1. Private Finance Initiatives Dominic Montagu

2. 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 studies PHSA Gather available information Identify additional needs In-depth studies Activities Hospitals PHC Diagnostic labs Producers / Distributors Ownership For-profit corporate For-profit small business Non-profit charitable Formal/ Informal Activities Hospitals PHC Diagnostic labs Producers / Distributors Ownership For-profit corporate For-profit small business Non-profit charitable Formal/ Informal Grow Harness Convert Strategy Assessment Goal Focus Private Sector Public Sector Restrict

3. 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 studies PHSA Gather available information Identify additional needs In-depth studies Activities Hospitals PHC Diagnostic labs Producers / Distributors Ownership For-profit corporate For-profit small business Non-profit charitable Formal/ Informal Activities Hospitals PHC Diagnostic labs Producers / Distributors Ownership For-profit corporate For-profit small business Non-profit charitable Formal/ Informal Harness Convert Assessment Goal Focus Private Sector Public Sector Restrict Grow Strategy

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

5. Outline of Session Definition Goals Evidence Advantages / Disadvantages Context definition

6. “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 “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

7. 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

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

9. Contracting non-clinical support services common terms Options 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 responsibilityPublic 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

10. Contracting non-clinical support services common terms Options 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 responsibilityPublic 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

11. 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

12. SPV State 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

13. SPV State 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

14. Players in PFI Adapted from: Health Research Institute. (Dec. 2010). Build and Beyond: The (R)evolution of Healthcare PPPs. PwC pg. 17. OperationsFundingLegislationMonitoring / consulting organizations Hospital providerFinancial/IndustrialFederal health authority Independent consultancies InsurersInfrastructure fundsState health authorities Non-governmental organizations ITBanksRegional Commissions Financial Medical devicesNational health insurance boards Legal Pharmaceutical companies Members of the Legislative Assembly Technical advisors Facilities management definition

15. 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

16. 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

17. Goals of a PFI 1.Encourage private investment 2.Transfer risk 3.Decrease government borrowing 4.Increase efficiency goals

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

19. 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

20. 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

21. 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

22. 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

23. 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

24. “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

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

26. 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

27. 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

28. 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

29. 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

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

31. 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.

32. 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.http://www.guardian.co.uk/politics/2009/sep/04/greens-pfi-hospitals

33. 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.