Creating value in healthcare projects using PPP models

Public Private Partnerships or PPPs have been used as vehicles to develop, maintain and operate healthcare assets for many years. Over time, these arrangements have become more complex and diverse.

Paxon Consulting Group has advised on over 80 PPP projects totalling more than US$130 billion. In this article we explore how different forms of PPPs deliver value in different ways – as well as the critical, definitional questions that need answering by both the public and private sector.

PPP AS AN UMBRELLA TERM, RATHER THAN A SINGLE MODEL

There are several types of PPP and each has a unique set of benefits and risks – but fundamentally they are about transferring risk. PPPs in the healthcare sector can create:

• New avenues for financing major assets – and the opportunity to achieve cost savings, during the construction phase, or longer term during the operating phase
• Opportunities to transfer risk – whether that is operational, financial or clinical risk
• Access to private-sector skills and capacity for the delivery of clinical services
• A mechanism to manage an asset or service based on outcomes, not inputs
• The potential, through structuring, to move assets off the Government balance sheet
• Greater predictability – costs (for Government) and revenue (for the private sector).

The structure of a PPP is typically defined by which party will Design, Build, Finance, Operate and Maintain the asset or service.

Different types of PPPs are often described in short-hand that references these variables – for example, ‘a DBFM model’ or ‘a DBFO model’. Despite their apparent similarity, these terms reflect models that are fundamentally different at their core. Different PPP structures are best conceptualised as mutually exclusive alternatives; rather than on a continuum of risk or functionality. Deciding which PPP model is most appropriate is a series of decision forks in the road.

WHO DOES WHAT DEFINES THE MODEL

Models that involve the private sector financing an asset (the ‘F’ models) involve a privately financed hospital being leased back to Government for a fixed term, often with Government purchasing the asset at end of contract. This reduces the up-front capex burden for Government, while minimising the financial risk for the private sector. It also provides a guaranteed, long-term, low-risk return on the investment – typically in the order of 12 – 13% (Equity IRR).

Models that involve the private sector maintaining an asset (the ‘M’ models) allow government healthcare providers to focus on their core capabilities (i.e. delivering clinical care) while outsourcing facilities management to specialist FM providers. The FM providers get a guaranteed long-term contract, with Government outsourcing maintenance and FM services based on desired outcomes and KPIs.

Models that involve the private sector operating a hospital (the ‘O’ models) constitute a much higher level of risk transfer from public to private sector. In these models, the private sector is responsible for the delivery of care and takes on significant clinical risk. A PPP involving clinical operations allows private healthcare providers to expand into new geographies with a shared risk around infrastructure investment. It also combines public and private activity on the same site, thereby hedging activity risk. The ‘O’ models allow Government to outsource the delivery of publicly funded care, thereby transferring workforce risk and management overhead to the private sector.

THE THREE MOST COMMON TYPES OF HEALTHCARE PPPS

DBFM – These models are primarily about transferring asset risk. Government transfers delivery risk and asset management risk, while maintaining control of clinical services.

Private sector raises finance for the new build and oversees design and construction. Government leases the facility from the private sector for a fixed term (typically 20+ years) and a fixed fee and delivers clinical services from the facility. The private-sector party is responsible for the ongoing maintenance of facilities (typically soft and hard FM) throughout the contract.

DBFO – These models allow Government to leverage private-sector skills, expertise and capacity in the delivery of clinical services, and achieve cost efficiencies in service delivery.

Private sector raises finance for the new build and oversees design and construction. The private sector party delivers publicly funded clinical services from the new facility, under a service contract with Government. This allows public and private healthcare services from the same site, giving the private sector provider economies of scale and access to a large patient population.

DBO – These models are focused on clinical operations, rather than financing the asset. They allow Government to leverage private-sector expertise and service delivery capacity.

Private sector oversees the design and construction of a publicly funded, new-build facility (funded by Government outside of the PPP arrangement). Private-sector party delivers the publicly funded clinical services from the new facility, under a service contract with Government.

NOT JUST A TRANSFER OF RISK, BUT A TRANSFER OF COMPLEXITY

The private sector party in a PPP often has a diverse set of roles – after all, soft FM is a different capability to constructing a hospital, and clinical operations distinctly different again. Because of this, the private-sector party is almost always a consortium of companies, led by a private healthcare provider, or by a dedicated Special Purpose Vehicle (SPV) – a ‘Project Co’, established specifically for the PPP.

This private-sector consortium typically includes: an architect, a contractor/builder, facilities manager, banks, equity finance, and a financial and transaction advisor. In a non- PPP public hospital build, Government needs to manage each of these parties individually. In a PPP, Government can liaise solely with the ProjectCo. The public-to-private transfer of risk is also a transfer of complexity. This is one of the key reasons why PPPs are attractive to Government – they allow Government to deliver and maintain highly complex projects without the need to resource those capabilities internally.

However, this also leads to one of the key risks for Government. Managing a PPP from the Government perspective – not just in the design and construction phases but throughout the lifecycle of the PPP – requires commercial, financial and contract management expertise which are often not core government capabilities.

CRITICAL QUESTIONS

There are some fundamental questions that determine whether a PPP is the appropriate vehicle for a given investment – and, if it is, what kind of PPP.

What are you trying to achieve? What is the risk or issue that Government is seeking to address? Is it to access finance? Transfer design and construction risk? Access to private-sector capability in the delivery of clinical services?

Then, once you really understand these questions…

Can the private sector help achieve this? Does the private sector have capabilities to meet this need, and achieve efficient risk transfer? Can they do it better than Government, to achieve Government’s overall objectives?

A CASE STUDY: NORTHERN BEACHES HOSPITAL

Northern Beaches Hospital in New South Wales, Australia, is a greenfield US$1.3billion, 488 bed tertiary hospital delivered by a 25-year DBFMO PPP model. The operator-led integrated hospital facility combines public and private hospital services, taking advantage of synergies in facilities and operations.

The private sector consortium assumed responsibility for the design, build, financing and maintenance of the facility, as well as delivery of all public hospital services. This fully outsourced model achieved a 20% decrease in Government’s net cost of meeting healthcare demand in the catchment area. This equated to approximately US$1 billion in savings to Government over the life of the contract. Paxon was the financial and commercial advisor to Government.