1. Lesotho Public-Private Partnership
Financing a New National Referral Hospital for Results
I am here today to talk about a PPP in Lesotho for financing a new national referral hospital and how the financing is linked to clearly defined performance indicators through the Government of Lesotho and private partners.

2. Topics What is PPP? Background of Lesotho Hospital PPP Why PPP
PPP Financing & Arrangements
PPP for Results
First, I want to make a general remark—PPP can be a specific way of RBF. Actually, with its explicit contractual arrangements on financing and results, PPP endorses the core principles of RBF and provide alternative and innovative thinking for health service delivery.

3. Definition of PPPs Public Private Partnership Public = Government
(national, district, municipal, local)
Private = anything other than government
(private company, NGO or other not-for-profit organization)
Partnership = formal agreement between the parties for the private provision of public infrastructure and/or public services
By its name, a PPP has three key elements.
Private - old history of private operators (eg – Europe & water)
- healthcare: many public hospitals in many diverse countries (US, Brazil, others) are operated by not-for-profit companies
- newer in Africa: (eg utilities, health & education in post- conflict countries provided by NGOs, exploring ways to concession to private operators as new local businesses)

4. Definition of PPPs
A contract between government institution & private party
Private party performs a public function according to output specifications
Substantial project risk (financial, technical, operational) is transferred to the private party
Government becomes purchaser of services and/or enabler
Payment received by private party – either:
Fees from government budget
User fees
Some combination of government fees and user fees
PPP has the following characteristics

5. Why embark on a PPP? Changing role for modern Governments
Old model: Govt plan, finances, and provides public services everything,
New model: Focus on high level priorities
Regulate, design & implement sector policies, quality standards
Contract out for specific services and infrastructure
Private sector expertise and resources provide efficient,
effective public services and infrastructure
PPP reflects the changing role for modern governments.
New model is more advanced and challenging, with better chance at success than old model which all acknowledge doesn’t work well in most countries, regardless of income.

6. PPP as RBF: Performance-Based, Output-Driven Contracts
Transparent bidding/negotiations
Objective ranking/selection criteria
Criteria to evaluate compliance with output needs to be clearly defined
Service-oriented
“What” controlled by buyer (Government)
“How” controlled by seller (private sector)
Responsibility for performance is clear
Allows the bidders to apply expertise and innovation to lower costs
PPP can be one form of RBF mainly through performance-based, output-driven contracts.
A clear regulatory environment as well as skilled contract monitoring is
KEY for success

7. PPP Options BOT Service Contracts Service Contracts Contracts
Public
Risk
Private
Service
Contracts
Service
Contracts
Service
Contracts
Mgt
Contracts
Rehab
ROT
BOT
DBOM
DBFO
Non-Clinical
IT equipment & services
Billing
Maintenance
Food
Laundry
Cleaning
Clinical Support
Lab analysis
Diagnostic tests
Medical equipment maintenance
Clin. Specialist
Dialysis
Oncology services
Day surgery
Other specialist services
Varied
Primary care
Public health
ART clinics
Mgt of new,
existing facilities
Mgt of entire
Hospital or
Hospital / clinic
network
Varied
Design and Rehabilitate
Upgrade and Re-equip
Management
Operate
(FM, support services, clinical)
Detailed design and construction
Medical equipment
Capital financing
Management
Operate
(FM, support svcs, clinical)
Public-private partnerships can be beneficially used for:
the funding, construction, equipping and/or operation of new facilities
the upgrading, maintenance and operation of existing facilities
There is a wide range of options for structuring PPPs for new facilities, with differing responsibilities for the public and private sectors pertaining to:
Capital financing (building and equipment)
Construction and procurement
Ownership
Provision of services

8. Hospital PPP PPP Models match needs by country:
Countries with primary need for infrastructure alone, have opted for the PFI model (UK, Canada, others)
Countries with need for infrastructure, know-how and trained staff have opted for full PPP models and purchase specified services from their PPP Partners (Brazil, Australia, US and countries in Eastern Europe, Latin America, Asia)
Projects include new and refurbished hospitals, clinical and support services, primary care, national insurance and contracting for other health services
Lesotho hospital PPP will be the first of such in IDA countries
Hospital PPPs have been used in several countries to match the need

9. Background
With a population of 1.89 million (2006 Census), and a GDP per capita of US$960, Lesotho is a small and landlocked economy, completely surrounded by the Republic of South Africa.
Two great challenges hindering economic growth and poverty reduction:
-A HIV/AIDS epidemic and a heavy disease burden
HIV prevalence in the adult population estimated to be the third highest rate in the world.
Life expectancy at birth in 2004 was estimated at years.
For a total population of about 1.8 Million (Census 2006), 108,700 children are orphaned due to AIDS and 270,272 people are reported to be living with HIV and AIDS.
There are an estimated 62 new HIV infections and 50 deaths from AIDS each day in the country.
Poor health status and heavy disease burden, featuring fifth highest TB incidence; high maternal and child mortality and malnutrition.
Lesotho is not on track to reach the health MDGs.
Lesotho and Vatican are the only countries that are completely surrounded by another countries

10. Queen Elizabeth II Hospital
The only national referral hospital and important part of the health care system.
The hospital, built in the early 1900s, is no longer fit to serve as the national referral hospital
Major problems: collapsing structure, obsolete systems, limited service space and capacity, and overcrowding of patients.
It even poses a real risk of cross-infection.
Nonetheless, the hospital continues to consume a significant share of the national health budget, and its budget has tripled in the last five years.
Minister’s story

11. The Need for a New Hospital
As part of the ongoing Health Sector Reform program, Government is replacing the Queen II hospital with a new referral hospital.
Government’s objectives for the new hospital project include:
A new public hospital with a higher level of service and quality;
Maximizing the value for money spent – more services!
Reliable services, affordable and predictable costs for the budget;
Accountability for results
Benefits from new hospital to all Basotho and throughout health sector.
The New Hospital cannot solve all issues in the health sector, but it will help to address many of them.

12. Financing options Public only (the traditional way) Private only
Public-Private Partnership
Financial simulation models were used to compare the three options

13. Why the PPP Model?
Increased need for better services as expressed by both the public and government
Private Sector can deliver the results Government and the public are seeking
Government is increasingly focusing on accountability and results
Government intends the New Hospital PPP Project to provide -
-Modern approaches to health management, clinical procedures, medical equipment
-Training for the health sector
-Predictable expenditure – to stay within Government’s Unitary Payment
The PPP option was chosen for the following reasons

14. Decision
Government began considering PPP options in late 2004; in late 2005 it requested the IDA and IFC to review the strategic options for a New Hospital PPP, to prepare for rapid implementation
In September 2006, Cabinet approved moving to market with the New Hospital PPP as a Design-Build-Finance-Operate project for a 390 bed hospital to be constructed on a greenfield site
The contract is anticipated to be for 18 years, during which the PPP Partner will initially refurbish and operate the filter clinics while constructing the new hospital, then fully manage and operate the clinics and hospital
Government has considered many approaches to hospital replacement over past decade, from Government commissioning and management, to private management, to PPPs
Boston University Study (2002) provided comprehensive analysis of replacement hospital needs. Its recommendations included that Government strongly consider private management of the new public hospital

15. PPP at Work: New Hospital
Private Operator
Ministry of Health
PPP Agreement $
New
Hospital $
Detailed designs
Capital financing
Construction
Medical supplies & equipment
Clinical services
Maintenance
Non-clinical services
Staffing and Training
Sector Policies and Strategy
Service Package
Reimbursement for all clinical and non-clinical services
Performance monitoring
Joint Services Committee

16. Lesotho: New Referral Hospital PPP
The Project
Greenfield public hospital of 390 beds + 35 private beds
Refurbishment, upgrade and operation of 3 large filter clinics
Design, construction, partial finance, full operation for 18 years – significant risk transfer to the private sector
Operational services include:
Non-clinical services - administration, building & facilities management, IT, etc.
Clinical Support Services - biomedical engineering, labs &pharmacy, imaging, etc.
Clinical Services - Tertiary hospital, with fewer referrals to South Africa
Private wing

17. Guiding Principles
New Public Hospital serves two equally important functions:
High quality services for all Basotho
Training resource for health sector
Balance what is needed with what is affordable
Suitability, durability, ease of maintenance and minimum life-time cost for the building and equipment
Maximum value for money spent on this project
Business model—bid for quality and quantity of services; not just the least cost

18. World Bank Contributions
Strong sector and country support, e.g., Health Sector Reform Program Phase II
World Bank has approved a GPOBA grant of $6.25m / M43.75m to “top up” the budget for the first 5 years of the PPP project, allowing additional patients to be seen for most needed services
IFC is providing TA to the PPP
IDA agreed to provide a PRG to mitigate the risks associated with the PPP and to attract bidders

19. Services offered: Queen II v New Hospital PPP
Queen II Today
New Hospital
387 Notional Beds
220 Functional Beds
390 Beds
390 Functional Beds
Surgeries p.a.
1,000 - General (emergency/basic)
1,500 - Opthalmology
100 - ENT
2,600 Total
General Surgeries p.a.
5,000 - General (emergency, basic & complex)
4,000 - Opthalmology
500 - ENT
10,000 Total
0 ICU beds
10 ICU beds
0 Recovery beds
10 Recovery beds
22,000 Dental patients p.a.
63,000 Dental patients p.a.
Radiology services p.a.
Unknown and low reliability
Staff understaffed
serious retention issues
20,700 Total (basic & complex services)
Staff Overall 20% increase in staff numbers
~79% salary increase, improved benefits
working conditions & extensive training
Heat / Hot Water None
Power Unreliable
Equipment Unavailable
Maintenance Very little, No budget
Heat / Hot Water Full Availability
Power Full Availability
Equipment Full Availability
Maintenance Fully Included
23,448 Inpatients basic level services
212,680 Outpatients basic level services
30,249 Inpatients high level of services
265,850 Outpatients basic & high tech
Comparing the specification of the new and current hospitals, the new hospital will be a step up.

20. Design of New Hospital

21. Financing New Referral Hospital PPP
Estimated cost – US$ 68m
Govt capital contribution ($46m)
Private sector capital contribution
Partial Risk Guarantee (World Bank) attractive to bidders
GPOBA: output based grant for service delivery ($6.25m)
Co-pay per patient does not change (~$1.25 per patient)
Unitary Payment
Guarantees service to 20,000 inpatients & 310,000 outpatients per annum
Escalated only by CPI – ensuring budget certainty for Government
Local Economic Empowerment
Strong contractual commitment - 20% at project start, 30% by year 12

22. Lesotho New Referral Hospital PPP
Goal: Maximize value for money – better quality and more services for similar budget
Bidders provided with
Set annual operating budget (“Service Payment”)
List of services (required & optional) to be provided at the new hospital
Set quality parameters for services and minimum patients to be seen p.a.
Bidders required to specify the volume of each service to be provided from list, within the specified budget and quality standards
PPP Agreement allows for changes in the service mix, to meet future needs, changes in demographics and disease profiles
Operator required to gain and maintain hospital accreditation
Under the PPP

23. PPP for Results
Operator must manage services within set budget, adjusted for inflation
Hospital building required to have minimum 50 year lifespan
PPP Agreement includes equipment replacement schedules, maintenance and servicing levels to manufacturers standards
Equipment replacement schedule means that at handover, Government receives equipment in good operational condition
Staff may choose to transfer to Operator or be reassigned by Govt
New hospital must attend all patients who present
New hospital required to provide practical and ongoing professional training opportunities for health professionals throughout the country (medical and nursing students, district hospitals, clinics)
Operator committed to attracting and retaining health professionals – key constraint for Government
Results are clearly defined. In addition to the service package,

24. How will the New Hospital Affect the Health Sector?
Higher level of medical services at New Hospital – fully functioning hospital with required staff, training and equipment
Greater access to services – more patients can be seen, and at higher level of service & quality
Better referral resource for district hospitals
New Hospital will serve as a training resource for the health sector, complementing existing programmes – this is a contractual obligation – students from NHTC will have placements, District hospital staff will also have training rotations
Fewer referrals expected to South Africa over time
Fits in Government’s affordability envelope – similar budget, on net basis, to existing hospital, rising only for inflation

25. Accountability for Results
IFC Baseline Survey – measured services and quality today
Contractual Performance Indicators (clinical and support svcs)
Ramp up from current baseline to targets (equipment availability, charts, etc)
Indicators based on review of Government’s health targets (e.g., MCH MDG) and international best practices for quality of service
Failure to meet performance indicators invokes penalties (up to 10% of UP p.a.)
Performance Monitoring – 5 levels
Independent Monitor – quarterly assessment against performance indicators
Operator’s internal monitoring
Government monitoring
Joint Services Committee
COHSASA Accreditation

26. QEII Replacement Hospital PPP - Preparation Phase
Due
Diligence
Identify
PSP
Objectives
Legal/Regulatory
Review
Assess
PSP Options
Financial
Modeling
Asses
Investor Interest
Transaction
Structure
Phase I Preparation
The financial simulations and forecasts are the central ingredient in setting up the public/private partnership. Virtually every decision taken by the client, and every potential piece of advice from the consultants, has a financial implication, whether it is a basic objective (the target date for achievement of universal coverage), a technical contractual performance obligation (the level of voltage power is to be delivered at) or an environmental requirement. (A "do-able" transaction must be financially acceptable to the private sector partner, and all decisions and recommendations must be balanced within this constraint. For this reason, IFC invariably takes responsibility for the financial advice associated with the transaction, including the modeling of the financial forecasts, and the analysis of restructuring possibilities. We always use in-house skills for this process.
IFC also takes charge of the implementation for the client, ensuring that the process remains on track: (i) developing a marketing strategy, undertaking the promotion work, preparing an information memorandum, (ii) preparing and overseeing the process of prequalification, (iii) preparing contractual and bidding documents with the transaction lawyers, (iv) establishing due diligence procedures and overseeing the process, (v) assisting the client during contract negotiations, (vi) assisting with bid evaluation, bid award and financial closure.

27. Hospital PPP - Implementation Phase
QEII Replacement
Hospital PPP - Implementation Phase
Implementation will begin in with the marketing program and Investors Conference,
and will be completed with bid evaluation, bid award and closure later this year.
Information Memorandum
Pre-
qualification
Bidder
Due Diligence
Draft Bidding
Documents
Final
Bidding
Closing
Phase II Implementation
The financial simulations and forecasts are the central ingredient in setting up the public/private partnership. Virtually every decision taken by the client, and every potential piece of advice from the consultants, has a financial implication, whether it is a basic objective (the target date for achievement of universal coverage), a technical contractual performance obligation (the level of voltage power is to be delivered at) or an environmental requirement. (A "do-able" transaction must be financially acceptable to the private sector partner, and all decisions and recommendations must be balanced within this constraint. For this reason, IFC invariably takes responsibility for the financial advice associated with the transaction, including the modeling of the financial forecasts, and the analysis of restructuring possibilities. We always use in-house skills for this process.
IFC also takes charge of the implementation for the client, ensuring that the process remains on track: (i) developing a marketing strategy, undertaking the promotion work, preparing an information memorandum, (ii) preparing and overseeing the process of prequalification, (iii) preparing contractual and bidding documents with the transaction lawyers, (iv) establishing due diligence procedures and overseeing the process, (v) assisting the client during contract negotiations, (vi) assisting with bid evaluation, bid award and financial closure.

28. Ongoing Process
Bidding process was completed and private operators have been selected
PPP arrangement signing is scheduled for October 2008
Financial closing by the end of 2008
Construction will start in January 2009
The new hospital is expected to be operational in 2011