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Public Private Partnerships and the wider dimensions of capital investment strategy Barrie Dowdeswell Executive Director EuHPN.

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Presentation on theme: "Public Private Partnerships and the wider dimensions of capital investment strategy Barrie Dowdeswell Executive Director EuHPN."— Presentation transcript:

1 Public Private Partnerships and the wider dimensions of capital investment strategy Barrie Dowdeswell Executive Director EuHPN

2 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

3 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.

4 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”

5 What the UK (English NHS) is saying official ? 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

6 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

7 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.

8 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

9 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

10 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)

11 Core / Non-core Services a hypothesis Maintenance Ancillary Administration Diagnostic Clinical Low High Public Sensitivity / Complexity / Financial risk The ‘serviced’ building UK PFI / boundary* ICT Community Cost efficiency & Lifecycle durability Cost effectiveness & Operational relationships Integrated service & building options

12 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

13 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

14 European pressures, health – and health facilities - the attraction of PPP Cost Unsustainable - social Unsustainable - economic Affordability Policy aims Social development needs Economic needs Expectation

15 The third age of healthcare – the new context frame Hospital Morbidity compression but also Co- morbidities Public Health - 1950 Acute Care 1950 - 2005 Chronic Illness 2005 - Aged Care 2010 - Community, Lifestyle Diversity Re-emergence & revitalisation

16 The PPP environment - competition vs coherence choice of episodes or pathways, the paradox Provider agencies Commissioning agencies core chronic acute networks market contestable choice‘tariff’ based contracts contracts

17 Multiple change / risk factors - the importance of lifecycle investment planning technology care markets outcomes H&S&environment aged care high low Probability of change Volatility - demand lifecycle Functional - evolution Stability - relative Contract renewal - PPP growth

18 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

19 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

20 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

21 Lifecycle investment Hot floor (clinical diagnostic) 30.5% Ward (hotel) 32.2% Office 23.5% 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

22 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

23 0 100 200 300 400 500 600 700 800 900 1000 012345678910111214161820 duration of stay in days service in Euro / day Acute care patient‘s real average demand Services offered by public hospitals in the 90s Costs per case: 3600 + 270 (Inv.) = about 3870 € Patient and process guided flow principle of RKA costs/case / Price 2.660 € incl. about 720 € investments Service conception of RHÖN-KLINIKUM AG acute care hospital

24 day- care ? day clinic operation / conservative therapy yes no yes operation conservative therapy complete diagnosis Intensive care inpatient operation inpatient clinic no yesja inpatient recovery room intermediate care normal care inpatient low care discharge outpatient ? oupatient therapy yes outpatient operation “Concept of treatment therapy (care-pathway)- as a design principle“ Rhon-Klinikum - the workforce and infrastructure link

25 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

26 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

27 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

28 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’

29 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

30 Thank your for your attention

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