Private Finance Initiatives

Private Finance Initiatives Dominic Montagu

Harding-Montagu-PrekerFramework: Overview Assessment Strategy Focus Goal • PHSA • Gather available information • Identify additional needs • In-depth studies • Distribution(equity) • Efficiency • Quality of Care Private Sector Grow Harness Activities • Hospitals • PHC • Diagnostic labs • Producers / Distributors Ownership • For-profit corporate • For-profit small business • Non-profit charitable Formal/ Informal Convert Restrict PublicSector Source: Adapted from Harding & Preker, Private Participation in Health Services, 2003.

Objectives • How do PFIs work • How do PFIs differ from other PPP models • PFI Value-for-money • Advantages and disadvantages of PFIs

definition Outline of Session • Definition • Goals • Evidence • Advantages / Disadvantages • Context

definition “Private Finance Initiative (PFI) hospital contracts are awarded and managed by local Trusts. The contracts use private funding to build and maintain hospital buildings. The contractor often provides support services, typically including cleaning, catering and portering, often referred to as hotel services.” -The performance and management of hospital PFI contracts. British National Audit Office 2010 “Private Finance Initiative (PFI) hospital contracts are awarded and managed by local Trusts. The contracts use private funding to build and maintain hospital buildings. The contractor often provides support services, typically including cleaning, catering and portering, often referred to as hotel services.” -The performance and management of hospital PFI contracts. British National Audit Office 2010

definition PFI Origins • Origins in the UK and Australia • 1992 under John Major • Continued under Tony Blair • Started with non-health infrastructure • Highways • Offices, Schools, Embassies • 1993 began Hospital PFIs • PFI obligatory for major projects after 1994 • NHS (Residual Liabilities) Act 1996 • NHS (Private Finance) Act 1997

Source of Capital Investment in UK Hospitals Sources: Department of Health 1997, 1998, 1999, 2000; John Sussex, Office of Health Economics

definition common terms Options Private sector responsibility Public sector responsibility Provides all clinical services (and staff) and hospital management; manages contract and pays for support services Contracting non-clinical support services Provides nonclinical services (cleaning, catering, laundry, security, building maintenance) and employs staff for these services. Outsourcing Contracting Provides clinical support services such as radiology or laboratory services. Contracting clinical support services Outsourcing;PPP Manages hospital and provides clinical services; manages contract and pays for services. Contracting specific clinical services Outsourcing; PPP Provides specific clinical services (such as lithotripsy; dialysis) or routine procedures (cataract removal). Manages hospital and provides most clinical services; manages contract and pays for services. Buying hospital services Contracted private hospitals provide services in accordance with contractual provisions Contracting; Purchasing Contracts with private hospitals, monitors, pays for services. Contracts with private firm for provision of public hospital services, pays private operator for services provided, and monitors and regulates services and contract compliance. Manages public hospital under contract with government or public insurance fund; provides clinical and nonclinical services. May employ all staff. May also be responsible for new capital investment, depending on terms of contract. Private management of public hospital Operating contract Private financing, construction, and leaseback of new public hospital Finances, constructs, and owns new public hospital and leases it back to government Manages hospital and makes phased lease payments to private developer. PFI Reimburses operator for capital costs and recurrent costs for services provided. Private financing, construction, and operation of new public hospital Services & capital contract Finances, constructs, and operates new public hospital and provides nonclinical or clinical services, or both. Reimburses operator for capital and recurrent costs for services provided. Takes facility ownership at end. Co-location of private wing or department within or beside public hospital Operates private wing or department (for private & public (?) patients); fulfills payment and service access conditions agreed Manages public hospital for public patients and contracts with private wing for sharing joint costs, staff, and equipment.; supervises fulfillment of patient access and other conditions Co-location Sale of public hospital for alternative use Monitors conversion to ensure adherence to contractual obligations. Purchases facility and converts it for alternative use depending on sales agreement Privatization

definition A Typical PFI Private Healthcare Providers State Department of Health Contract Assets (facility, skills, etc) Assets ($$, land, facility, etc) New Healthcare Facility Adapted from: Health Research Institute. (Dec. 2010). Build and Beyond: The (R)evolution of Healthcare PPPs. PwC pg. 7.

definition A Typical PFI Three Contractual Entities SPV(special purpose vehicle) • Investors • Construction contractor • Facility operators Capco(capital equipment or infrastructure provision company) Opco(services or operating company) SPV State Department of Health Contract

definition Players in PFI Adapted from: Health Research Institute. (Dec. 2010). Build and Beyond: The (R)evolution of Healthcare PPPs. PwC pg. 17.

definition Funding • PFIs are initially funded by the private partner • The facility and facility management is then paid back over a 30 year period* by local government • Private funding usually from three sources • Banks • Bonds • Senior Debt • In recent years public financing institutions have also funded PFIs • EIB; SADB; IFC * 25-30 years is the norm. In rare instances contracts are as low as 15 or high as 40

definition Funding Continued • Risk of PFI is highest during construction • Post-construction refinancing is common • Refinancing often with (lower costing) bonds • Government often obligated to buy-out project if continuation halted partway through

goals Goals of a PFI • Encourage private investment • Transfer risk • Decrease government borrowing • Increase efficiency

goals Goals of a PFI 1. Encourage private investment Effective mobilization of capital Private participation in public goods

goals Goals of a PFI 2. Risk Transfer “Risk should be allocated to the entity most able to manage that risk” Linking finance, construction, and facility management Allocation of Risk to Private and Public • Public partner risk: • Annual payments • Oversight • Utilization forecasting • private partner risk: • Construction delay • Facility quality • Partner / subcontractor coordination

goals Goals of a PFI 3. Decrease government borrowing Government borrowing is zero short term goals met Government obligations are fixed long term budget impact possible

goals Goals of a PFI 4. Increase efficiency • Theory - Efficiency will be driven by: • Competition • Private sector profit-driven innovation • Efficiency gains due to linked construction/maintenance • Challenges - Efficiency undermined by: • Low government capacity to write contracts • Rent-seeking behavior by private partners • Contract duration reduces flexibility

Evidence Evidence: Positive but low VfM • PwC review of PPP healthcare infrastructure projects showed a published VfM range of $3M to $56M in Canada and Japan. Savings ranged from less than 1% to 20%. Health Research Institute. (Dec. 2010). Build and Beyond: The (R)evolution of Healthcare PPPs. PwC pg. 15.

Evidence Evidence: UK PFI operations good • “most contracts are performing satisfactorily or better and meeting the expectations of Trusts • …there is strong enough evidence to say that most contracts are delivering the value for money expected of them. • Available information shows the cost and performance of PFI hotel services are similar to those services in non-PFI hospitals. • cleaning, laundry and portering costs are about the same whether delivered through PFI or not; • catering is on average slightly cheaper in PFI hospitals; and • hospitals with PFI buildings spend more on maintenance annually, because the contracts require them to be maintained to a specified high standard.” UK National Audit Office Report on PFIs, 2010

Evidence Evidence: UK PFI construction unclear “The value for money of the whole PFI contract, however, depends upon wider factors outside the scope of this report, such as potential benefits from the construction and design of the buildings, risk transfer during the construction phase or having fixed whole life costs, all set against the higher costs of private finance” UK National Audit Office Report on PFIs, 2010

Evidence Documented Quality Problems Mkee et al.. Public-private partnerships for hospitals. WHO Bulletin 2006

Conclusions Critical Success Factors(a private-sector view) Timothy Dixon, Gaye Pottinger, Alan Jordan, (2005) "Lessons from the private finance initiative in the UK: Benefits, problems and critical success factors", Journal of Property Investment & Finance, Vol. 23 Iss: 5, pp.412 – 423.

Conclusions High Cost of Capital • Public Finance • Government borrows • Government cost of capital paid (future taxpayers bear risk) • Private Finance • Borrow from banks, bond, equity markets • Private capital costs more than public capital

Conclusions PFI vs Publicly Financed • Higher transaction costs • External advisors • Tendering and contract negotiations • Commitment risk • In UK some established hospitals closed when usage declined because PFIs could not be shut down

Conclusions PFI vs Publicly Financed Private financing offers: • Slightly lower construction costs? • Fewer construction time overruns • Slightly better/cheaper support services • Better maintained hospitals? • Higher transactions costs • Higher costs of borrowing

Conclusions PFI vs Publicly Financed Private financing offers: • Rapid mobilization of capital • Rapid construction • Potentially more access to skilled project management

Key Messages • PFI allows the government to build new hospitals without raising taxes or borrowing heavily (in the short term). • The PFI model does not provide, in most cases, high value for money. It is more expensive, and in the long run, taxpayers must shoulder this burden.

Birmingham PFI Mulholland, H. (Sept. 2009). Government should 'buy back' PFI hospitals, say Green. The Guardian. Accessed 03/20/2011 . Available: http://www.guardian.co.uk/politics/2009/sep/04/greens-pfi-hospitals.

Background readings Taylor, R. & Blair, S. (no date).Public Hospitals: Options for Reform through Public-Private Partnerships, Viewpoint, Washington D.C. Mckee, M., Edwards, N. & Atun, R. (Nov. 2006).Public Private Partnerships for Hospitals. Bulletin of the World Health Organization,84(11), 890-896.

Private Finance Initiatives