European Investment Bank (blades@eib.org) 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)

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

Project Finance - Hospital PFIs

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

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

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

UK hospital PFIs (Project Finance) EIB Banks/Bondholders Construction SPC (borrower) Lifecycle investment Dept of Health NHS Trust (promoter) Facilities Management (hard and/or soft) Patients Equity Providers

Where do the risks go? Shareholders Equity Banks Bondholders Taxpayers

Dudley Hospitals Configuration

Plan on new PFI Hospital [add plan of site]

The New Russells Hall Hospital

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

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

Joint Venture - Primary Care LIFT

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

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

Structure of LIFT Local Stakeholders Department of Health Lenders 20% Department of Health 50% (national joint venture) LIFTco (SPC) 20% Partnerships for Health Patients Partnerships UK Oversight by public sector 50% Private Sector Partner Strategic Partnering Board 60%

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

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

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

Can PPPs deliver cost-effective health investments? - Is the jury out?

PFIs - the advantages … Solution to capital shortage – though time shifting/smoothing of expenditure Off balance sheet treatment – though, changes to accounting treatment makes more difficult More likely to be on time and budget – potentially at the cost of quality Optimises capital component of projects Potential for design innovation Contracts : With appropriate risk sharing Providing greater certainty over future cost & quality Management of services by those best able New healthcare facilities have been, and are being, built!!

PFIs - the disadvantages… Cost of private sector capital higher than government High transactions costs for all parties, potentially reducing competition for very large projects Contracts complex & costly to negotiate for all parties Projects can offer VfM and still be unaffordable – though the extent to which PFI is responsible is debated Faster build times…..but longer procurement Performance standards may give perverse incentives Long contracts may reduce flexibility to respond to changes in healthcare demand and practice Public continue to express concerns about PFI model – sometime confusion between changes to hospital configurations per se and the role of PFI