Public Private Collaboration in Healthcare:
UK Public Private Partnerships
17-18 September 2007
Podgorica, Montenegro
Chris Blades
European Investment Bank
(blades@eib.org)
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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Value for Money (VfM) Principle
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 risk
Reduced cost of risk  better Value for Money
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Project Finance - Hospital PFIs
4
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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UK hospital PFIs (Project Finance)
EIB
Banks/Bondholders
Construction
Dept of
Health
NHS Trust
(promoter)
SPC
(borrower)
Lifecycle
investment
Facilities
Management
(hard and/or soft)
Patients
Equity
Providers
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Where do the risks go?
Construction
and design
risks
Hard FM
Soft FM
Force
Majeure /
Insurance
b to r
u
S r ac e
t ur
n
l
co fai
Sub-contractors: Construction
and equipment, ‘Hard’ and
‘ Soft’ FM
Shareholders
SP V
Equity
Banks
Bondholders
Volume /
residual
value
P ublic
sector
Taxpayers
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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
Department of
Health
Local
Stakeholders
50%
Lenders
20%
LIFTco
(SPC)
(national joint venture)
Partnerships
for Health
Partnerships
UK
20%
Patients
Oversight by
public sector
50%
Private Sector
Partner
60%
Strategic
Partnering Board
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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 PFI
NHS 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 projects
5. Potential for design innovation
6. Contracts :
●
●
With appropriate risk sharing
Providing greater certainty over future cost & quality
7. Management of services by those best able
8. New healthcare facilities have been, and are being,
built!!
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PFIs - the disadvantages…
1. Cost of private sector capital higher than government
2. High transactions costs for all parties, potentially
reducing competition for very large projects
3. Contracts complex & costly to negotiate for all parties
4. Projects can offer VfM and still be unaffordable – though
the extent to which PFI is responsible is debated
5. Faster build times…..but longer procurement
6. Performance standards may give perverse incentives
7. Long contracts may reduce flexibility to respond to
changes in healthcare demand and practice
8. Public continue to express concerns about PFI model –
sometime confusion between changes to hospital configurations per
se and the role of PFI
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