Public Private Partnershipsand the wider dimensions of capital investment strategy

Barrie Dowdeswell

Executive Director EuHPN

PPP What the EU says

• DG Markets - current strategy for developing the internal market of the EU prioritises public services as the next sectors for liberalisation. Part of that strategy is

– To facilitate public-private partnerships– That the private sector will play an increasingly important role in

financing infrastructure

• The Green Paper aims to – ensure that such partnerships are compatible with public procurement

rules, and – to clarify the relationship between PPPs and state aid rules

PPP EU cont’d

• “Central and Eastern Europe have a real opportunity to improve their infrastructure at low cost by embracing Public Private Partnerships”

• Internal Market Commissioner Frits Bolkestein said: They can be an important tool for improving the quality of public services and supporting growth in Europe”.

• But DG Economy says -– there is the risk that the recourse to PPPs is increasingly motivated by

the purpose of putting capital spending outside government budgets

– It may happen that PPPs are carried out even when they are more costly than purely public investment.

PPP what the World Bank says• “As governments struggle with rising health care costs, public-

private partnerships in constructing and managing public hospitals can provide innovative ways to control costs and improve service

– PPPs can be a powerful policy tool for improving the viability of public hospitals and the quality of their services.

– they are often controversial– getting them right requires careful attention to the critical policy issues”

• “The World Bank continues to experiment with new lending instruments including:– Adaptable Program Loans, – Learning and Innovation Loans, – Sector Adjustment Loans—and – selectively incorporating health sector–related conditions into– macroeconomic adjustment loans”

What the UK (English NHS) is sayingofficial ?

• The Head of the NHS programme to accelerate patients' access to treatment - raised fears about the inflexibility of the UK version of PPP; the Private Finance Initiative (PFI). He said:

• hospitals could compete better with their private sector rivals if they built cheap and cheerful premises to last five years

• I've seen some awfully grand PFI schemes that are starting to give us a real problem in our capacity mapping

• We need a fundamental rethink about how much we invest in capital rather than human resources

UK cont’d

And finally -

• “We do not need to be designing monuments with long-term leases. Some of the better players are recognising that, and not getting into big capital investment. Build for five years, possibly 10, and really focus on human resources solutions.” Ricketts, DH, May 2005

What some of the figures say• National Audit Office report:

– Banks and property developers made windfall profits of £73m by refinancing, the £229 million, 989-bed Norfolk and Norwich hospital

– The consortiums have made the windfalls by being able to remortgage the properties with other financiers charging much lower interest rates - just as a homeowner might switch mortgages to cut their monthly interest payments.

– The PFI consortium:

• put up £33m in 1998

• borrowed £197m to build a hospital

• was able to refinance the deal five years later, taking £115m out of the project.

• The group,shared £31.4m refinancing windfall with the health trust.

• The group will be paid £37.8m a year over a 39-year deal to run and maintain the hospital.

• The National Audit Office estimates that investors will get a 60% return on their investment, compared with an expected 18.9% return at the time the deal was signed.

– The NAO concludes that taxpayers will "continue to pay a premium" on the deal for the next 32 years but got the new facilities for patients much earlier than if it had been financed from general taxation.

Some observations

• European (and global) finance and market interests see PPP as the primary means of financing health infrastructure

• Contestability is seen as a means of driving better value• Health Ministries are increasingly re-active to Treasury financing models• Treasury models have their roots in non-health infrastructure e.g. roads• The principle value of PPP seems to be the accelerated provision of

hospitals and health infrastructure - with transfer of risk - on time, within budget providing added benefit

• The risk transfer benefit is a commercial commodity for which there is a charge:

– Some estimates suggest that in the UK the premium paid for risk transfer - principally construction - is as high as 30%, CIPFA report

– The procurement value gain on health projects has been assessed as between 1% to 8% - but the benchmark model - the public sector comparator - is questionable

Observations cont’d• Evidence is suggesting:

– Translation of PPP into the health environment is complex - too complex ?– There is a continuing gulf between the business model of industry and the

welfare ethos of the Public sector – There is a skills gap within the health sector in converting PPP principles for

application in healthcare– PPPs introduced as a ‘one size fits all’ model may be a flawed strategy– There is an underlying problem of capacity mapping - linked to lifecycle

investment strategies

But

• None of the headlines is particularly helpful - in abstract• There is a need to understand context• There is a need to understand the longer term operational dynamics of

PPP - as helping assess and measure value• What is in any event meant by PPP

PPP the diversity of models

• The ‘public’ clinical service model• Full operating licence

– Fixed tariff– Competitive tariff

• Contracted services - short-term treatment - specific focus centres

• Outsourcing services• Non-clinical• Clinical, specialist e.g.

– Diagnostic ‘factories’– Manufacturer franchises - neonatal care packages

• Co-locations with the private sector• PFI - the infrastructure ‘lease’• Joint stock equity (portfolio) ownership e.g. (LIFT)

Core / Non-core Servicesa hypothesis

Maintenance

Ancillary

Administration

Diagnostic

Clinical

Low HighPublic Sensitivity / Complexity / Financial risk

The ‘serviced’building

UK PFI / boundary*

ICT

Community

Cost efficiency&

Lifecycle durability

Cost effectiveness & Operational relationships Integrated service

& building options

What are the influences - macro

• Strategic policy shift - government devolution - reducing direct government engagement and funding ? Evidence suggests a European trend in this direction

• Ideology - the benefits of market enterprise• Social need• Economics

– Debt management– Commission (and other) aid programmes

• Stimulating the economy• Pension funds

What are the influences - micro

• Urgency over infrastructure replacement– Performance commitments e.g.waiting times– Poor condition of buildings - the quality dimension - and patient

mobility– Workforce mobility

• Leverage for change– Culture– Professional performance

• Procurement value• Whole life cost value - e.g. maintenance standards

European pressures, health – and health facilities - the attraction of PPP

Cost

Unsustainable - social Unsustainable - economic

Affordability

Policy aims

Social development needs Economic needs

Expectation

The third age of healthcare – the new context frame

Hospital Hospital

Morbidity compression

but alsoCo-

morbidities

Public Health- 1950

Acute Care1950 -2005

Chronic Illness 2005 -

AgedCare2010 -

Community,

LifestyleDiversity

Re-emergence &revitalisation

The PPP environment - competition vs coherencechoice of episodes or pathways, the paradox

Provider agencies Commissioning agencies

core chronic acute networks marketcontestable choice ‘tariff’ based contracts

contracts

Multiple change / risk factors - the importance of lifecycle investment planning

technology care markets outcomes H&S&environment aged care

high

low

Probabilityof change

Volatility - demand

lifecycle

Functional - evolution

Stability - relative

Contract renewal - PPP

growth

Cross matching the models if we have to adopt PPP

• Core services - sustainable non-contestable investment - perhaps PFI?

• Chronic illness - portfolio ‘agile’ space and multi-sectoral investment e.g. LIFT

• Care networks - coherence and compatability - and adaptability factors. Possible franchise operation and funding

• Market - full service PPP, license and contestable models

• Outsourced - flexible lease / operating licences

There are alternative ‘capital’ models

• Public procurement– Government grants– Bank lending

• EIB• World bank• Commercial banking Sector

– Direct bond issue• Supply chain systems• Property leasing• Structural aid funding

Lifecycle economy - a framework for analysis

Concept planning phase;Inputs - service model change factors finance

Functional efficiency gap on commissioning

Functional Decay vs Outputs and income

Adaptability costs

Lifecycle capacity

Adaptability value

Ref: Multiconsult Norway

Lifecycle investment

Hot floor(clinicaldiagnostic)30.5% Ward

(hotel)32.2%

Office23.5%

Decay factor

clinical operational cultural building standards

high

low

Issues•Standard depreciation (25 to 40 yrs)•Differential rates•Procurement funding amortisation•Design standards•Service inhibition•Tariffs

Ref:bouwcollege

probability

The EuHPN Lifecycle study - preliminary view

• application of lifecycle principles seems proportionate to the nature of competition strategies– Public procurement

• Government funding - weak application e.g. underinvestment in maintenance, queuing for capital funds

• Private loans - debt management rigour; income as collateral - little explicit incentive for lifecycle investment

– PFI, the lifecycle infrastructure lease• ‘weak’ design in adaptability terms, uncertain lifecycle effectiveness

• Maintenance as a profit centre - for the operator

– PPP• Fixed tariff - incentivises lifecycle economy strategies

• Competitive tariffs - the great unknown re lifecycle sustainability of asset value and re-investment

0

100

200

300

400

500

600

700

800

900

1000

0 1 2 3 4 5 6 7 8 9 10 11 12 14 16 18 20

durationof stay

in days

serv

ice

in E

uro

/ d

ay

Acute care patient‘s real average demand

Services offered by publichospitals in the 90sCosts per case: 3600 + 270 (Inv.)= about 3870 €

Patient and process guidedflow principle of RKA costs/case /Price 2.660 € incl. about 720 €investments

Service conception of RHÖN-KLINIKUM AG acute care hospital

day-care

?

day-care

?

day clinicoperation /

conservativetherapy

yes

no no

yes

operationconservative

therapy

complete diagnosis

Intensive care

inpatient operation

inpatient clinicno no

yesjainpatient

recovery room

intermediatecare

normal care

inpatient

low care

discharge

outpatient?

outpatient?

oupatienttherapy

yes yes

outpatientoperation

“Concept of treatment therapy (care-pathway)- as a design principle“

Rhon-Klinikum - the workforce and infrastructure link

PPP / Capital matrix analysis

Adaptability

&effectiveness

Lifecycle

standards

Procurement value

Risk transfer

value

Service

response

/ priority

PPP

licence

PPP

tariff

PPP

joint stock

PFI

infrastructure

Conventional

variants

Summary

• The EU seems to be moving from a neutral to advocacy stance• The Treasuries (& finance markets) appear dominant in setting the

agenda - this is unsurprising• The valuing systems tend towards speed of access to funds (and

infrastructure development) allied to short-term procurement gain• Risk transfer is expensive - and may outweigh procurement gain

But

• So far it is clear that governments have been prepared to pay a premium (substantial in some cases) for: – speeding up hospital provision - transfer of construction risk included– guaranteeing lifetime maintenance

• PPPs have been employed to stimulate culture and professional change - this will continue

• In some instances PPPs are being used explicitly as a learning exercise

Summary

• PPPs may be increasingly the option of choice for governments disengaging - distancing themselves from healthcare delivery

• The macro issue of ‘debt-management’ may leave some governments little choice other than adopting PPPs

• The principle may be dominated by other factors, therefore it is:– The relevance and realities of markets in healthcare– Having sufficient understanding of the issues to moderate the approach– Having effective valuing systems to inform decisions– Having the skills to manage the policy

• There is sufficient diversity in the types of models to get a better fit

Conclusions

• PPPs may however simply be exposing deeper rooted problems that have existed for some time

• The premiums paid - including some legacies - may represent a necessary transitional stage in obtaining better value

• The culture and skills gap may yet represent the main obstacle to change

• Macro-economics will remain the dominant determinant

• Some evidence seems to demonstrate the effectiveness of competition in stimulating ‘better value’

Conclusions

• We are experiencing acute (and controversial) growing pains in coping with deeply embedded (and possibly undeclared) government shifts in healthcare strategy

• The ‘problem’ may be related as much to process and application as principle

• We need better tools, skills and value systems to manage the inevitable changes in health policy - and to generate better value

• The development and application of lifecycle economy principles may offer a constructive way forward in meeting the investment challenge for health infrastructure

Thank your for your attention

barriedowdeswell@aol.comWWW.EUHPN.org