Public Private Collaboration in Healthcare:UK Public Private Partnerships

17-18 September 2007

Podgorica, Montenegro

Chris Blades

European Investment Bank(blades@eib.org)

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The UK’s Private Finance Initiative (PFI)

• PFI is UK’s formalised PPP model, in which:- private sector - designs, builds, finances and operates

(DBFO) the hospital facility and may also deliver some facilities-related services (e.g. maintenance, energy, cleaning, etc.)

- public sector - delivers healthcare services, pays a “rent” for the use of the accommodation, makes payments for facilities-related services

- a long-term relationship - managed by a legally binding contract established at the outset

• Two health sector models – project finance (hospitals), joint ventures (primary care)

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PFI models are designed to improve VfM in infrastructure investments by:

• Providing incentives for on-time and on-budget project implementation

– No service/no payment– Incentives to cost control

• Optimising capital & maintenance spend over project life• Innovation in design and financing structures• Improving management of operational risks

Optimal risk allocation reduced cost of riskReduced cost of risk better Value for Money

Value for Money (VfM) Principle

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Project Finance - Hospital PFIs

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Hospital PFIs (Project Finance)

• Special Purpose Company (SPC) established for the sole purpose of delivering the hospital project

• Used for ”stand-alone”, typically large hospital projects

• High ratio of debt to equity (“gearing”)• Lenders typically rely on project contracts, not

physical assets, as project security• Finite project life, debt repaid at project close• EIB lends directly to SPC (not health service),

as borrower/concessionaire

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Traditional UK hospital procurement

The public sector:•Prepares a design (input spec) for the hospital•Raises the finance to pay for the buildings•Selects a builder/procures an asset

The private sector:•Builds the hospital•Its risk is limited to construction•Gets paid and walks away

The public sector:•Owns the hospital•Staffs the hospital•Maintains (or not) the hospital

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PPP hospital procurement

The public sector:•Prepares a specification of service need (output spec)•Develops a “public sector comparator” (PSC) •Selects a private partner and procures a service

The private sector:•Designs, builds and operates the hospital•Raises the finance•Maintains the hospital to defined standards •Gets paid annually for services delivered•Suffers penalties where standards fall•Takes risk throughout the project•Transfers the hospital to the NHS at end of contract

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Dept of Health

Facilities Management

(hard and/or soft)

EIB

Patients

UK hospital PFIs (Project Finance)

Banks/Bondholders

Construction

SPC(borrower)

Lifecycleinvestment

NHS Trust(promoter)

Equity Providers

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Construction and design risks

Hard FM Soft FM

Force Majeure / Insurance

Volume / residual value

Sub-contractors: Construction and equipment, ‘Hard’ and ‘Soft’ FM

SP V Publicsector

Shareholders EquityBanks

Bondholders

Taxpayers

Where do the risks go?

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Dudley Hospitals Configuration

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Plan on new PFI Hospital

[add plan of site]

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The New Russells Hall Hospital

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Example - Dudley Hospitals PFI• Modernisation of acute hospital services for population of

400,000• SPC designs, finances and builds/refurbishes 700 bed hospital

and 2 ambulatory centres• Includes non-clinical service delivery (IT, hotel, portering, waste

management, etc)• Facilities transfer to public sector after 40-year concession

period for a nominal sum• “Standard” gearing (90 debt/10 equity)• £70 million EIB loan to SPC, 33 year maturity• Balance of funding from index linked public bond issue by SPC• Performance related debt repayments made from cash flow

payable to SPC by health service

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Facilitating value for money from PFI

• Clear, well defined healthcare strategies:- PFI is not a substitute for strategic analyses/decision-making- Disciplines required for successful PFI can improve healthcare

facilities planning generally

• Sufficient and effective market competition• Public sector PFI procurement and negotiation skills (central

support, expert advisers)• Process and contract standardisation• Structuring PFI transactions with:

- Alignment of risk, incentive and reward is key to VfM- Correct risk transfer critical to securing affordability- Allocation of risk through payment mechanism, fixed and variable

components of PFI charge

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Joint Venture - Primary Care LIFT

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Local Improvement Finance Trusts (LIFT)

• A joint venture model introduced into the English NHS in 2001

• Initial focus on deprived inner city areas • EUR 1.5 billion to upgrade 3,000 primary care

premises and create 500 one-stop health centres • Objectives of programme, to:

– Improve primary care premises – Facilitate coordination of healthcare professionals and

health and related agencies – Help alter the balance of services between primary and

secondary care – Improve recruitment and retention of family practitioners

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LIFT Joint Venture

The joint venture:• Long-term collaboration, 40% public sector and 60%

private sector (bank, contractor, service providers) • 20 year franchise agreement to develop and maintain

health and social care facilities• The SPC, “LIFTco”:

- builds, owns and long-term leases facilities to health providers- receives rentals for facilities, implicitly underpinned by

government cash flows

• Commercial banks within LIFTco, EIB participates by lending to banks, reducing cost of borrowing

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Structure of LIFT

LIFTco(SPC) Patients

Lenders

Strategic Partnering Board

Local Stakeholders

Partnerships for Health

Private Sector Partner

Department of Health

Partnerships UK

50%

50%

(national joint venture)

20%

20%

60%

Oversight by public sector

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LIFT Joint Ventures

Greatly assisted by facilitative mechanisms:• Central support from Partnerships for Health• Enabling funds for the preparation of LIFTs• Standardised procedures and documentation• Central role of Primary Care Trusts as both

commissioners and providers of services• Growing private sector of specialist developers able

to offer supply chain management

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Success in LIFT Implementation?

Nevertheless, implementation not smooth, slower than anticipated:

• Large numbers of parties, complex relationships, different objectives, range of processes/procedures, other demands on public sector, etc.

• Difficulties coordinating all different elements in a timely basis, including required approvals

• Changes to scope and procedures being introduced to address difficulties

• Affordability challenges for the public sector

Still early days to draw conclusions on meeting ultimate objectives of LIFT

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Differences: LIFT and hospital PFINHS LIFT PFI

Joint venture company or group is created, investors include the public sector participants

Company created to deliver the solution is wholly owned by the private sector consortium

A number of investments procured, each small and some not identified at outset of procurement

A single large building/complex procured, output specifications are defined at outset

The LIFTco becomes a vehicle through which new schemes are developed

The company exists only to deliver the procured building

Through exclusivity agreement with the LIFTco has an automatic right to propose future schemes

The company has no automatic right to develop future schemes

The LIFTco will exist for an unknown period that is determined by the expiration of the final lease

The life of the SPC is linked to the length of the primary lease period

To date, soft facilities management services are excluded from the leases

Soft facilities management services are often included in the lease

The freehold to the land upon which the assets are to be constructed is sold to the LIFTco

Long leasehold is granted on land used for construction, freehold retained by the NHS

Cost of the lease reflects an assumed residual value (mainly land) at end of concession period

The asset will usually be fully depreciated by the end of the lease period – no residual value

The asset will be available for repurchase by the NHS at a modified market value

The asset will be transferred to the NHS at a nominal value

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Can PPPs deliver cost-effective health investments?- Is the jury out?

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PFIs - the advantages …1. Solution to capital shortage – though time

shifting/smoothing of expenditure

2. Off balance sheet treatment – though, changes to accounting treatment makes more difficult

3. More likely to be on time and budget – potentially at the cost of quality

4. Optimises capital component of projects5. Potential for design innovation6. Contracts :

● With appropriate risk sharing● Providing greater certainty over future cost & quality

7. Management of services by those best able8. New healthcare facilities have been, and are being,

built!!

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PFIs - the disadvantages…

1. Cost of private sector capital higher than government2. High transactions costs for all parties, potentially

reducing competition for very large projects3. Contracts complex & costly to negotiate for all parties4. Projects can offer VfM and still be unaffordable – though

the extent to which PFI is responsible is debated

5. Faster build times…..but longer procurement6. Performance standards may give perverse incentives7. Long contracts may reduce flexibility to respond to

changes in healthcare demand and practice8. Public continue to express concerns about PFI model –

sometime confusion between changes to hospital configurations per se and the role of PFI