Private Finance Initiatives
Dominic Montagu
Harding-Montagu-Preker Framework: Overview
Goal
Assessment
Strategy
• Gather available information
Grow
Focus
Private
Sector
PHSA
• Identify additional needs
• In-depth studies
Activities
•Distribution
• Hospitals
• PHC
• Diagnostic labs
• Producers / Distributors
(equity)
•Efficiency
Ownership
•Quality of Care
Harness
Convert
• For-profit corporate
• For-profit small business
• Non-profit charitable
Public
Sector
Formal/ Informal
Source: Adapted from Harding & Preker, Private Participation in Health Services, 2003.
Restrict
Harding-Montagu-Preker Framework: Overview
Goal
Assessment
Strategy
• Gather available information
Grow
Focus
Private
Sector
PHSA
• Identify additional needs
• In-depth studies
Activities
•Distribution
• Hospitals
• PHC
• Diagnostic labs
• Producers / Distributors
(equity)
•Efficiency
Ownership
•Quality of Care
Harness
Convert
• For-profit corporate
• For-profit small business
• Non-profit charitable
Public
Sector
Formal/ Informal
Source: Adapted from Harding & Preker, Private Participation in Health Services, 2003.
Restrict
Objectives
• How do PFIs work
• How do PFIs differ from other PPP models
• PFI Value-for-money
• Advantages and disadvantages of PFIs
definition
Outline of Session
• Definition
• Goals
• Evidence
• Advantages / Disadvantages
• Context
definition
“Private Finance Initiative (PFI) hospital contracts
“Private Finance Initiative (PFI) hospital contracts
awarded and managed by local Trusts. The
are are
awarded
and managed by local Trusts.
contracts
use use
private
funding
to build
and maintain
The
contracts
private
funding
to build
and
hospitalhospital
buildings.
The contractor
often provides
maintain
buildings.
The contractor
often
provides
support
support
services,
services,
typically
typically
including
including
cleaning,
cleaning,
catering
and portering,
often referred
to
catering
and portering
, often referred
to as hotel
as hotel services.”
services.”
-The
performance
and management
of hospital
PFI contracts.
-The
performance
and management
of hospital
PFI
British
National
AuditNational
Office 2010
contracts.
British
Audit Office 2010
definition
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
Source of Capital Investment in UK
Hospitals
3,500
3,000
2,500
£ million
2,000
1,500
1,000
500
0
1990/91
1991/92
1992/93
1993/94
1994/95
1995/96
1996/97 1997/98
Net government
1998/99 1999/00e 2000/01p 2001/02p 2002/03p 2003/04p
Asset sales
Sources: Department of Health 1997, 1998, 1999, 2000; John Sussex, Office of Health Economics
PFI
Options
common
terms
definition
Private sector responsibility
Provides nonclinical services (cleaning,
catering, laundry, security, building
maintenance) and employs staff for these
services.
Public sector responsibility
Provides all clinical services (and staff)
and hospital management; manages
contract and pays for support services
Contracting non-clinical
support services
Outsourcing
Contracting
Contracting clinical support
services
Outsourcing;
PPP
Provides clinical support services such
as radiology or laboratory services.
Manages hospital and provides clinical
services; manages contract and pays for
services.
Contracting specific clinical
services
Outsourcing;
PPP
Provides specific clinical services (such
as lithotripsy; dialysis) or routine
procedures (cataract removal).
Manages hospital and provides most
clinical services; manages contract and
pays for services.
Buying hospital services
Private management of
public hospital
Private financing,
construction, and leaseback
of new public hospital
Contracting;
Purchasing
Operating
contract
PFI
Private financing,
construction, and operation
of new public hospital
Services &
capital
contract
Co-location of private wing or
department within or beside
public hospital
Co-location
Sale of public hospital for
alternative use
Privatization
Contracted private hospitals provide
services in accordance with contractual
provisions
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.
Finances, constructs, and owns new
public hospital and leases it back to
government
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.
Reimburses operator for capital costs
and recurrent costs for services provided.
Finances, constructs, and operates new
public hospital and provides nonclinical or Reimburses operator for capital and
recurrent costs for services provided.
clinical services, or both.
Takes facility ownership at end.
Manages public hospital for public
Operates private wing or department (for
patients and contracts with private wing
private & public (?) patients); fulfills
for sharing joint costs, staff, and
payment and service access conditions
equipment.; supervises fulfillment of
agreed
patient access and other conditions
Purchases facility and converts it for
Monitors conversion to ensure adherence
alternative use depending on sales
to contractual obligations.
agreement
Options
common
terms
definition
Private sector responsibility
Provides nonclinical services (cleaning,
catering, laundry, security, building
maintenance) and employs staff for these
services.
Public sector responsibility
Provides all clinical services (and staff)
and hospital management; manages
contract and pays for support services
Contracting non-clinical
support services
Outsourcing
Contracting
Contracting clinical support
services
Outsourcing;
PPP
Provides clinical support services such
as radiology or laboratory services.
Manages hospital and provides clinical
services; manages contract and pays for
services.
Contracting specific clinical
services
Outsourcing;
PPP
Provides specific clinical services (such
as lithotripsy; dialysis) or routine
procedures (cataract removal).
Manages hospital and provides most
clinical services; manages contract and
pays for services.
Buying hospital services
Contracting;
Purchasing
Private management of
public hospital
Private financing,
construction, and leaseback
of new public hospital
Private financing,
construction, and operation
of new public hospital
Operating
contract
PFI
Services &
capital
contract
Co-location of private wing or
department within or beside
public hospital
Co-location
Sale of public hospital for
alternative use
Privatization
Contracted private hospitals provide
services in accordance with contractual
provisions
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.
Finances, constructs, and owns new
public hospital and leases it back to
government
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.
Reimburses operator for capital costs
and recurrent costs for services provided.
Finances, constructs, and operates new
public hospital and provides nonclinical or Reimburses operator for capital and
recurrent costs for services provided.
clinical services, or both.
Takes facility ownership at end.
Manages public hospital for public
Operates private wing or department (for
patients and contracts with private wing
private & public (?) patients); fulfills
for sharing joint costs, staff, and
payment and service access conditions
equipment.; supervises fulfillment of
agreed
patient access and other conditions
Purchases facility and converts it for
Monitors conversion to ensure adherence
alternative use depending on sales
to contractual obligations.
agreement
definition
A Typical PFI
Private
Healthcare
Providers
Contract
Assets
(facility, skills, etc)
State
Department of
Health
Assets
($$, land, facility, etc)
New Healthcare
Facility
Adapted from: Health Research Institute. (Dec. 2010). Build and Beyond: The (R)evolution of Healthcare PPPs. PwC pg. 7.
A Typical PFI
Three Contractual Entities
Contract
SPV
State
Department of
Health
SPV (special purpose vehicle)
–
–
–
Investors
Construction contractor
Facility operators
Capco (capital equipment or infrastructure provision company)
Opco (services or operating company)
definition
A Typical PFI
Three Contractual Entities
Contract
SPV
State
Department of
Health
SPV (special purpose vehicle)
–
–
–
Investors
Construction contractor
Facility operators
Capco (capital equipment or infrastructure provision company)
Opco (services or operating company)
definition
definition
Players in PFI
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
Technical advisors
Legislative Assembly
Facilities
management
Adapted from: Health Research Institute. (Dec. 2010). Build and Beyond: The (R)evolution of Healthcare PPPs. PwC pg. 17.
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
goals
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 capital
Private participation in public goods
goals
Goals of a PFI
2. Risk Transfer
“Risk should be allocated to the entity most able to manage that risk”
Linking finance, construction, and facility
management
Allocation of Risk to Private and Public
private partner risk:
Construction delay
Facility quality
Partner / subcontractor coordination
Public partner risk:
Annual payments
Oversight
Utilization forecasting
goals
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
Goals of a PFI
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
Evidence
Evidence: Positive but low VfM
• 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
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: UK PFI construction
unclear
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”
UK National Audit Office Report on PFIs, 2010
Evidence
Documented Quality Problems
Mkee et al.. Public-private partnerships for hospitals. WHO Bulletin 2006
Critical Success Factors
Conclusions
(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
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.