What are we talking about when we talk about PPPs
With the prospect of Valentine’s day looming over, now is not a bad time to reflect on relationships. Across the policy spectrum, private sector participation to public activities such as the provision of health services is gaining traction as increasingly public decision makers show interest in tapping into a set of skills which are not necessarily available at public level : design and construction of health infrastructure combined with long term operation and maintenant for instance.
The UHC agenda further accelerates the thrust of private sector participation and increases its ambit : availability of care for everyone is a critical part of #HealthforAll, heralded by the WHO Director General.
Entrusting skilled private sector specialists, leveraging private finance for health may seem appealing to health stewards who are aware that according to the SDG Health Price Tag, infrastructure is the second cost driver (34%) of the total amount needed to achieve the health targets across the SDGs.
Scoping PPPs : what are we talking about?
PPPs have been the new kid on the block since the mid 1990’s, triggering increasing interest and controversy. At the core of the concept lies a set of contracting instruments to procure infrastructure, goods and services to the public sector. PPPs are an overarching procurement model to engage and work with private sector organizations, alongside traditional procurement routes. In sum, PPPs are
Co-operative ventures between public and private sector based upon the expertise of each partner and that best meets a clearly defined public need through the appropriate allocation of resources, risks and rewards
- PPP are essentially complex contracting arrangements between the public and private sector whereby a global stream of services are provided by private contractors. Contrary to traditional procurement with a fragmentation of the phases of the project, PPPs enables a group of private providers to make available fully operational health infrastructure: from blueprint to sweating the assets over their life cycle, private providers offer one point of entry to health decision makers;
- Health decision-makers do not buy infrastructure and related clinical or non-clinical services: they buy a comprehensive set of services against a unitary charge, tied to performance targets.
- PPPs aim at procuring infrastructure and or services policy makers to improve quality and performance of health infrastructure and service while achieving BVFM – best value for money across the capital goods life cycle.
How does it work?
PPPs are identified by a common pattern of idiosyncrasies summarised hereunder
- Risk allocation commensurate to the capacity of public and private partners to best manage those risks
- Streamof services : the public sector does not buy an asset as in other forms of procurement or private sector participation)
- The value of the public contract is assessed against the cash flow generated and not the value of the asset
- PPP financing is off the books: part of it as this is not considered investment since the private sector owns the assets in the case of infrastructure financing and public sector repays a unitary charge for the services (expenditure vs investment)
- Payment is made against measured/checked performance : this is the operationalisation of the risks undertaken by private partners, who face penalties is performance is under par
- Project finance is a common route to finance long term debt for infrastructure PPPs. Equity arrangements (corporate structure) are possible but seldom seen in the health sector/
Most common health infrastructure PPPs models designate contracting arrangements as varied as:
- Service contracts
- Management contracts
- Lease contracts
- Joint Ventures
- « Alphabet soup » ad hoc contracts designating the services provided : e.g. DBFOM (Design-Build-Finance-Operate- Maintain) or BOOT (Build-Own-Operate-Transfer)
In sum : Drivers of PPPs - what are health decision makers trying to achieve?
- Improving service quality through greater diversity and contestability
- Focusing on outcomes – bringing in new perspectives and solutions
- Getting more from public assets over their life cycle
- Accessing private sector management skills and expertise
- Sharing risk commensurate with the respective strengths of each partner in managing that risk
- Engaging citizens and civic groups in governance and monitoring
- Use of output specification to favour innovative solutions
- Performance measurement & incentive (performance based payments)
- Tapping into private sector infrastructure management skills
- Innovation stimulation (in particular to respond to design constraints or environmental norms)
- Smoothing the budget flow…or write off the books!
Amongst hundreds of examples of projects that PPPs allow health stewards to carry out, the most common instances range from the shift of the building heating facility to comply with increasingly stringent environmental norms to the procurement of complete health facilities together with ancillary services (e.g. catering; laundry; security of premises; shops and facility management; sterilization; and maintenance services).
The recent blunt force trauma inflicted to the UK tax payers by the spectacular failure of one of the main PPP private players (Carilion Ltd) does not preclude strong empirical evidence of success stories of PPPs, including in the health sector, as often highlighted by national audit offices (including British NAO). Possibilities of refinancing the contract or generating third-party revenue on the infrastructure operations also help secure cost-effectiveness of some of the contracts.
Empirical evidence : the case of UK DBFOM models (Private Finance Initiative contracts)s
- Positive results
- Building costs reduced by 20% to 25%
- Tariff price around 10% lower that State hospitals
- Quality Comparable - Public / PPP
- High performance values e.g. bed occupancy rates
- Quicker access - reduced waiting time
- Systemising the care pathways
- Using systemised care pathways as the basis of hospital design
- High rates of investment in technology
- Negative outcomes – ( typically 3 to 4 years later)
- Quality decay (contracts not sustainably viable)
- Cost spiral
- Unrealistic pricing from the start (to undercut public rate)
- Contract trading
- Undermined public confidence (an hardened opposition)
« Outstanding performance » : the case of the Finnish Coxa Hospital, a joint venturespecialising in joint replacement. The project involving public and private stakeholders at regional level yielded positive results :
- The Finnish Occupational Health Study (Work and Health of Finnish Staff) rated Coxa, “outstanding” for workforce satisfaction
- STAKES (the Finnish national health and social welfare institute) rated, Coxa as “exemplary for patient satisfaction”
- Financial security has allowed price reductions and self-financed sustainable capital development, while health outcomes showed positive results.
When should PPPs be avoided?
Conversely most common mistakes in using PPPs models, in particular in the health sector, pertain to:
- The cost of project finance (capital investment in infrastructure leveraged on financial markets is more expensive than public debt)
- Lack of sufficient public capacity to manage large and complex contracts…and their potential shortcomings (risk of failure of the private partner)
- Drivers for this contracting solution relies on the facility to offset public debt or write off the books substantial investment.
In their own words
There is the risk that the recourse to PPPs is increasingly motivated by the purpose of putting capital spending outside government budgets … It may happen that PPPs are carried out even when they are more costly than purely public investment (European Commission)
While the World Bank underlines that “PPPs can be a powerful policy tool for improving the viability of public hospitals and the quality of their services.”
WHO also has a role to play, with increasing requests for guidance and operational advice as regards the opportunities and pitfalls of PPPs in health, and more broadly contracting in order to procure capital goods and infrastructure in the health sector.
The Decide Hub will foster a working group on Private Sector Participation in Health which will underscore good practices and recommendations for policy makers in the fields of Capital Investment in Health; Contracting models; and PPPs. Follow us on decidehealth.world!