will maintain its current capacity, implying increased investment on top of €20 million per annum currently.

Private sector will fill capacity shortfall as per Tables 2.1 and 2.2

Capacity grows to meet shortfall, depending mainly on private sector.

4. Accelerated Capital Allowances

Public sector will maintain its current capacity, implying increased investment on top of €20 million per annum currently.




Directly provided public sector will lose approximately 2,800 long stay beds net by 2020. This is gradually made good over the period to 2036 as €20 million per annum continues to be spent. PPPs will be used to meet this deficit and fill capacity shortfall as per Tables 2.1 and 2.2.


Capacity grows to meet shortfall, depending mainly on PPPs.

6. State Fund Public sector will maintain its current capacity, implying increased investment on top of €20 million per annum currently.



3.3 CONSTRAINTS

The following are the main constraints applying to the sector and to the various

policy options, as we see them:

Exchequer finances, in terms of

maintaining or increasing public sector nursing home capacity,

continuing to procure services from the private sector via the Fair Deal

scheme,

new incentives to the private sector, whether extension of the EIIS,

accelerated capital allowances, or a State fund.

The physical inadequacy of a proportion of the public sector nursing home

stock, in the context of the requirement to meet HIQA infrastructural

standards.

The aging population.

18


Relative fragmentation of the private sector, characterised by small size,

isolated ownership, few larger operators, and in some cases lack of equity and

limited capacity to expand.

Very little overseas activity, compared to other sectors of the economy.

Overseas operators can bring scale, competition and innovation to a market.

Excess demand in Dublin and some other urban areas, and excess supply in some

areas of the west.

19


4. EXCHEQUER CASHFLOW ANALYSIS

4.1 DEFINITION

In the Exchequer Cashflow Analysis/Financial Appraisal we are concerned with the

financial costs and benefits of the project to the Exchequer. These will differ with

respect to public sector facilities and private sector facilities:

For public sector facilities, the cost is the direct expenditure by the HSE. This

has been estimated at €1,390 per week per resident17.

For private sector facilities, the Exchequer cost will comprise costs under the

Fair Deal scheme, and any further expenditure such as tax concessions, under

the various options being considered.

Referring back to Table 1.1, Exchequer costs and benefits can be considered as

the internal costs and benefits18, i.e.:

Table 4.1: COSTS AND BENEFITS TO BE CONSIDERED, EXCHEQUER CASHFLOW ANALYSIS

Costs

For new/upgraded public facilities:

Capital costs net of VAT, less residual value of buildings at the

end of the evaluation period.

Opportunity cost of land (net of residual value of land at the

end of the evaluation period). Additional payroll & non-payroll operating costs.

Fair Deal & other Exchequer payments for new capacity in

private sector nursing homes.

Loss of tax revenue and Deadweight Loss.

Benefits

Additional revenues to the Exchequer from resident charges.

Reduced Costs elsewhere in healthcare system.

Market value of property released.

Reduced HR costs due to greater ease of attracting and retaining

staff because of better work environment.

Each of these must be assessed over the lifetime of the project, and for each

alternative option.

17 Per draft review of the NHSS, Chapter 5, provided confidentially to the team. The Review has since been published. 18 The Exchequer is also likely to benefit from some reduction in social welfare payments, as a proportion of the construction workers employed on the project would otherwise have been unemployed. This can be considered to be captured in the adjustment of construction wages to shadow prices, which is generally treated as a wider socio-economic impact rather than a direct financial impact (see Section 5).

20


4.2 CAPITAL COST

Assessing capital cost for the programme of investment in public nursing homes is

challenging, given the number, location and variety of premises. From the

Exchequer’s point of view, we are primarily interested in its own direct capex.

With respect to the private sector, we are concerned with the payments the

Exchequer must make to the private sector, rather than the actual costs the

private sector itself incurs.

The HSE is currently spending approximately €20 million on upgrading public

nursing home stock. HSE Estates indicate that the figure to bring the long stay bed

stock up to HIQA infrastructural standards is €485 million, albeit this accepts that

some reduction in HSE capacity will occur. HSE Estates indicates:

“The €20m per annum helps develop costed upgrade programmes for all

units, achieves HIQA compliance for a number each year (5 to 8 per annum

possibly) and improves the infrastructure in others. ...... €20m per annum

until 2020 will result in 44 units and 1,682 long stay beds achieving HIQA

compliance in that period. However that leaves another 49 units and 2,776

long stay beds non- compliant in 2020.”19

In the earlier sections of the report, we have presented the supply gap in terms of

newbuild 100-bed facilities. Our analysis however must take into account that

much additional capacity will be provided in terms of refurbishments and

extensions to existing facilities. For tractability, we assume that this will be in the

form of 50-bed refurbishments/extensions. AECOM has estimated the following

construction cost models (CMs) for providing facilities of various configurations

and ownership structures (see Appendix for further detail). They indicate a 5%

reduction in costs for facilities outside Dublin compared to in Dublin. Site costs are

excluded.

Table 4.2: AECOM NURSING HOME CONSTRUCTION COST MODELS (EX VAT)

Dublin Ex-Dublin

Cost Model

Facility Description €'000

per Bed

€'000 per

Facility

€'000

per Bed

€'000

per

Facility

CM 1 Public Nursing Home 50 Bed Refurbishment 54.4 2,720 51.7 2,584

CM 2 Private Nursing Home 50 Bed Refurbishment 45.7 2,286 43.4 2,172

CM 3 Public Nursing Home 50 Bed Extension 159.3 7,963 151.3 7,565

CM 4 Private Nursing Home 50 Bed Extension 135.4 6,769 128.6 6,431

CM 5 Public Nursing Home 100 Bed New Build 145.5 14,551 138.2 13,824

CM 6 Private Nursing Home 100 Bed New Build 123.7 12,373 117.5 11,755

CM 7 PPP Nursing Home 100 Bed New Build 148.4 14,836 140.9 14,094

Refurbishments are the most cost-effective options, albeit they do not add new

capacity. A public sector 50-bed extension is the most expensive option for adding

19 E-mail communication via Department of Health 3rd June 2015.

21


capacity, followed by a PPP 100-bed newbuild and a public sector 100-bed

newbuild. The high PPP capex reflects the private partners taking a “spend to

save” approach as they will also be responsible for ongoing Facilities Management

(FM).

These costs can be applied to the various options as per the table overleaf. Note

that for the purposes of the Exchequer Cashflow Analysis, the private sector’s

capex is not relevant: what is relevant is the Fair Deal payments to be made (see

Section 4.4). The latter represent a revenue cost rather than a capital cost.

4.3 PURCHASE PRICE/OPPORTUNITY COST OF LAND

Addressing the nursing home supply gap will involve a large roll-out of new

facilities and extensions to existing ones, and additional land will have to be

bought or taken up in most cases.

Private sector consultees have indicated a land cost in Dublin of approximately €1

million per facility. We assume a figure of €500,000 per site elsewhere. Again,

from the Exchequer’s perspective this is not directly relevant, as the cost is

covered by the Fair Deal payments.

Table 4.3: CAPEX IMPLICATIONS OF THE CBA OPTIONS

Option Public Sector Stock Private Sector Stock


€20 million spent per annum. Public sector will lose approximately 2,800 long stay beds net by 2020. This is gradually made good over the period to 2036 as €20 million per annum continues to be spent.

Private sector provides net additional 700 beds in 2016 and 2017, and 400 per annum thereafter. We assume that two-thirds of the capacity is provided in new 100-bed units, and one-third via extensions.


Public sector will make good the loss of ~ 2,800 long stay beds by 2020, and address the capacity shortfall as it arises. We assume that two-thirds of the capacity is provided in new 100-bed units, and one-third via extensions.


3 Extension of EIIS Public sector will make good the loss of ~ 2,800 long stay beds by 2020. We assume that two-thirds of the capacity is provided in new 100-bed units, and one-third via extensions.

Private sector will fill capacity shortfall as per Tables 2.1 and 2.2. We assume that two-thirds of the capacity is provided in new 100-bed units, and one-third via extensions.


Public sector will make good the loss of ~ 2,800 long stay beds by 2020. We assume that two-thirds of the capacity is provided in new 100-bed units, and one-third via extensions.

Private sector will fill capacity shortfall as per Tables 2.1 and 2.2. We assume that two-thirds of the capacity is provided in new 100-bed units, and one-third via extensions.


Public sector will lose approximately 2,800 long stay beds net by 2020. This is gradually made good over the period to 2036 as €20 million per annum continues to be spent. PPPs will be used to meet this deficit and fill capacity shortfall as per Tables 2.1 and 2.2.


22


Option Public Sector Stock Private Sector Stock

We assume that all of the PPP capacity is provided in new 100-bed units20.

6. State Fund Public sector will make good the loss of ~ 2,800 long stay beds by 2020. We assume that two-thirds of the capacity is provided in new 100-bed units, and one-third via extensions.

Private sector will fill capacity shortfall as per Tables 2.1 and 2.2. We assume that two-thirds of the capacity is provided in new 100-bed units, and one-third via extensions. Assume fund provides 30% of capex @ 2% lower interest rate than banks (but higher than rate State can borrow). No loss to the Exchequer.

With respect to public sector investment, additional investment will likely in some

cases be accommodated on existing campuses or public owned land. Where a site

must be bought, it is reasonable to assume it will cost the same as for the private

sector, i.e. €1 million in Dublin and €0.5 million elsewhere. Where existing State-

owned land is to be used, there is no need to “write a cheque”, but there is still an

opportunity cost associated with the commitment of the land for nursing homes.

For current purposes we use half the purchase price, i.e. €0.5 million for Dublin

and €0.25 million for elsewhere.

The value of this land is then credited back to the project at the end of the

evaluation period. For current purposes we assume the following with regard to

sites for public sector facilities:

Table 4.4: ASSUMPTIONS REGARDING SITES FOR PUBLIC SECTOR FACILITIES

Option Public Sector Site Requirement


All new/refurbished public sector capacity can be accommodated on existing publicly owned sites, incurring opportunity costs only.


Additional newbuild public sector capacity on top of Do Minimum will be on new sites, incurring cash costs.

3. Extension of EIIS Additional newbuild public sector capacity on top of Do Minimum will be on new sites, incurring cash costs.





6. State Fund Additional newbuild public sector capacity on top of Do Minimum will be on new sites, incurring cash costs.

4.4 FAIR DEAL & OTHER PAYMENTS

At present the large majority of nursing home residents avail of the Nursing Home

Support Scheme (NHSS) or ‘Fair Deal’ scheme, and it is reasonable to assume that

this will continue to be the case. Residents of private, voluntary and State-run

nursing homes can avail of the scheme, though only the Fair Deal prices for

private and voluntary homes are set by the NTPF.

20 This is based on advice from the NDFA that refurbishment would be less attractive for PPP partners.

23


The recently published NHI Annual Private Nursing Home Survey 2014/2015

indicates a figure of 12% for privately funded residents21. While these do not

benefit from the Fair Deal Contributions to their nursing home costs, they can

avail of tax relief at the marginal rate on their own payments.

4.4.1 Fair Deal Payments

This is a key cost for the Exchequer. There are two elements:

(i) Ongoing weekly payments to the nursing homes; and

(ii) Recovery of costs under the Ancillary State Support scheme.

Ongoing Weekly Payments

The NTPF has indicated that the national average price in 2014 was €893 per week

per resident, with price growth of less than 1% per annum in recent years.

However, payments vary greatly from county to county and from facility to

facility, from below €600 per week per resident to in excess of €1,300 per week

per resident.

Given that the scheme does not differentiate between the levels of dependency

of residents, this is a very wide range, and largely reflects historic differences in

nursing home prices across the country. Our consultations and analysis indicate

that this differential is unsustainable, because:

a) While the Dublin rates are more than adequate and are generating strong

interest in adding capacity, the rates being paid in much of the country do

not justify new investment.

b) The level of resident dependency is increasing over time, leading to increased

costs.

c) The standards being imposed by HIQA are rising over time, which will

likewise increase costs.

Point (a) above may not be causing an immediate supply problem, because there

is a legacy of excess capacity in many parts of the country. However, over time,

our investigations indicate that there will be supply deficits throughout the

country.

Review of the Fair Deal scheme is outside the scope of this study, and is the

subject of a separate report recently published. For current purposes, we assume

that:

Under Options 1, 2 and 5, where the private sector is not depended upon to

deliver the supply gap, average Fair Deal prices across the country will be

€900 in 2015 prices, with price changes not exceeding general inflation going

forward.

Under Options 3, 4 and 6, which we assume incorporate reform of the pricing

model of the Fair Deal scheme to reflect operational sustainability and

21 A certain proportion of the remaining 88% of residents are funded by other State schemes, but for current purposes we assume all these will be subsumed into Fair Deal over time.

24


encourage the private sector to meet the supply gap, prices will average

€1,000 per week per resident across the sector (2015 prices), including short

stay beds, with price changes not exceeding general inflation going forward.

However the State does not pay the full cost of the Fair Deal Scheme – residents

or their families must also contribute, and the State pays the balance, as well as

tax relief on the resident/family contributions.

The resident is required to contribute 80% of his/her income from all sources, plus

7.5% of any assets over the asset disregard of €36,000 per annum, capped at

22.5% (i.e. three years) in the case of the family home. Also, if assets relate to

land and property, this element of the payment can be postponed via the

Ancillary State Support Scheme (i.e. the loan scheme – see below).

For current purposes we work on the basis that:

1. All high net worth individuals will opt not to avail of Fair Deal.

2. For those who avail of Fair Deal, their only assets if any are land &

property - mainly the family home, and they avail of the loan scheme in respect of

same.

3. Research undertaken for the Review of the Fair Deal Scheme indicates

that the average weekly contribution from residents in a public unit is €285 and in

a private unit is €29322. This applies regardless of what level of payment is agreed

with private nursing homes by NTPF or the set price level for public homes.

4. Tax relief is claimed on this at 20% (either directly by the resident or by

his/her family), i.e. the net cost to the resident/family is €228 per week or

€11,856 per annum in a public home and €234 per week or €12,189 per annum in

a private home.

On this basis the net cost to the Exchequer in the case of private nursing home

residents is:

Options 1, 2, 5: €900 – €234 = €666 per week or €34,632 per annum.

Options 3, 4, 6 €1,000 – €234 = €766 per week or €39,832 per annum.

With respect to a Fair Deal resident of a public nursing home, in our model we

include the full cost of operating the nursing homes in question (transfers

between the Exchequer/HSE and the nursing home in question are irrelevant for

our purposes), but must then credit back what the State can recover from

residents. As indicated above, this figure is €11,856 per annum.

Recoveries under the Ancillary State Support Scheme

HSE indicates that currently somewhat under €20 million per annum is being paid

to nursing homes under the scheme, out of the annual Fair Deal budget. This will

be recovered by the Revenue Commissioners when the resident leaves the

nursing home or passes away.

22 These gross back up to annual income of €18,500 for Fair Deal residents of public nursing homes and €19,000 for those in private homes (contribution ÷ 0.8 x 52).

25


As of the end of 2014, the HSE had informed the Revenue Commissioners of €34.8

million in recoverables, of which €20.2 million had been recovered at that point23.

On this basis it appears that perhaps 2% of annual Fair Deal outgoings would be

recoverable under the scheme.

4.4.2 Non-NHSS Residents

As indicated, not all residents of private nursing homes will avail of the Fair Deal

scheme, the proportion in this category currently being 12%24. These residents or

their families will be in a position to avail of tax relief at the marginal rate

however on their payments. For this cohort we assume:

Their weekly payments are more than for Fair Deal residents - say €1,300 per

week on average across the State.

These contributions are eligible for tax relief at the higher tax rate i.e. 40%.

The net cost to the Exchequer in this case is €1,300 x 40% = €520 per week, or

€27,040 per annum25. It is noteworthy that the difference between this and the

net cost to the Exchequer under Fair Deal is not greatly different.

4.5 ADDITIONAL REVENUE COSTS

Additional revenue costs can be considered under the headings:

Payroll;

Non-payroll;

Maintenance. These will differ as between public and private sectors.

4.5.1 Payroll

For the Exchequer Cashflow analysis, we are concerned with payroll costs in the

public sector, and how they may evolve in the future.

With regard to Option 1 (Do Minimum) the costs are already in place, so no

additional costs will arise.

In Options 2 and 5, where the public sector is to operate all additional required

capacity, we can consider what costs are currently. Research undertaken for the

Review of the Fair Deal Scheme indicates that the average “cost of care” (i.e. the

price charged under the Fair Deal scheme) per bed per week in public homes is

€1,390, while in the private sector it is just under €900 (in line with the NTPF

23 Although the payments to nursing homes under the scheme come from the annual Fair Deal budget, the monies recovered by the Revenue Commissioners are returned to the general Exchequer revenue base, as opposed to being recycled into the Fair Deal scheme. 24 The Department of Health have indicated to us that it is fair to assume that all residents of public nursing homes avail of Fair Deal or are otherwise publicly funded. 25 In reality there are likely to be residents with relatively modest incomes but high asset levels, who will opt not to avail of Fair Deal. While they would not be in a position to avail of tax relief at the high rate in their own rights, family members could claim the relief at the high rate by funding the nursing home expenses. On this basis it is unlikely to be substantially inaccurate to assume that all such payments can avail of the top rate of tax relief.

26


figure indicated above). We understand, however, that the public sector cost

excludes depreciation and staff pension costs.

Consultations with NHI and others indicate that payroll costs represent

approximately 60% of turnover in the private sector26. Assuming average all-in

costs (including depreciation and return on capital) of approximately €1,000 per

bed per week implies payroll costs per bed per week in the private sector would

be €600.

It is well-established that there is a large difference between labour costs in the

public and private sectors, as has been discussed earlier. For current purposes we

assume a figure of €1,000 per bed per week for public nursing home labour costs

(implying non-payroll costs of approximately €400 notwithstanding exclusion of

depreciation).

We understand that the HSE is planning a staffing review of the public nursing

home sector in the near future, with a view to determining whether the staffing

skill mix is appropriate. It is also clear that there are significant nursing staff

shortages across the Irish health sector at the moment, partly because the HSE

has recommenced hiring. This will push up staff costs, particularly for the private

sector where rates are currently less attractive.

In view of this we take the view that the pay rate differential will gradually close,

from €400 per week per bed to €200 per week per bed over the coming decade.

For tractability we assume that this will be achieved by means of the public sector

figure falling.

4.5.2 Non-Payroll

General Non-Payroll Costs

The Public Spending Code recommends using an uplift of 25% applied to payroll to

account for general non-payroll costs. We apply this to all options.

Maintenance

AECOM recommend the following to estimate maintenance costs:

“it is anticipated that the public sector would maintain its current

programme of €20m per annum addressing the condition of the existing

stock. In relation to this stock the CBA model should allow 2.5% per annum

until the refurbishment is carried out and 1.75% thereafter. In regard to

option 2, it is proposed to increase the Exchequer funding to similarly

upgrade the existing stock however at a more accelerated manner through

upfront capital funding and thus the 2.5% will change to 1.75% in a quicker

timeframe. 1.25% should be applied to the new build additional capacity.

26 The recently published NHI Annual Private Nursing Home Survey 2014/2015 indicates a figure of 61.03% (p.54)

27


Under Option 5, the PPP, bidders have the opportunity to spend-to-save

through increasing the capital spend to achieve reduced maintenance and

operational costs. For the purposes of this cost model we have not increased

the capital construction cost for spend-to-save initiatives and thus have

maintained the same 2.5%, 1.75% and 1.25% as outlined above.”

For convenience, we apply a maintenance cost of 1.75% of capex per annum for

maintenance of refurbished public sector stock, and 1.25% of capex for new stock,

whether private, PPP or public.

4.6 LOSS OF TAX REVENUE & DEADWEIGHT LOSS

4.6.1 Loss of Tax Revenue

Option 3 Extension of the EIIS and Option 4 Accelerated Capital Allowances will

involve the Exchequer foregoing tax revenues.

Option 3 Extension of the Employment and Investment Incentive Scheme (EIIS)

This is an existing scheme which grants relief to investors at a rate of 75% (30/40)

of the investment amount in year 1 and 25% (10/40) in year 4. The overall

scheme already has EU approval up to 2020, and the Finance Act 2014 has already

extended the range of relevant trading activities to include the management and

operation of nursing homes, subject to Ministerial order27.

This could benefit smaller operators by affording them access to low cost capital

with no capital repayments or interest for the first four years. As such, it could

address one of the issues identified as a barrier to investment, namely the

presence of single-home operators who lack equity to expand. However, the

impact of the scheme could be limited by the fact that it is unlikely to apply to the

acquisition of nursing homes or new builds. Additionally, it should be noted that

in consultations, the five year term during which the investment must be held is

viewed as shorter than ideal for the sector.

For the funds raised under this scheme, the cost of funding to the operator is

between 2% and 3% per annum lower than the cost of senior bank debt.

Compared with mezzanine or other forms of subordinated debt, the saving is

considerably higher. Thus for a 50-bed extension, costing a private sector

operator say €7 million (see Table 4.2), costs would be reduced by:

€7 million x 3% = €210,000 per annum

The cost to the Exchequer in the form of foregone revenue would be:

27 Our consultations indicate that the Revenue Commissioners have adopted a restrictive view of the scheme which presently prohibits its application to capital investment in the sector, including expansion of existing operations. It would appear that whilst this view that the Scheme is not applicable to purchases or initial capital investment in nursing homes may be shared by the Department of Finance, the view that it cannot apply to expansion of existing operations may not be shared by the Department, which may be open to explicitly recognising the extension of the scheme to encompass the expansion of existing nursing home facilities.

28


€7 million x 30% + €7 million x 10% (in Year 4) = €2.8 million.

It must be acknowledged that this represents a high cost to the Exchequer for the

sake of a modest benefit to the operator.

We assume that 1/3 of new private sector capacity will be generated via

extensions as opposed to newbuild, and that all of these will avail of the scheme.

Option 4 Accelerated Capital Allowances on Plant & Machinery

This option involves accelerating existing allowances in respect of plant and

machinery so that, instead of being applied over an 8 year period, an accelerated

one year allowance for investment in plant & machinery up to a capped amount

might be permitted in the case of the nursing home sector. It is worth

emphasising that this is a cash flow benefit rather than an actual reduction in tax

liability. However, it could still be a valuable support for the sector given that

plant and machinery represents approximately 20% of the capital cost of

construction or up to 100% of refurbishment costs.

This option is a form of incentive to perhaps mitigate the disadvantage that

operators have in investing in nursing home sites and buildings where they are

competing against other sectors (such as residential housing developers). Nursing

home operators are not in a position to obtain recovery of VAT on site and

building costs in contrast to residential property developers who can and this

presents a significant cash flow disadvantage, which was identified by a number of

operators and funding institutions in the consultations. It should be noted that

this relief is likely to require State Aid approval. Unlike the EIIS relief, it is

applicable to both extensions and newbuilds.

However, as the relief is only a timing issue, the relevant tax rate is 12.5% and

from our consultations many operators have tax losses carried forward, it is

unlikely that this benefit will be very decisive in operators’ decision-making. For

current purposes we assume that 75% of all private sector investment would be in

a position to avail of this relief (the balance not having sufficient profits to do so),

and that the relief remains throughout the period under consideration.

4.6.2 Deadweight Loss

Both Option 3 Extension of the EIIS and Option 4 Accelerated Capital Allowances

are likely to generate Deadweight Loss, i.e. tax incentives will be provided for

projects that would have happened anyway.

For current purposes we assume that the private sector capacity addition under

Option 1 Do Minimum, which is expected to happen anyway, will make use of the

tax incentives on offer. These will represent the minimum Deadweight Loss – in

reality the level of Deadweight Loss is likely to be higher.

29


4.7 PPP PAYMENTS

Under Option 5, the supply gap, including the loss of public sector capacity by

2020, would be made good by PPP contracts, incorporating the private partner

building and maintaining the facilities, while the public sector operates them. For

current purposes we assume a 25-year period for the PPP contracts, at the end of

which the facilities revert to the State.

The Exchequer will be required to pay the private partner each year for the use

and maintenance of the facilities. The amount payable depends on (i) the cost of

building and maintaining the facilities, and (ii) the private partner’s Weighted

Average Cost of Capital (WACC). AECOM’s Cost Review indicates the cost of

building and maintenance. With regard to WACC, our consultations with the NDFA

provided the following details in relation to the recently negotiated PPPs for

Primary Care Centres:

Cost of debt 2.6% to 2.7%

Return on equity 8% to 10%

Assumed D/E ratio 70/30

WACC 4.2% [70%x2.6%+30%x8%] to 4.9% [70%x2.7%+30%x10%]

Assuming that over time payments from the State to the PPP partner fully cover

these costs of capital, the state is effectively acquiring the assets at a WACC of

approximately 4.5%.

The State appears to have achieved an exceptionally competitive outcome in this

PPP, and it may face a higher WACC in other PPP processes. Indications from the

market at present are that interest on debt is unlikely to be under 3%, and the

required return on equity for this kind of project would be around 10%. With a

70/30 debt/equity ratio, that gives a WACC of approximately 5%. This is a nominal

interest rate; for CBA purposes we use a real (net of inflation) interest rate, of 3%.

We estimate that a good private operator could expect to earn a WACC of

approximately 6.7% on their overall property funding, while a weaker private

operator with less clarity on future income could expect to see a WACC of

approximately 8.0% on their overall property funding.

This means that the State, through a PPP process, may be able to procure similar

nursing home properties less expensively than private operators by at least 2%

per annum of the capital cost. In other words, for a property-related investment

in a nursing home of €1 million, the annual cost to the State would be at least

€20,000 lower than to a private operator. PPP capex costs however tend to be

higher than pure private capex costs, as indicated in Table 4.2 above.

In addition, the State must recompense the private partner for its annual

maintenance costs, which AECOM estimate at 1.25% of capex. We assume a

straight profit mark-up of 25% of these costs.

30


4.8 ADDITIONAL REVENUES TO THE EXCHEQUER FROM RESIDENT CHARGES

We assume for current purposes that no additional Exchequer revenues will arise

from this source, apart from (i) net-of-tax contributions from residents of public

nursing homes under Fair Deal, and (ii) recoveries under the Ancillary Support

Scheme of Fair Deal, which are dealt with above.

4.9 REDUCED COSTS IN THE HEALTHCARE SYSTEM

A key benefit of adequate supply of nursing home beds is savings elsewhere in the

healthcare system. As the level of dependency of residents is rising, it is

reasonable to work on the basis that in the absence of adequate nursing home

capacity, the residents in question would avail of other healthcare services. The

Department of Health’s Long Term Activity Statistics 201328 indicate that 65% of

nursing home residents are considered high or maximum dependency, while the

remaining 35% are low to medium dependency29.

The question then arises, what alternative health care services might be used by

residents in the future, in the absence of adequate nursing home capacity? In

discussions with the Services for Older People section of the Department, it was

concluded that a reasonable 'rule of thumb' would be to assume that about 65%

of those in need of nursing home care (i.e. all high and maximum dependency

residents) would need to be accommodated in a nursing home and, in its absence,

are likely to be delayed in an acute hospital. The remaining 35% could be

supported by means of an intensive home care package30 31.

We then must place a cost on these alternatives to nursing home care. Having to

accommodate high to maximum dependency residents in the acute hospital

system generates direct care costs, as well as cascading costs through the acute

system, from delayed elective procedures to ED waiting times. These are difficult

to place a value on, but one approach is to value them at the cost of stays in the

acute system. As of January 2014, the price charged to private patients in public

hospitals is:

28 http://health.gov.ie/wp-content/uploads/2015/04/long_stay_2013.pdf 29 The Department indicates that policy is that only residents with high or maximum dependency needs should be in long-term nursing home care. However, there is a cohort of residents with lower level care needs in nursing homes and many may have been there for a number of years due to social or other reasons. 30 The Services for Older People section notes that, in the case of people with high/maximum dependency, intensive home care packages tend to delay entry to nursing home care rather than provide a long-term alternative. 31 These estimations can be seen in the context of the overall target of 4% of the 65+ population requiring long term nursing home accommodation, which is a 0.6 percentage point reduction in the proportion currently accommodated, and implies that only those in need of long term nursing home care are included in the estimates of future demand.

http://health.gov.ie/wp-content/uploads/2015/04/long_stay_2013.pdf

31


Hospital Category

Single-occupancy room overnight

Multiple-occupancy room overnight

Fifth schedule hospitals €1,000 €813

Sixth schedule hospitals €800 €659

The above relates to the price charged to the patient, and not necessarily the cost

of the service. A 2011 media report indicated a cost of €909 per bed per night in a

public hospital, excluding depreciation32. Another report places it at between

€800 and €900 per bed per night33. Taking into account depreciation, it would

appear that a cost of €1,000 per night would be reasonable, considering also that

we are looking forward over the next two decades. Thus the annual benefit of

every additional nursing home bed supplied for the 65% of residents who are high

to maximum dependency would be:

€1,000 x 365 days x 95% occupancy rate = €347,000

With regard to intensive home care packages, the Department indicates a cost of

€1,000 per week. Thus the annual benefit of every additional nursing home bed

supplied for the 35% of residents who are low to medium dependency would be:

€1,000 x 52 weeks x 95% occupancy rate = €49,400

It should be noted that, unlike the Fair Deal scheme, in the case of home care,

there is no contribution required of beneficiaries or their families where services

are being provided by the State, i.e. State bears the full cost of any services it

provides or procures. The same applies in effect to acute hospital

accommodation.

In reality, families may privately choose to top-up home care services, and

anecdotally many do, and can claim tax relief on same. However, we are not in a

position to evaluate this, and must leave it as a qualitative benefit of the provision

of nursing home capacity.

Thus the weighted average saving per annum in the healthcare system per

additional nursing home bed provided is

€347,000 x 65% + €49,400 x 35% = €242,840.

4.10 MARKET VALUE OF LAND & PROPERTY RELEASED

It is not expected that any publicly-owned lands will be released as part of this

project.

32 http://www.herald.ie/news/cost-of-just-one-hospital-bed-rises-to-f331k-a-year-27973268.html 33 http://www.irishexaminer.com/ireland/delayed-hospital-discharges-cost-500k-a-night-241282.html

http://www.herald.ie/news/cost-of-just-one-hospital-bed-rises-to-f331k-a-year-27973268.html

http://www.irishexaminer.com/ireland/delayed-hospital-discharges-cost-500k-a-night-241282.html

http://www.irishexaminer.com/ireland/delayed-hospital-discharges-cost-500k-a-night-241282.html

32


4.11 RESIDUAL VALUE OF LAND & BUILDINGS

This project is evaluated over the period 2015 to 2036, but the useful lives of the

land acquired and buildings built on it will exceed this. Where facilities are built

directly by the public sector, or under PPP, this will accrue the State. This value,

albeit discounted back to today, must be added to the estimated benefits (or

reduced from the costs) of the project.

With regard to publicly-owned land, we assume that it will not lose its value over

time, so that its value at the end of the evaluation period is the same as its

current value. However, the residual value in today’s money is much lower

because of the discount rate applied.

With regard to the buildings, we work on the basis that they will have a useful life

of 40 years. New public facilities built in 2016/2017 will have expended

approximately 50% of their useful lives by 2036, while new facilities built later will

have more of their useful lives remaining in 2036.

With regard to buildings built under PPP arrangements, which will revert to the

State at the end of the PPP contract periods, we can expect that they will have

been better-maintained than directly-owned public facilities. We assume that the

depreciation rates for the former will be 2/3s of the rate for the latter.

For convenience, it is assumed that the residual values of refurbished buildings at

the end of 2036 are Nil. Depreciation of privately-owned facilities is not relevant

for the Exchequer Cashflow Analysis.

4.12 REDUCED HR COSTS

One would expect that it might be easier for the HSE to recruit and retain quality

staff in an improved and more integrated working environment, such as where

new public nursing homes are rolled out, or existing facilities are upgraded.

However, this is difficult to measure and thus remains as a qualitative benefit.

4.13 RESULTS OF EXCHEQUER CASHFLOW ANALYSIS/FINANCIAL ANALYSIS

Exchequer Cashflow Analysis/Financial Analysis reviews the purely financial

aspects of a project – the cash inflows and outflows of each option – from the

Exchequer’s Viewpoint. All our values are stated in terms of today’s (2015)

money, i.e. net of normal inflation. In the following table and graph we present

the Net Present Value (NPV), the Internal Rate of Return (IRR) and discounted

Benefit-Cost Ratio (BCR). Note that NPV is considered the best measure for

comparing competing options34. The cost of capital used to generate the NPV is

2.48% real (equivalent to 4.48% nominal, the estimated cost of long term

Exchequer borrowing as per the NDFA)35.

34 Both IRR and BCR measure the benefits as a proportion of the cost, whereas NPV captures net benefit. It is not unusual to obtain a better IRR or BCR on an option that is low cost (such as the counterfactual) but which doesn’t deliver the required benefits. 35 http://www.per.gov.ie/project-discount-inflation-rates/, May 2015.


33


The financial appraisal counts all the financial flows over the period 2015 to 2036,

including changes in operating costs, and the residual value of buildings and lands,

where these accrue to the Exchequer.

Table 4.5: EXCHEQUER CASHFLOW ANALYSIS/FINANCIAL APPRAISAL

Option NPV

€ Million

Internal

Rate of

Return

Benefit/

Cost Ratio

NPV Rank






6 State Fund 44,142 2102% 6.8 1

Figure 4.1: EXCHEQUER CASHFLOW ANALYSIS/FINANCIAL APPRAISAL (NPV € MILLION)

In financial terms all the options have a highly positive Net Present Value (NPV)

over the evaluation period, while Option 6 (“State Fund”) emerges as the most

positive. This reflects the fact that there is no cost to the State in operating the

fund, as it lends on the money at a margin to cover risk and administration, but

lower than commercial rates. It should be noted however that there is a question

mark over whether the borrowing for such a fund could be excluded from the

State balance sheet (i.e. would not be included in the State’s debt: GDP ratio). It is

also fair to point out that the differences in NPV between options 3, 4 and 6, and

between options 2 and 5, are modest. With regard to the latter, PPP does have

benefits in terms of impact on the State balance sheet, which are not taken into

account in the CBA.

34


A positive financial return for the Exchequer is unusual for health-related projects,

but is driven by the estimated savings in the acute hospital system. Savings grow

rapidly over time to very large sums, given the cost of accommodating residents

elsewhere in the healthcare system, and the large numbers of residents involved.

A key message to take from this is that, based on the expected savings elsewhere

in the healthcare system, the roll-out of adequate nursing home capacity is highly

worthwhile financially, whatever the configuration of the service.

Given that the healthcare system savings swamp all the other effects, it is

worthwhile also presenting the numbers without this impact, which gives results

closer to a cost-effectiveness analysis. The following table present the results of

this:

Table 4.6: EXCHEQUER CASHFLOW ANALYSIS/FINANCIAL APPRAISAL – COST-

EFFECTIVENESS

Option NPV

€ Million

Rank

1 Counterfactual/Do Minimum -2,414 1

2 Direct Exchequer Provision -9,884 5

3 Extension of EIIS -7,503 4

4 Accelerated Capital Allowances -7,404 3

5 Public Private Partnership -10,360 6

6 State Fund -7,399 2

Note: Excludes savings in acute hospital system.

The ranking of the options is the same (with the exception of the Counterfactual).

This reflects the fact that all the Options 2 to 6 are taken to generate the same

benefits in terms of catering for envisaged demand. The difference in cost level is

perhaps more clear from this analysis. However, the more important

consideration is the socio-economic analysis (next section), which takes into

account the broader socio-economic costs and benefits.

35


5. ECONOMIC APPRAISAL

5.1 DEFINITION

In the Exchequer Cashflow/Financial Appraisal we were concerned with the

financial costs and benefits of the project to its promoter, i.e. the Exchequer. The

economic appraisal takes these figures and includes the external/unpaid for costs

and benefits of the project, evaluated from the perspective of society as a whole.

Referring back to Chapter 1, these additional items can be considered as the

external or unpaid-for costs and benefits, i.e.:

Table 5.1: COSTS AND BENEFITS TO BE CONSIDERED IN ECONOMIC CBA

External/Unpaid for

Costs

Additional pollution & congestion costs from construction of new facilities.

Additional pollution & congestion costs from running new facilities.

Shadow price of public funds.

Benefits

Additional health benefits to residents from improved/more appropriate facilities and delivery of care.

Benefits to those in need of acute hospital care in terms of accessing more timely treatment.

Reduced suffering/distress/disruption on the part of family and friends, and saved time, due to health benefits for residents and their being accommodated in more appropriate facilities.

Credit for reduced shadow price of construction labour.

Each of these categories is assessed in the following sections over the lifetime of

the project and for each of the alternative options.

5.2 ADDITIONAL POLLUTION & CONGESTION

The two main potential environmental costs are emissions from energy usage and

traffic congestion. Some additional noise and disruption could be expected during

the construction phase, but we assume that project management would act to

minimise these impacts.

36


5.2.1 Air Pollution

In recent years a number of steps have been taken which have effectively

internalised the energy usage-related environmental costs of construction,

namely:

the introduction of the carbon tax,

the evolving EU Emissions Trading System (ETS) for larger emitters such as power stations and cement producers, and

a range of regulations aimed at reducing the level of localised air pollution from the transport, energy and industrial sectors (e.g. EURO VI standards for transport).

On this basis we disregard costs from emissions from energy usage.

5.2.2 Traffic Congestion

Construction Phase

Some additional traffic congestion could be expected during construction.

Construction would be undertaken throughout the period of analysis, as new

capacity is added. Given the dispersed nature of this construction, geographically

and temporally, however, we work on the basis that no excessive congestion

arises at any one location, and hence do not place a value on this cost.

Post-Construction

Similarly, the size and nature of nursing homes is unlikely to generate excessive

amounts of traffic congestion while operational. Accordingly, we include no cost

for increased traffic congestion, either for the project or the alternative options.

5.3 ADDITIONAL HEALTH BENEFITS

Here we are concerned with two sets of health benefits:

(i) for nursing homes residents, and

(ii) for those in need of acute hospital care in terms of accessing more timely

treatment.

5.3.1 Health Benefits for Nursing Home Residents

Health benefits (in the widest sense) arise for residents from being in a modern

nursing home as opposed to being accommodated elsewhere in the healthcare

system, specifically that cohort who would otherwise have to be accommodated

in an acute hospital setting. These would be on top of the savings to the

Exchequer from residents being accommodated in nursing homes as opposed to

the acute system.

It could be expected that most residents would prefer to be in a modern nursing

home than in the acute hospital system, given the better privacy, dignity and

quality of life offered by more appropriate accommodation in a nursing home.

However, as for the most part neither service is fully paid for by the resident,

most of the benefit would represent consumer surplus - the difference between

37


residents’ willingness-to-pay (WTP) and the price they actually pay for the service.

Valuation of WTP is challenging, as it is not directly observable, and research

evidence is limited. Thus, we are forced to leave this as a qualitative benefit,

though it may represent a significant omission in our analysis.

5.3.2 Health Benefits for Those in Need of Acute Hospital Care

Because adequate nursing home capacity will free up space in the acute hospital

system, there will be benefits to those members of the general public in need of

acute hospital care, in terms of accessing more timely treatment. This is a very

real and substantial benefit with major impacts in terms of health, quality of life

and ability to work. Again, these are difficult to measure, and they are captured to

some extent in the savings to the State from freeing up acute hospital space,

estimated as part of the Exchequer Cashflow Analysis. We are forced to leave

them as a qualitative benefit for the purpose of this study.

5.4 SHADOW PRICE OF PUBLIC FUNDS

With a publicly funded project the Government must withdraw money from other

sectors of the economy to fund it, in the form of taxes36. There is an additional

cost imposed by these taxes, as they distort the economy away from its private

optimum37.

Consultation with the Central Expenditure Evaluation Unit (CEEU) of DPER

indicates using a rate of 130%38. This represents a significant burden on any

project. However, it needs to be kept in mind that this does not take into account

the unpaid for/external or indirect benefits and costs discussed in this report,

including health benefits for residents under the various options.

5.5 BENEFITS FOR FAMILY/FRIENDS OF RESIDENTS

The main benefit here relates to improved well-being/reduced distress on the

part of family and/or friends due to improved outcomes for residents, compared

to being accommodated in the acute hospital system. It is difficult to quantify and

value these benefits in an economic sense. One way of looking at them is as a

complement of the benefits experienced by residents themselves, as they are

likely to be related in some reasonably constant way, i.e. the greater the benefit

for the resident, the greater the benefit for family/friends. In previous CBAs we

have taken the approach that these benefits are valued at 20% of the resident

36 Even if the Government borrows to fund the investment, that borrowing must be repaid with interest, and these repayments eventually come from tax revenue or alternative expenditure foregone. 37 In some cases the private optimum does not coincide with the socioeconomic optimum, and some taxes are at least partly designed to bridge the gap, e.g. taxes on cigarettes, alcohol and fossil fuels. In these cases taxes may reduce distortions in the economy and are beneficial. However most taxes, particularly direct taxes, distort the economy away from both the private and socioeconomic optimum. 38 As articulated also in http://www.djei.ie/publications/strategicpolicy/2015/Technical_Annex_Evaluation_Methodology.pdf



38


benefits. One could argue that in the current context a higher percentage might

apply.

However, since we have been unable to identify and value a benefit for patients

over and above the saving to the Exchequer from reduced demands on the acute

hospital system, this approach cannot be used here.

That said, at a minimum, we can measure travel time and cost savings for visitors

who travel to a nursing home rather than an acute hospital to visit their loved

ones. There are approximately 57 acute hospitals in Ireland39 and approximately

ten times that number of nursing homes. Simplistically assuming all hospitals are

equidistant from each other, then:

Area of Ireland 70,000km2 / 57 = 1,228km. If this is a circular area then the

average distance from any point is the radius, i.e. the ‘r’ in πr2. On this basis the

radius equals 20km. The equivalent for a nursing home, using the same formula, is

6km. There would thus be a difference of 14km in the distance between the

average nearest acute hospital and the average nearest nursing home, or 28km in

terms of a round trip.

This can be applied to the 65% of future nursing home residents whom it is

estimated would have to be accommodated in acute hospitals in the absence of

adequate nursing home capacity. Let us assume that each resident would have

two visits per week, each involving two people and that the visitors arrive by

private car, driving at an average of 80km/hour, meaning that the extra journey

time per round trip would be 21 minutes.

On this basis, for each relevant nursing home resident, the additional travel time

per annum would be

4 x 52 x 21/60 = 73 hours per annum.

These can be valued at the standard value of leisure time as developed by the

Department of Transport Tourism & Sport (DTTAS). Using their methodology, we

estimate that the appropriate value for 2015 is €13.31 (40% of average earnings

per hour). Thus the value of travel time saved per resident per annum would be

73 hours x €13.31 = €969. This can be expected to grow over time as real earnings

grow. To cater for this we assume a rate of 1% per annum growth.

To this must be added vehicle costs, in terms of fuel and depreciation. The

average distance travelled per resident per annum will be

28km x 2 vehicles x 52 weeks = 2,912km per annum.

DTTAS data indicate an average combined fuel and non-fuel cost in the Irish

private car fleet of €0.12/km (@ speed = 80km/h), implying annual vehicle cost

39 https://www.esri.ie/news_events/latest_press_releases/activity-in-acute-public--1/index.xml

https://www.esri.ie/news_events/latest_press_releases/activity-in-acute-public--1/index.xml

39


saving per resident of €33840. We assume this will grow in line with general

inflation.

Thus the travel costs avoided by family/friends per relevant resident per annum

would be €1,307. As stated, this excludes the improved well-being/reduced

distress on the part of family and/or friends due to improved outcomes for

residents, which is likely to greatly exceed the above estimate.

5.6 CREDIT FOR REDUCED SHADOW PRICE OF CONSTRUCTION LABOUR

As discussed in Section 1, in a fully employed economy, it is generally taken that

the shadow price of resources used is 100%, i.e. equal to the market price. The

rationale is that, in the absence of the project, the resources could be put to an

equally productive use elsewhere in the economy. However, if there is

unemployment in the economy, then the price paid for labour for instance would

likely be above the value of its next best use, and it would be appropriate to use a

shadow price of less than 100%.

Construction activity in Ireland has been in severe decline for a number of years,

notwithstanding recent improvements, which are restricted to Dublin and a small

number of other centres. It is reasonable to assume that the construction sector is

currently not fully employed (i.e. has spare capacity) and will remain so for a

number of years41.

Consultation with the CEEU indicates that the minimum rate that can be applied is

80%42. Given the conditions in the construction labour market, taking the country

as a whole, we are of the opinion that this is justified.

To be conservative, we work on the basis that the labour market will fully recover

by 2020, and there will be no difference between market price and shadow prices

of construction labour thereafter.

5.7 SOCIOECONOMIC COST BENEFIT ANALYSIS

The socioeconomic CBA takes the net cash flows from the financial appraisal,

adjusts them to shadow prices (i.e. true economic prices) including a 30%

premium for the shadow price of public funds, and adds the health benefits and

the external costs to the calculation. It then applies a social discount rate of 5%

real. The results are summarised in the table and graph below. As indicated in the

previous Section, NPV is considered the best measure for comparing competing

options.

40 There are a number of aspects of this calculation which diverge from reality. Most obviously, both population and acute hospitals are concentrated in urban areas, meaning that actual travel distances would be lower. By the same token, travel speeds in urban areas would also be lower. We assume for current purposes that these two aspects cancel out. 41 We note that there is rarely significant unemployment in the health sector and that nurses, doctors and other health professionals are on the Department of Enterprise and Employment’s list of priority professions for immigration. 42 Op. Cit.

40


Table 5.2: SOCIO-ECONOMIC COST BENEFIT ANALYSIS RESULTS

Option NPV

€ Million

Internal

Rate of

Return

Benefit/

Cost Ratio

NPV Rank






6 State Fund 40,596 2444% 8.4 1

Figure 5.1: SOCIO-ECONOMIC COST BENEFIT ANALYSIS RESULTS (NPV € MILLION)

As with the Exchequer Cashflow Analysis, under the socioeconomic CBA analysis,

all options deliver a highly positive NPV, and thus are considered worthwhile from

a socioeconomic point of view. Option 6 – “State Fund” - once again delivers the

highest return, based on our estimates. However, the differences in NPV between

options 3, 4 and 6, and between options 2 and 5, are modest.


model of the Fair Deal scheme to enable private operators to earn a return on

efficient investment as the main means by which the private sector will deliver







in this study.

41


It is worth keeping in mind also that the benefits of accommodation in nursing

homes as opposed to an acute hospital setting for both residents and their

families, as well as benefits for users of the acute system due to freed-up acute

system capacity, have only been qualitatively assessed and this further enhances

the worthwhileness of the project.

42


6. SCENARIO & SENSITIVITY ANALYSIS

6.1 SCENARIOS

We now employ a range of scenario and sensitivity analysis tests, to evaluate the

impact of varying our assumptions regarding each of the main costs and benefits

discussed so far in this report. Uncertainty and the requirement to use long-term

forecasts in many cases have forced us to make a number of assumptions.

Realistic assumptions will reduce the level of uncertainty but will not eliminate it.

As such, the results of the analysis are potentially associated with a wide margin

of error. The following tests will assist us in identifying the sensitivity of our

results to changes in the major assumptions.

The sensitivity analysis should highlight critical factors and the areas that may

require further analysis in order to quantify their impact more accurately.

Sensitivity analysis strictly speaking should assess both positive and negative

variations, but in project appraisal, the focus is understandably on negative

variation. We can also assess how negative some impacts would have to become

before the project did not generate a positive return, i.e. the ‘switching values’.

This helps us to understand what is driving the results and makes them more

robust, while keeping in mind that not all identified benefits have been quantified

and valued, which acts as a counterbalance to any vulnerabilities identified in the

scenario analysis.

Table 6.1 sets out what we consider to be the key assumptions made in this CBA,

and the variations we propose to test.

Table 6.1: SUMMARY OF SCENARIO ANALYSIS TESTS

Factor Base Value

(used in CBA)

Scenario Analysis Value

1. Discount rate 5% real Base x 1.5 (7.5% real)

2. Upfront capital expenditure As per Section 4 Base x 1.5

3. Valuation of benefits As per Section 4 & 5 Base x 0.5

4. Shadow price of construction labour 80% 100%

Each of these is tested from the socioeconomic perspective in the rest of this

Section. The Exchequer cashflow/financial appraisal is not revisited.

6.2 HIGHER DISCOUNT RATE

A social discount rate of 7.5% real gives the following results:

43


Table 6.2: CBA RESULTS, DISCOUNT RATE = 7.5%

Option NPV

€ Million

Internal

Rate of

Return

Benefit/

Cost Ratio

NPV Rank






6 State Fund 29,391 2444% 8.2 1

A higher social discount rate results in significantly reduced but still highly positive

NPVs; PPP moves marginally ahead of Direct Exchequer Provision in the rankings.

6.3 HIGHER CAPITAL EXPENDITURE

If the upfront capital expenditure turns out to be 50% higher than expected, the

results would be as follows:

Table 6.3: CBA RESULTS, UPFRONT CAPITAL EXPENDITURE 50% HIGHER

Option NPV

€ Million

Internal

Rate of

Return

Benefit/

Cost Ratio

NPV Rank






6 State Fund 40,252 1605% 7.9 1

A higher than expected capital expenditure makes relatively little difference to

the project, because the benefits over time are significantly higher than the

capital expenditure. The rankings are unchanged.

6.4 LOWER BENEFITS

If measured benefits turn out to be 50% of the expected levels, the results would

be as per the table overleaf. As can be seen, reducing benefits to 50% of their

expected level reduces the NPV significantly, but they remain positive for all

options.

In the case of Option 6, as long as benefits are at least 15% of the estimated

benefits under the base case, the project generates a positive NPV. This gives

comfort around the robustness of our results.

44


Table 6.4: CBA RESULTS – BENEFITS & SAVINGS 50% LOWER

Option NPV

€ Million

Internal

Rate of

Return

Benefit/

Cost Ratio

NPV Rank






6 State Fund 16,862 1049% 4.1 1

6.5 SHADOW PRICE OF CONSTRUCTION LABOUR = 100%

On the basis of a 100% shadow price of construction labour, the results would be

as follows:

Table 6.5: CBA RESULTS – 100% SHADOW PRICE OF CONSTRUCTION LABOUR

Option NPV

€ Million

Internal

Rate of

Return

Benefit/

Cost Ratio

NPV Rank






6 State Fund 40,548 2108% 8.4 1

This makes minimal difference to the results.

6.6 CONCLUSIONS

In this Section we have tested the robustness of our results to significantly more

negative outturns than the base case. All the options turn out to be robust to

these more negative scenarios. The analysis gives comfort around the robustness

of our results. Option 6 remains the optimal option, although the differences in

NPV between options 3, 4 and 6, and between options 2 and 5, are modest

throughout.

Based on our analysis, this is a highly worthwhile project, which generates a

significantly positive return for both the Exchequer and for society. We tested a

range of procurement options, all of which generated highly positive returns. In

reality it is likely that a range of approaches will be used to deliver the nursing

home system, and our analysis confirms that these other approaches all generate

positive returns.

45


APPENDIX: AECOM CAPITAL COST REVIEW

See overleaf.

Capital Cost ReviewProvision of Nursing Homes& Community Nursing UnitsDepartment of Health

30 June 2015

DOH NH CBA30 June 2015

CONTENTS Page

Option & Cost Model Review………………………………………………………………………………………………1

Cost Model 1: 50 Bed Public Refurbishment……………………………………………………………………………………………………..7

Cost Model 2: 50 Bed Private Refurbishment……………………………………………………………………………………………………..8

Cost Model 3: 50 Bed Public Extension……………………………………………………………………………………………………..9

Cost Model 4: 50 Bed Private Extension……………………………………………………………………………………………………..10

Cost Model 5: 100 Bed Public New Build ...................... 11

.................................................. 12

13

Narrative…………………………………………………………………………………………………….. 14

Basis of Cost Review……………………………………………………………………………………………………..14

Assumptions……………………………………………………………………………………………………..14

Exclusions……………………………………………………………………………………………………..14

Cost Model 6: 100 Bed Private New Build………………………………………………………………………………………….

........……………………………………….

Cost Model 7: 100 Bed PPP New Build………………………………………………………………………

This report has been provided to DKM Economic Consultants for the sole purpose of providing a Capital Cost Reviewfor the provision of Nursing Homes & Community Nursing Units. No party other than DKM Economic Consultants shallbe entitled to use or to rely upon the content of this report for any purpose whatsoever. AECOM shall have no liability inrespect of any such use or reliance.


Option 1 Counterfactual

Option 2 Direct Exchequer Investment

Option 3 Extension of EIIS Scheme

Option 4 Accelerated Capital Allowances

Option 5 PPP Build & Maintain, Public Operate

Option 6 Private Sector Provision (ISIF type fund)

Option 3 retains the status quo in respect of the public sector stock and thecurrent €20m per annum investment programme.

It should be noted that this option will not provide for any additional bedsand will fall considerably short of the estimated €480m required to bring theexisting stock up to the requisite standard.

AECOM are part of the DKM Economic Consultants team appointed by theDept. of Health to undertake the review of the current Nursing Homeprovision and the barriers to the public and private sector providing therequired additional bed capacity. Upon the conclusion of this review,including consultations with stakeholders, the team are to prepare a CostBenefit Analysis (CBA) on an agreed list of options.

In this option it is anticipated that the private sector will provide circa 700additional beds per annum over the next two years and 400 additional bedsper annum thereafter.

OPTION & COST MODEL REVIEW

option review

summary of options

Option 2 involves the commitment of the requisite public funds, over aperiod to be agreed with HIQA, for a programme of direct exchequerinvestment to bring all existing bedstock up to HIQA standards and toprovide the necessary additional beds to meet the demand (having regardto any additional capacity added by the private sector).

The Cost Benefit Analysis is to be based on the following six optionsagreed with the Department of Health.

option 1Counterfactual

We set out below the nature of the facility refurbishment / extension / newbuild construction envisaged under the various agreed options and theanticipated procurement route in each situation.

option 2Exchequer Funding

Under the counterfactual option the HSE would continue with it's existingcapital programme of circa €20m per annum on refurbishment of existingand new build replacement beds in the public nursing home sector.


option 3 EIIS

introduction

Page 1


Option 5 retains the public sector capital investment programme of circa€20m per annum. This investment would be focussed on refurbishingexisting units where they are deemed viable to do so.

This option centres around the extension of the existing EIIS Scheme toincentivise the private sector to expand existing units to provide additionalbeds in a more accelerated manner than currently projected.

This option centres around permitting the acceleration of capital allowancesto incentivise the private sector to expand or provide new beds in a moreaccelerated manner than currently projected.

option 5PPP


cost models

In addition, the Government would engage in a programme of PublicPrivate Partnership models to provide new build units to both existing non-viable units and also to provide the additional bed capacity not provided bythe private sector.


option 4 CapitalAllowances


This option centres around a Government agency establishing a fund toprovide finance (to assist in bridging the gap from that available fromcommercial banks) to private sector providers seeking to provide additionalcapacity. This finance would be made available at attractive rates tofacilitate and encourage the private sector to provide the additional bedcapacity required.

option 6Private Sector with (ISIF

type fund)

The cost models outline the indicative capital costs for sample"Refurbishment", "Extension" and "New Build" projects, in both the "Public"and "Private" sectors. The cost models also express the capital cost ofeach in Euro € / per bed for comparison purposes. For a number ofreasons the cost per bed varies across the different cost models and wesummarise the key reasons for these variances.

Typically the capital cost of public sector nursing home accommodation ishigher than the private sector. The principle reasons for this include thatpublic projects will typically;

- include a higher level of equipping and building services generally,such as the provision of oxygen , power and I.T. points at all bed heads.

This report consists of a series of cost models for the capital cost variantsbeing envisaged in some or all of the options outlined above.

public versus privatesector costs

cost modelcomparisons

- design all bedrooms to accommodate the most highly dependantpatients.

Page 2


€ per Bed*CM 1 Public Nursing Home 50 Bed Refurbishment 63,064

CM 2 Private Nursing Home 50 Bed Refurbishment 53,080

CM 3 Public Nursing Home 50 Bed Extension 183,858

CM 4 Private Nursing Home 50 Bed Extension 156,107

CM 5 Public Nursing Home 100 Bed New Build Unit 167,589

CM 6 Private Nursing Home 100 Bed New Build Unit 142,348

CM 7 PPP Nursing Home 100 Bed Unit 171,090

* Costs include construction, fees, contributions, equipment, contingency & VAT;excludes site cost & finance

The following is a summary of the Construction Cost Models contained inthe report:

( as part of a deal for 5 - 7 units)

Cost Models 1 & 2 involve the refurbishment of existing units. It isacknowledged that all units are likely to be in variable condition and as aresult the costs cannot be estimated without significant scoping and costingwork. We have included an allowance of 33% for comparison purposes,however this cost level could vary significantly and up to circa 70% afterwhich viability of same would be a significant issue. It is anticipated asmore and more units are refurbished the cost per bed is likely to rise as theeasier projects are prioritised first to increase capacity.

- be constrained by the public procurement process from takingadvantage of sourcing specific products, commercial approach tonegotiating works & service contracts.

extension versus newbuild

refurbishment works inexcess of 33% of new

build

- incur higher design team fees due to longer pre-contract programmeand typically more extensive scope of services.

- comply with public policy requiriing all public buildings to achieve A3BER rating.

- often be on an existing public site and to make available may involvedemolition of existing building(s), relocation of facilities, works to addresslong term campus wide infrastructure deficits etc.

Our cost models indicate a marginally higher cost per bed for extensionprojects over that of new build projects and the principle reasons include;

- reduced economies of scale due to typically smaller scale projects.

- likely to incur interface costs where linking to existing units and whilstin some instances economies may be achieved through extension ofexisting services etc it may also involve more expense if the systems in theexisting accommodation also requires upgrading.

- due to their smaller scale and interfacing with existing buildings theywill typically attract a higher percentage for design fees and require ahigher risk / contingency provision.

Page 3


These factors would include the site and any limitations in terms of shapeand proximity to other buildings, any requirement to provide ancillaryfacilities such as therapy rooms or other community facilities, if thedevelopment is an extension to an existing unit or a new unit.

benchmark costs

The following items should also be taken into consideration;

programme

We have included a 2.5% allowance for costs for interface works where anextension is being built onto an existing nursing home.

All of the options set out above are based on the medium to long termstrategies to address the capacity requirement. All costs in this report arebased on current rates and inflation will be accounted for in the DKM CBAreport.

We have benchmarked the construction capital costs on recent projects ofsimilar accommodation provision and estimates for same.

items for furtherconsideration

We would highlight that every project will be different and siteworks costs inparticular will be influenced by the site constraints / opportunities. For thepurposes of this report and the cost models we have included a 7.5%allowance for private sector new build & extension projects and 10% forpublic sector projects. This differential is to include an allowance to reflect,as previously mentioned, public projects may involve demolition of existingbuilding(s), relocation of facilities or works to address long term campuswide infrastructure deficits etc. We would expect siteworks costs in respectof new units to be proportionately higher than extensions andrefurbishments however due to the lower project value of refurbishment &extension projects we have retained the 10% allowance for therefurbishment cost models.

These and other factors will drive the gross area per bed (gross floor areaof the development divided by the number of beds) and in turn influencethe cost per bed.

For the purposes of the costs included in this report we have taken a grossarea per bed of 57.5 sq m and utilised same across each of the costmodels in order to bring uniformity to the comparison. In practice this areacan vary by - / + 15% depending on the factors described above.

In common with most capital projects, the floor area of a nursing homedevelopment will be a key cost driver. In this regard compliance withstandards will dictate a certain minimum area however other factors caninfluence the overall gross floor area and in turn the efficiency of thedevelopment.

siteworks

interface works

floor areas

Page 4


Typically one could expect to make a provision of between 1.25% and 2.5%of capital cost per annum for planned maintenance, the variance beingdetermined by a number of factors including building age / condition andfunction. The lower end of the range would not include building elementreplacement (a new building) whereas the higher end would include someelement of replacement. This requirement would increase with the age ofthe building.

In respect of cost model 7, the PPP route, it would be anticipated that therewould be a lower risk provision requirement as more risk is passed to theprivate sector, however the private sector would be expected to price thisrisk in their capital cost, accordingly we have maintained the samecontingency risk allowance of 3% as the traditional route and not adjustedthe capital cost.

Under Option 5, the PPP, bidders have the opportunity to spend-to-savethrough increasing the capital spend to achieve reduced maintenance andoperational costs. For the purposes of this cost model we have notincreased the capital construction cost for spend-to-save initiatives andthus have maintained the same 2.5%, 1.75% and 1.25% as outlined above.

Cost models 1 and 2 inclusive involve more complex refurbishments wheremore unforeseen costs may arise and thus a higher contingency riskallowance of 7.5% is included. A contingency of 5% has been included incost models 3 & 4 for the extensions of existing units.

design team fees

Consideration should be given to the capital cost risk associated with thedifferent options. In this regard options 3, 4, 5 & 6 would be similar as theyare primarily focussed on new build projects through traditionalprocurement. A contingency risk allowance of 3% has been included fornew build units as per cost models 5 & 6 inclusive.

whole life costs

In this regard, under options 1, 3, 4 & 6 it is anticipated that the publicsector would maintain it's current programme of €20m per annumaddressing the condition of the existing stock. In relation to this stock theCBA model should allow 2.5% per annum until the refurbishment is carriedout and 1.75% thereafter. In regard to option 2, it is proposed to increasethe exchequer funding to similarly upgrade the existing stock however at amore accelerated manner through upfront capital funding and thus the2.5% will change to 1.75% in a quicker timeframe. 1.25% should be appliedto the new build additional capacity.

risk

A range of design team fees between 9% and 15% have been included inthe cost models dependant on the scale of works, new build orrefurbishments and public or private sector.

In respect of Cost Model 7, PPP procurement, an additional allowance of2.5% has been included for the additional legal & other fees associatedwith the establishment of PPP's.

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For the purposes of the CBA cost model we would propose that projectsoutside the greater Dublin area should be adjusted by -5% to account forregional cost variations.

"other" cost

contingency A 5% construction risk allowance / contingency provision (based on theconstruction costs) has been included in the order of magnitude costings inrelation to the new build options on the clear site (options 2, 3, 4 & 6). Ahigher provision of 10% has been included in relation to the Options' 1 & 5to reflect the greater degree of risk associated with refurbishment projectsand building over an existing hospital.

Under the "Other costs" category, costs such as planning & fire cert fees,development contributions, Utility contributions and other miscellaneouscosts. For the purposes of this CBA we have included a 5% allowance for"Other Costs" on refurbishments and 6% on extensions and new builds toallow increased allowance for development contributions .

regional cost variations

equipment As identified earlier public sector nursing homes typically have higher levelof expenditure on equipping thus we have included per bed allowances of€10,000; €12,000 and €6,000 for public 100 bed new build, 50 bedextension and 50 bed refurbishment respectively and €7,000; €8000 and€4,000 as private sector allowances.

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GFA Sq m No. € / sq m €

1.01.1 Basic Building Cost

- Refurbishment of existing 50 bed nursing home 2,875 1 600.00 1,725,000

1.2 External Works (10% of Basic Building Costs) 172,500

1.3 Sub-total - Construction (excluding VAT) 1,897,500

1.4 VAT @ 13.5% 256,163

1.5 VAT @ 23% 10,0001.6 Sub-total - Construction Cost (including VAT) 2,163,663

2.02.1 Design Team Fees 284,625

2.2 VAT @ 23% 65,464

2.3 Sub-total - Fees (including VAT) 350,089

3.03.1 - Refurbishment of existing 50 bed nursing home 50 6,000 300,000

3.2 VAT @ 23% 69,000

3.3 Sub-total - Equipping Costs (including VAT) 369,000

4.0 108,183

5.0 Construction Risk Allowance & Contingency 162,275

6.0 Sub-total - (incl VAT) € 3,153,209

€ 63,064

Element

Construction Costs

Design Team Fees

Equipping Costs (50% of new allowance)

Others Costs Allowance

CM 1: PUBLIC NURSING HOME REFURBISHMENT COST MODEL

Cost Per Bed

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- Refurbishment of existing 50 bed nursing home 2,875 1 525.00 1,509,375



1.4 VAT @ 13.5% 224,142

1.5 VAT @ 23% rate 20,0001.6 Sub-total - Construction Cost (including VAT) 1,904,455


2.2 VAT @ 23% 49,643



3.2 VAT @ 23% 46,000


4.0 95,223



€ 53,080


CM 2: PRIVATE NURSING HOME REFURBISHMENT COST MODEL

Element

Construction Costs

Design Team Fees

Equipping Costs (50% of new allowance)

Cost Per Bed

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- 50 bed extension to existing nursing home 2,875 1 1,850.00 5,318,750


1.3 Interface Works (2.5% of Basic Building Costs) 132,969


1.5 VAT @ 13.5% 807,785



2.2 VAT @ 23% 165,147



3.2 VAT @ 23% 138,000


4.0 409,283



€ 183,858


CM 3: PUBLIC NURSING HOME EXTENSION COST MODEL

Element

Construction Costs

Design Team Fees

Equipping Costs

Cost Per Bed

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- 50 bed extension to existing nursing home 2,875 1 1,650.00 4,743,750

1.2 External Works (7.5% of Basic Building Costs) 355,781

1.3 Interface Works (2.5% of Basic Building Costs) 118,594


1.5 VAT @ 13.5% 704,447



2.2 VAT @ 23% 132,019



3.2 VAT @ 23% 92,000


4.0 357,154



€ 156,107


CM 4: PRIVATE NURSING HOME EXTENSION COST MODEL

Element

Construction Costs

Design Team Fees

Equipping Costs

Cost Per Bed

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- New Build 100 bed nursing home 5,750 1 1,800.00 10,350,000

1.2 External Works (10% of Basic Building Costs) 1,035,000


1.4 VAT @ 13.5% 1,536,975


2.02.1 Design Team Fees 1,138,500

2.2 VAT @ 23% 261,855

2.3 Sub-total - Fees (including VAT) 1,400,355

3.03.1 - new build 100 bed nursing home 100 10,000 1,000,000

3.2 VAT @ 23% 230,000

3.3 Sub-total - Equipping Costs (including VAT) 1,230,000

4.0 777,719



€ 167,589


CM 5: PUBLIC NURSING HOME NEW BUILD COST MODEL

Element

Construction Costs

Design Team Fees

Equipping Costs

Cost Per Bed

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1.2 External Works (7.5% of Basic Building Costs) 690,000


1.4 VAT @ 13.5% 1,335,150



2.2 VAT @ 23% 204,723


3.03.1 - new build 100 bed nursing home 100 7,000 700,000

3.2 VAT @ 23% 161,000


4.0 675,909



€ 142,348


CM 6: PRIVATE NURSING HOME NEW BUILD COST MODEL

Element

Construction Costs

Design Team Fees

Equipping Costs

Cost Per Bed

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1.2 External Works (10% of Basic Building Costs) 1,035,000


1.4 VAT @ 13.5% 1,536,975


2.02.1 Design Team Fees 1,138,500

2.2 Legal & Other PPP Establishment Fees 284,625

2.3 VAT @ 23% 327,319


3.03.1 - new build 100 bed nursing home 100 10,000 1,000,000

3.2 VAT @ 23% 230,000

3.3 Sub-total - Equipping Costs (including VAT) 1,230,000

4.0 777,719



€ 171,090


CM 7: PPP NURSING HOME NEW BUILD COST MODEL

Element

Construction Costs

Design Team & Other Fees

Equipping Costs

Cost Per Bed

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NARRATIVE

This report has been based on information issued by the Department ofHealth as a briefing for the project, during progress review meetingsand the various stakeholder consultations as part of the full reportconsultation phase.

information received

BASIS OF COSTREVIEW

ASSUMPTIONS

base date A base date of Q2 2015.

finance costs The cost models exclude finance costs.

The costs included in this report are prepared for the purposes ofcomparing options only and should not be used for establishing projector programme budgets.

The precise scope of works for option alternatives have not beendeveloped and would require detailed planning before an accuratedetailed cost plan could be prepared for same.

phasing Compression of schedule, premium or shift work, and restrictions on thecontractor's working hours.

access The main contractor will have full access to the sites at normal hours.

programme The programme for the implementation of the various options willpotentially significantly impact on overall costs if their implementation isa medium to long term strategy. This and its impact should beconsidered prior to selecting a chosen option.

tendering Contracts for works will be competitively tendered to pre-selectedcontractors.

site purchase site purchase and associated costs

haz mat removal Hazardous material handling, disposal and abatement.

scope of works

EXCLUSIONS

cost model basis

cost ranges

inflation Inflation is not included in the Cost Models included in this report.

Cost ranges have been utilised in generating the cost models however itshould be noted that costs can fall outside of these ranges dependenton the scope, complexity and range of other factors thus such factorsshould be specifically considered in preparing estimates for anyindividual or group of projects.

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CONTACT DETAILS

DKM ECONOMIC CONSULTANTS

Office 6 Grand Canal Wharf

South Dock Road

Ringsend, Dublin 4.

Telephone: 01 6670372

Fax: 01 6144499

Email:[email protected]

www.dkm.ie