Private Finance Initiatives Dominic Montagu. Harding-Montagu-Preker Framework: Overview Distribution (equity) Efficiency Quality of Care Source: Adapted.

Private Finance Initiatives

Dominic Montagu

Harding-Montagu-Preker Framework: Overview

•Distribution(equity)

•Efficiency

•Quality of Care

Source: Adapted from Harding & Preker, Private Participation in Health Services, 2003.

PHSA

•Gather available information

• Identify additional needs

• In-depth studiesActivities

•Hospitals•PHC•Diagnostic labs•Producers / Distributors

Ownership

•For-profit corporate • For-profit small business

• Non-profit charitable

Formal/ Informal

Grow

Harness

Convert

StrategyAssessmentGoal Focus

Private

Sector

PublicSector

Restrict

Harding-Montagu-Preker Framework: Overview

•Distribution(equity)

•Efficiency

•Quality of Care

Source: Adapted from Harding & Preker, Private Participation in Health Services, 2003.

PHSA

•Gather available information

• Identify additional needs

• In-depth studiesActivities

•Hospitals•PHC•Diagnostic labs•Producers / Distributors

Ownership

•For-profit corporate • For-profit small business

• Non-profit charitable

Formal/ Informal

Harness

Convert

AssessmentGoal Focus

Private

Sector

PublicSector

Restrict

Grow

Strategy

Objectives

• How do PFIs work

• How do PFIs differ from other PPP

models

• PFI Value-for-money

• Advantages and disadvantages of PFIs

Outline of Session

• Definition

• Goals

• Evidence

• Advantages / Disadvantages

• Context

definition

“Private Finance Initiative (PFI) hospital contractsare awarded and managed by local Trusts.The contracts use private funding to build andmaintain hospital buildings. The contractor oftenprovides support services, typically includingcleaning, catering and portering, often referred toas hotel services.”

-The performance and management of hospital PFI contracts. British National Audit Office 2010

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

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

definition

Source of Capital Investment in UK Hospitals

Sources: Department of Health 1997, 1998, 1999, 2000; John Sussex, Office of Health Economics

0

500

1,000

1,500

2,000

2,500

3,000

3,500

1990/91 1991/92 1992/93 1993/94 1994/95 1995/96 1996/97 1997/98 1998/99 1999/00e 2000/01p 2001/02p 2002/03p 2003/04p

£ m

illi

on

Net government Asset sales PFI

Contracting non-clinical support services

common termsOptions

Contracting clinical support services

Contracting specific clinical services

Buying hospital services

Private management of public hospital

Private financing, construction, and

leaseback of new public hospital

Private financing, construction, and

operation of new public hospital

Sale of public hospital for alternative use

Services & capital

contract

PFI

Operating contract

Private sector responsibility

Public sector responsibility

Provides nonclinical services (cleaning, catering, laundry, security, building maintenance) and employs staff for these services.

Finances, constructs, and operates new public hospital and provides nonclinical or clinical services, or both.

Reimburses operator for capital costs and recurrent costs for services provided.Reimburses operator for capital and recurrent costs for services provided. Takes facility ownership at end.

Finances, constructs, and owns new public hospital and leases it back to government

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.

Contracted private hospitals provide services in accordance with contractual provisions

Provides specific clinical services (such as lithotripsy; dialysis) or routine procedures (cataract removal).

Provides clinical support services such as radiology or laboratory services.

Purchases facility and converts it for alternative use depending on sales agreement

Provides all clinical services (and staff) and hospital management; manages contract and pays for support services

Manages hospital and provides clinical services; manages contract and pays for services.

Manages hospital and provides most clinical services; manages contract and pays for services.

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 hospital and makes phased lease payments to private developer.

Monitors conversion to ensure adherence to contractual obligations.

Outsourcing; PPP

Privatization

Outsourcing Contracting

Co-location

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

Outsourcing;PPP

Contracting; Purchasing

definition

Contracting non-clinical support services

common termsOptions

Contracting clinical support services

Contracting specific clinical services

Buying hospital services

Private management of public hospital

Private financing, construction, and

leaseback of new public hospital

Private financing, construction, and

operation of new public hospital

Sale of public hospital for alternative use

Services & capital

contract

PFI

Operating contract

Private sector responsibility

Public sector responsibility

Provides nonclinical services (cleaning, catering, laundry, security, building maintenance) and employs staff for these services.

Finances, constructs, and operates new public hospital and provides nonclinical or clinical services, or both.

Reimburses operator for capital costs and recurrent costs for services provided.Reimburses operator for capital and recurrent costs for services provided. Takes facility ownership at end.

Finances, constructs, and owns new public hospital and leases it back to government

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.

Contracted private hospitals provide services in accordance with contractual provisions

Provides specific clinical services (such as lithotripsy; dialysis) or routine procedures (cataract removal).

Provides clinical support services such as radiology or laboratory services.

Purchases facility and converts it for alternative use depending on sales agreement

Provides all clinical services (and staff) and hospital management; manages contract and pays for support services

Manages hospital and provides clinical services; manages contract and pays for services.

Manages hospital and provides most clinical services; manages contract and pays for services.

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 hospital and makes phased lease payments to private developer.

Monitors conversion to ensure adherence to contractual obligations.

Outsourcing; PPP

Privatization

Outsourcing Contracting

Co-location

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

Outsourcing;PPP

Contracting; Purchasing

definition

Adapted from: Health Research Institute. (Dec. 2010). Build and Beyond: The (R)evolution of Healthcare PPPs. PwC pg. 7.

Private Healthcare Providers

State Department of

Health

New Healthcare

Facility

Contract

Assets(facility, skills, etc)

Assets($$, land, facility, etc)

definition

A Typical PFI

SPVState

Department of Health

Contract

A Typical PFI

SPV (special purpose vehicle)– Investors– Construction contractor– Facility operators

Capco (capital equipment or infrastructure provision company)

Opco (services or operating company)

Three Contractual Entities

definition

SPVState

Department of Health

Contract

A Typical PFI

SPV (special purpose vehicle)– Investors– Construction contractor– Facility operators

Capco (capital equipment or infrastructure provision company)

Opco (services or operating company)

Three Contractual Entities

definition

Players in PFI

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

Operations Funding Legislation Monitoring / consulting organizations

Hospital provider Financial/Industrial

Federal health authority

Independent consultancies

Insurers Infrastructure funds

State health authorities

Non-governmental organizations

IT Banks Regional Commissions

Financial

Medical devices National health insurance boards

Legal

Pharmaceutical companies

Members of the Legislative Assembly

Technical advisors

Facilities management

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

definition

Goals of a PFI

1. Encourage private investment

2. Transfer risk

3. Decrease government borrowing

4. Increase efficiency

goals

Goals of a PFI

1. Encourage private investment

Effective mobilization of capitalPrivate participation in public goods

goals

Goals of a PFI

private partner risk: Construction delay Facility quality Partner / subcontractor coordination

Public partner risk: Annual payments Oversight Utilization forecasting

Allocation of Risk to Private and Public

2. Risk Transfer“Risk should be allocated to the entity most able to manage

that risk”

Linking finance, construction, and facility management

goals

Goals of a PFI

3. Decrease government borrowing

Government borrowing is zeroshort term goals met

Government obligations are fixedlong term budget impact possible

goals

Goals of a PFI

goals

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

• 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: Positive but low VfM

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

“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”

Evidence: UK PFI construction unclear

UK National Audit Office Report on PFIs, 2010

Evidence

Documented Quality Problems

Mkee et al.. Public-private partnerships for hospitals. WHO Bulletin 2006

Evidence

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

Conclusions

Key Messages

1. PFI allows the government to build new hospitals without raising taxes or borrowing heavily (in the short term).

2. 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.