1. w w w. s a n i g e s t. c o m C O N S U L T I N G | I N V E S T M E N T & A D V I S O R Y | T E C H N O L O G Y Health Care, Education, Social Security, Poverty Reduction, and Public Sector Reform “Practical Application of Public-Private Partnership in the Economy of Kazakhstan” Presented by James A. Cercone Sanigest Internacional V Astana Economic Forum Astana, Kazakhstan

2. www.sanigest.comSlide 2 Agenda The Need for PPPs PPPs in the health sector Successful PPPs in the health sector: international experience Lessons Learned

3. www.sanigest.comSlide 3 The Need for PPPs Throughout the CIS and in Kazakhstan there is an urgent need to improve the hospital network in terms of infrastructure, equipment and organization of activities to ensure compliance with current international standards. From this… ….to this

4. www.sanigest.comSlide 4 The Need for PPPs The World Bank estimates that the need for replacement hospital infrastructure in CIS will be more than $45 billion over ten years. In Kazakhstan alone, the figure could > $3 billion. Implementing Health Financing Reform: Lessons from countries in transition Edited by Joseph Kutzin Cheryl Cashin Melitta Jakab. World Health Organization 2010

5. www.sanigest.comSlide 5 Quicker Delivery of Infrastructure: global experience evidences that in 70% of PPP cases, infrastructure delivered early and under budget; Additional Capital: Private financing and extended repayment periods allow public authorities to deliver more social infrastructure in the short term; Private Sector Efficiencies: An average of 20% savings in long-term “life-cycle” costs of the assets; No delivery, no payment: Performance-based payments mean governments only pay for services that are delivered to satisfaction; Quality of Service: Incentive structures and private expertise result in higher service quality. PPP refer to forms of cooperation between public authorities and the private sector to procure the financing, construction, renovation, management, operation and/or maintenance of a public infrastructure facility or provision of a public service. Public sector retains responsibilities in PPP Private partner must be compensated for its investment and costs plus a reasonable profit Risk sharing Life-cycle focus What is PPP? Benefits of PPP PPPs in the Health Sector

6. www.sanigest.comSlide 6 Public-Private Investment Partnerships 20% Facilities Management and Support Services ………………………………… Engineering Housekeeping Dietary Laundry 80% Clinical and Ancillary Services …………………………………… Preventative Primary Secondary and Tertiary Ancillary (lab radiology FinanceBuildMaintainDeliver Horizontal bundling Service integration The PPIP model embraces the full spectrum from financing through integrated service delivery Design PPPs in the Health Sector

7. www.sanigest.comSlide 7 Hospital Management Hospital Management Specialized Clinical Services Specialized Clinical Services Clinical Support Services Clinical Support Services Non-clinical Services Non-clinical Services Detailed designs Building construction Medical equipment Capital financing Lab analysis Diagnostic tests Medical equipment maintenance Management of entire hospital or network of hospitals and/or clinics Hemodialysis Radiotherapy Day surgery Other specialist services IT equipment & services Maintenance Food Laundry Cleaning Billing Design & Construction Design & Construction PPPs can be applied to a wide range of services Public-Private Partnerships Options 7

8. www.sanigest.comSlide 8 Scope of services Infrastructure only Building design Construction Life cycle maintenance (eg roof replacement) Mechanical and electrical maintenance Cleaning Laundry and Linen Security Pest control Grounds maintenance Waste disposal Car parking Full-service Model All infrastructure All support services Management team Clinical services Sometimes included (intermediate model)  Laboratory  Medical equipment  IT  Catering (food service)  Private patient unit  Equipment sterilisation

9. www.sanigest.comSlide 9 Characteristics of a PPP-style arrangement Operator (SPV) makes investment to finance construction of hospital and manages over 15-30 years the project Government does not pay for the initial capital costs but pays over 15-30 years for the “service” of providing and managing services of the hospital. Profit for the operator is based on ability to contain life-cycle costs (with good maintenance and effective investments) and deliver high quality efficient services Risks are transferred from MOH/Government to the private operator

10. www.sanigest.comSlide 10 Jorge Abreu Simões #10 Successful PPPs in the health sector: international experience United Kingdom Availably Payment Basically, Infrastructure Services and Hard & Soft FM Valência (Spain) Payment by a per capita fee Integrated Delivery of Primary and Acute Hospital Care for a population area Portugal Availably Payment Payment by Clinical Episodes (“Case Mix”) Availably Payment Payment by Clinical Episodes (“Case Mix”) Hospital Management, Infrastructure and Clinical Services Victoria (Australia) Payment by Clinical Episodes (“Case Mix”) Hospital Management, Infrastructure and Clinical Services

11. www.sanigest.comSlide 11 Public-Private Partnerships Options – Private Finance Initiative Case Study: Darent Valley, UK  Darent Valley (400 beds) was the first PFI project, built to replace three old hospitals (totaling 450 beds) Transaction Structure  Government tendered for a private operator to: ­ design, construct and capital finance the new hospital ­ maintain and provide non-clinical services ­ Long-term contract with facility and services payments linked to performance  All clinical services and management remain under the public sector  25 year contract  Completed and commissioned in July 2002 11

12. www.sanigest.comSlide 12 Case Study: Hospital Geral de Pedreira, Brazil  State Government financed, built and equipped 16 new hospitals under traditional public works contracts  State contracted with ‘not-for-profit’ hospital operators to manage the hospitals (including all clinical and non-clinical services)  Santa Catarina was chosen to operate the Pedreira hospitals Public-Private Partnerships Options – Operating Lease Transaction Structure  Operator obliged to treat all local residents  Operator receives global fixed budget (monthly disbursements) from State, provided specified patient volume and quality parameters are achieved (contract includes 10 performance targets)  Operator receives capital expenditure reimbursement  Operator assumes all operating risk (demand and financial) 12

13. www.sanigest.comSlide 13 Public-Private Partnerships Options – Integrated Care Concession Case Study: Alzira Health Area, Spain  Newly constructed 250-bed Ribera Hospital with MRI, cardiac surgery, radiotherapy services  Approx. 20,000 inpatients annually, 20,000 surgeries and 460,000 outpatient visits  Annual budget of approx $125 million Transaction Structure  The transaction is an administrative concession to privately finance the construction of a new hospital - Hospital de la Ribera - on public land and manage the hospital  The Valencia Health Department (VHD) contracted with a consortium (UTE) to build, own, and operate the $75 million hospital for 10 years  VHD pays the consortium an annual capitation fee for residents of the area and a DRG fee for patients from outside the catchment area 13

14. www.sanigest.comSlide 14 Dialysis Services  IP and OP dialysis services are provided in approx. 40 public hospitals  Dialysis supplies are purchased by the NHIF and equipment is purchased by the Ministry (if funds available) and allocated to the hospitals  Backlog of patients and facilities in need of upgrading and expansion Transaction Structure  NHIF tendered for experienced private dialysis operators to take over and upgrade dialysis centers in 8 different public hospitals across Romania  Operator to assume full responsibility service provisioning  NHIF conducted simultaneous tender for 8 dialysis centers  Winning bidders selected on basis of highest investment commitments  Total investment commitments amounting to over $16m Public-Private Partnerships Romania– Dialysis Centers

15. www.sanigest.comSlide 15 Jorge Abreu Simões #15 PPP Models for Health Sector The Variable Geometry Approach Infrastructure Services Clinical Services Public Operator (PAS Hospital) Private Operator Infraco Clinco A Infrastructure Services Clinical Services Public Operator (Corporate Hospital) Private Operator Infraco Clinco B Infrastructure Services Clinical Services Public Operator Private Operator InfracoClinco C Infrastructure Services Clinical Services Public Operator Private Operator InfracoClinco D

16. www.sanigest.comSlide 16 Jorge Abreu Simões #16 Two Separated Payment Mechanisms Infraco Availability Payment to cover Capex and building O&M Annual Service Payment Fixed Component: annual, not subject to revision Variable Component: annual according to CPI Performance Failures Deduction Availability Payment to cover Capex and building O&M Annual Service Payment Fixed Component: annual, not subject to revision Variable Component: annual according to CPI Performance Failures Deduction Availability Payment Availability Payment Clinco Payment by Clinical Activity Lines Variable payment according to effective clinical production Availability payment component related with special and specific clinical units Pharmaceutical’s savings sharing Performance Failures Deduction Payment by Clinical Activity Lines Variable payment according to effective clinical production Availability payment component related with special and specific clinical units Pharmaceutical’s savings sharing Performance Failures Deduction Inpatient Outpatient Payment Inpatient Outpatient Payment

17. www.sanigest.comSlide 17 A Concrete Example for Akmola Oblast New Multi-Profile Inter-District Hospital Zerendinsky Hospital Krasnyi Yar City Hospital Kokshetau City Hospital Oblast Derma Venerology Clinic Akmola Perinatal Center Zerendinsky Hospice

18. www.sanigest.comSlide 18 Lessons Learned >90% of hospital projects have been delivered on time All projects were delivered within the public sector budgets 77% of hospital managers stated that the projects have, so far, met their initial expectations (only 4% described value-for-money as poor) Estimated that PFI projects cost 17% less than public sector projects – a saving of $4 billion on a $22 billion programme – the equivalent of 25 hospitals

19. www.sanigest.comSlide 19 Lessons Learned ―Recent UK Treasury study into PPP projects showed: ―89% coming in on time or early ―No cost overruns on construction borne by public sector ―Noting: ―70% of Non-PPP were delivered late, and ―73% ran over budget ―UK National Audit Office Study of Highway PPP.’s found savings of: ―19% on capital costs ―34% on operating costs ―17% overall lifecycle savings ―Reasons for cost savings in UK PPP.’s ―Transfer of risk and.“whole life.” responsibility to private sector ―Broader competition (not just contractors, but also operators, suppliers) ―Economies of scale in project management, design, construction, operation

20. www.sanigest.comSlide 20 Lessons Learned Design to meet public policy objectives Health service planning is key to meet objectives Political commitment is necessary Enabling legislation for PPP is important Signals to market for long term sustainability Deal flow from MOH Good governments get good PFI/PPPs

21. www.sanigest.comSlide 21 Thank You Contact: James A. Cercone jcercone@sanigest.com www.sanigest.com Contact: James A. Cercone jcercone@sanigest.com www.sanigest.com