PPPLessons Learnt

S T R AT E G I C

HEALTHCARE

P L A N N I N G

DISCUSSION PAPER

Public Private Partnerships in Turkey Lessons Learned in the UK A discussion paper prepared by Strategic Healthcare Planning

October 2013

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Contents 04

Introduction

The Introduction of PFI in the UK 06

Overview

06

Contracts

07

Method of Funding

08

History

The way forward 11

Lessons learned in the UK

12

This created a process of Competitive Dialogue

13

How can Strategic Healthcare Planning Help

14

Clarity of clinical models

14

Clarity over non-clinical issues

15

Clarity of design requirements

17

Clarity of process

18

The role of Strategic Healthcare Planning

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Introduction The mid-1980s saw the UK National Health Service facing its biggest challenge since its inception in 1948. The Minister for Health had required an analysis to be undertaken of the condition of the estate from which patient care was administered that revealed such a significant backlog cost to repair an ageing system that the public purse was unable to cope with the demand.

This brought about one of the most creative national policies that was to have a dramatic impact not only nationally but also worldwide………………………………..

“The introduction of the Private Finance Initiative.”

This involved the Private Sector funding, designing, building and operating new hospitals to the extent that it was to change the landscape of the healthcare estate in the UK forever.

The mid-1990s saw new hospitals springing up across the country and Strategic Healthcare Planning was at the forefront of consultancy organisations advising both public and private sectors on the required standards and quality to be achieved. They were involved in the first hospitals to be delivered in this manner.

1990s

§ §

2010s

The County Hospital Hereford The Worcestershire Royal Hospital

2000s

§

University Hospitals Coventry and Warwickshire

§

John Radcliffe Hospital Oxford

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Hope Hospital Salford

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University Hospital of North Staffordshire

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University Hospital of Birmingham

§ § § §

Manor Hospital Walsall Papworth Hospital Birmingham Dental School Ludlow Community Hospital

Tameside Hospital

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Over the decades those involved in the process became more and more sophisticated and developed strategies and techniques that enabled initial proposals made by the private sector to be more robust, have more cost certainty and able to be delivered more quickly.

Strategic Healthcare Planning believes that the lessons it has learned over its 20-year involvement in the PFI process should be shared with those more formative markets to the benefit of the patients for which those countries care.

Strategic Healthcare Planning has been introduced to the Private Finance Initiative processes in Turkey and would welcome the opportunity of discussing with the Ministry of Health the changes that took place in the UK that improved the hospitals in that country to determine whether there is any benefit to the people of Turkey.

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The introduction of PFI in the UK British PFI in the early years Overview The Private Finance Initiative (PFI) is a procurement method, which uses private sector capacity and public resources in order to deliver public sector infrastructure and/or services according to a specification defined by the public sector. It is a sub-set of a broader procurement approach termed Public Private Partnership (PPP), with the main defining characteristic being the use of project finance (using private sector debt and equity, underwritten by the public) in order to deliver the public services. Beyond developing the infrastructure and providing finance, private sector companies operate the public facilities, sometimes using former public sector staff who have had their employment contracts transferred to the private sector through the Transfer of Undertakings Protected Employment (TUPE) process which applies to all staff in a company whose ownership changes.

Contracts A public sector authority signs a contract with a private sector consortium, technically known as a Special Purpose Vehicle (SPV). This consortium is typically formed for the specific purpose of providing the PFI. It is owned by a number of private sector investors, usually including a construction company and a service provider, and often a bank as well. The consortium's funding will be used to build the facility and to undertake maintenance and capital replacement during the life-cycle of the contract. Once the contract is operational, the SPV may be used as a conduit for contract amendment discussions between the customer and the facility operator. SPV's often charge fees for this go-between 'service'.

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PFI contracts are typically for 25–30 years; although contracts less than 20 years or more than 40 years exist, they are considerably less common. During the period of the contract the consortium will provide certain services, which were previously provided by the public sector. The consortium is paid for the work over the course of the contract on a "no service no fee" performance basis.

The public authority will design an "output specification" which is a document setting out what the consortium is expected to achieve. If the consortium fails to meet any of the agreed standards it should lose an element of its payment until standards improve. If standards do not improve after an agreed period, the public sector authority is usually entitled to terminate the contract, compensate the consortium where appropriate, and take ownership of the project.

Termination procedures are highly complex, as most projects are not able to secure private financing without assurances that the debt financing of the project will be repaid in the case of termination. In most termination cases the public sector is required to repay the debt and take ownership of the project. In practice, termination is considered a last resort only.

Whether public interest is at all protected by a particular PFI contract is highly dependent on how well or badly the contract was written and the determination and capacity of the contracting authority to enforce it. Many steps have been taken over the years to standardise the form of PFI contracts to ensure public interests are better protected.

Method of funding Prior to the financial crisis of 2007–2010, large PFI projects were funded through the sale of bonds and/or senior debt. Since the crisis, funding by senior debt has become more common. Smaller PFI projects — the majority by number — have typically always been funded directly by banks in the form of senior debt. Senior debt is generally slightly more expensive than bonds, which the banks would argue is due to their more accurate understanding of the credit-worthiness of PFI deals — they may consider that monoline providers underestimate the risk, especially during the construction stage, and hence can offer a better price than the banks are willing to.

Refinancing of PFI deals is common. Once construction is complete, the risk profile of a project can be lower, so cheaper debt can be obtained. This refinancing might in the future be done via bonds — the construction stage is financed using bank debt, and then bonds for the much longer period of operation. In most PFI contracts, the benefits of refinancing must be shared with the government.

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Banks who fund PFI projects are repaid by the consortium from the money received from the government during the lifespan of the contract. From the point of view of the private sector, PFI borrowing is considered low risk because public sector authorities are very unlikely to default. Indeed, national governments are not permitted to go bankrupt.

Repayment depends entirely on the ability of the consortium to deliver the services in accordance with the output specification in the contract.

History

Rev original by

Description

LOD

Date date created

Dr by App by

12/19/11

SN

Aedas Aedas Architects Aedas Architects Ltd St Mary's Court 21 St Mary's Street Shrewsbury SY1 1ED United Kingdom

T +44(0)1743 283000 F +44(0)1743 232717 E shrewsbury@aedas.com aedas.com

client name

Amber Solutions For Care project

Ludlow HealthCare Facility

In 1992 PFI was implemented for the first time in the UK by the Conservative government of John Major. It immediately proved controversial, and was attacked by the Labour Party while in opposition. Labour critics such as the future Cabinet Minister & Deputy Leader of the Labour Party, Harriet Harman, considered that PFI was really a back-door form of privatisation (House of Commons, 7 December 1993), and the future Chancellor of the Exchequer, Alistair Darling, warned that "apparent savings now could be countered by the formidable commitment on revenue expenditure in years to come". Nonetheless, the Treasury considered the scheme advantageous and pushed Tony Blair's Labour government to adopt it after the 1997 General Election. Two months after the party took office, the Health Secretary, Alan Milburn, announced that "when there is a limited amount of public-sector capital available, as there is, it's PFI or bust".

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drawing

Main Entrance computer file

plot date

C:\Revit Projects\Ludlow\LUD-AED-XX-XX-M3-AR-BUILDING-CENTRAL-2012 _RFW1.rvt

project number

scale

2011.00154.000 drawing number

VL_001

@A3 rev

issue status

PLANNING

This drawing is to be read in conjunction with all related drawings. All dimensions must be checked and verified on site before commencing any work or producing shop drawings.The originator should be notified immediately of any discrepancy. This drawing is copyright and remains the property of Aedas.

A recent study by University College London, studying data at hospitals built since 1995, supports the argument that private-sector providers are more accountable to provide quality services: It showed that hospitals operating under PFI have better patient environment ratings than conventionally funded hospitals of similar age. The PFI hospitals also have higher cleanliness scores than non-PFI hospitals of similar age, according to data collected by the NHS. There is evidence that the cost of hospitals ordered through PFI is adversely affecting the UK's National Health Service. Jonathan Fielden, chair of the British Medical Association's consultants' committee has said that PFI debts are "distorting clinical priorities" and impacting the treatment given to patients. Fielden cited the example of University Hospital Coventry where the NHS Trust was forced to borrow money in order to make the first £54m payment owed to the PFI contractor. He said that the Trust was in the ignominious position of struggling for money before the hospital's doors even opened.

The high cost of hospitals built under PFI is forcing service cuts at neighbouring hospitals built with public money. For example, overspending at the PFI-funded Worcestershire Royal Hospital has put a question mark over services at neighbouring hospitals. A Strategic Health Authority paper in 2007 noted debts at two hospitals in south-east London: Princess Royal University Hospital and Queen Elizabeth Hospital.

The paper attributed the debts in part to their high fixed PFI costs, and suggested that the same would soon apply at a third hospital in the area, Lewisham Hospital.

Because PFI costs are fixed, with big penalties for terminating contracts, the effect of these regional debts is to increase the risk of services being closed at nearby hospitals built with public money, such as Guy's, St Thomas', King's College and Queen Mary's.

Peter Dixon, Chairman of University College Hospital, one of the largest PFI-built hospitals in England, has gone on the record to say:

“We now have indexed payments for the next 35 years which at a time of growing concern over NHS budgets can only be a millstone. It isn't just that our scheme was expensive. Its very existence distorts whatever else needs to happen in this part of London and beyond.”

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A National Audit Office study in 2003 endorsed the view that PFI projects represent good value for taxpayers' money, but some commentators have criticised PFI for allowing excessive profits for private companies at the expense of the taxpayer. An investigation by Professor Jean Shaoul of Manchester Business School into the profitability of PFI deals based on accounts filed at Companies House revealed that the rate of return for the companies on twelve large PFI Hospitals was 58%. Excessive profits can be made when PFI projects are refinanced. An article in the Financial Times recalls the acute embarrassment of the early days of PFI, when investors in projects made millions of pounds from refinancings and it turned out that the taxpayer had no right to any share in the gains. Investors in one of the early prison projects, for example, made a £14m windfall gain and hugely increased rates of return when they used falling interest rates to refinance.

John Clarke, Partner at Strategic Healthcare Planning expressed the opinion that;

“it is only right and fitting that the private sector should make a profit as it is they that are taking part of the risk however it should be commercially reasonable and not place an unfair burden on the taxpayer. With the developing sophistication of the UK market there is becoming a greater degree of cost certainty at bid stage and therefore a more realistic opportunity for the hospital”

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The way forward Lessons learned in the UK Since the introduction of PFI in the UK there have been various adjustments to the process that have been intended to streamline the delivery and to reduce bidding costs to improve the overall competitiveness and to encourage the Private Sector to participate.

The initial process developed in the latter part of the 20th century was for;

§

the hospital, or healthcare provider to prepare a statement of its requirements both clinically and for the facilities management service that sets out what is to be delivered.

The potential bidders would then;

§

express their interest in undertaking the proposed development in response to an invitation to pre-qualify for the work;

§

these submissions would undergo an auditable process to select 6 consortia who would move forward to the next stage;

§

the 6 bidders would be required to submit quite detailed proposals for selection to the next round of discussion. At this point each of the 6 bidders would have expended significant amounts of money, the majority of which would be abortive;

§

3 bidders would be selected to provide the next level of refinement of their designs that would inform the ongoing competition that would determine the final 2;

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the final 2 parties would then both provide detailed designs that could move forward to delivery.

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This process of 6 – 3 – 2 – 1 brought about a situation where the 5 unsuccessful parties would have expended considerable sums of money abortively.

This caused a great level of tension in the market place with many contractors no longer wishing to participate.

It was therefore necessary to improve the process so as to provide increased clarity of requirements upon which to base the negotiation.

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This created a process of Competitive Dialogue, Since its introduction in 2006, the Competitive Dialogue procedure has received a mixed response: caution in the face of growing costs, yet recognition of the efficiencies gained.

Our panel of experts offers insight from both a public and private sector viewpoint.

The Competitive Dialogue procedure continues to provoke controversy. Many bidders see it as leading to further increases in the already high development costs of PPPs and the PFI. However, approximately 650 Competitive Dialogue contract notices have now been issued in the UK demonstrating its widespread impact on the PPP market.

Competitive Dialogue obliges authorities to put much more effort into early preparation for the procurement, prior to the Official Journal of the European Communities (OJEU) notice in creating draft versions of the main procurement documents and thoroughly thinking through strategic elements of the project such as award criteria. It provides - 12 -

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opportunities for innovation and encourages greater value for money solutions through the dialogue phase, where there is still a competitive element in the process.

A shorter closure phase, post-Preferred Bidder, can be achieved as there are restrictions on the scope of the changes that the authority and Preferred Bidder can make to the overall deal.

The top three concerns from bidders are that the process can be slow, expensive and resource intensive. It is vital that the authority's project team has the right skills to handle the process.

Early planning and preparation govern the success of the procedure. If it is run effectively and efficiently, it has the potential to have a positive impact and ensure benefits can be realised by both parties.

How can the Strategic Healthcare Planning help?

In order to create an appropriate environment in which to conduct a Competitive Dialogue it is essential there is total clarity of all issues in order to give Bidders the confidence that the Health Provider has a robust, sustainable offering e.g.

§ §

Clarity of process Clarity of requirement

• • §

Clarity of clinical models Clarity over non -clinical operational issues

Clarity of design approach and physical solution

Strategic Healthcare Planning (SHP) have been involved in all of the manifestations of the process and therefore well suited to assist in the preparation of the appropriate level of documentation.

It is believed that the more informative the information is the more refined the Bidder price will be.

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The following diagram indicates the typical form of relationships within a UK deal and as one can see there is a Technical Advisory Team ensuring that the best interests of the Healthcare Provider are secured. This is the role that SHP team traditionally fulfils.

Department(of(Health

Funder

!

Local(Hospital

Project(Agreement

"

Project(Co

advisers

Design

designer

clinicians

Build

contractor

Operate

operator

Clarity of clinical models Bidding Consortia are becoming more and more sophisticated and often engage the services of clinical specialists and doctors to advise them whether the underlying clinical activity upon which the deal is to be founded is sufficiently robust and sustainable. It is imperative therefore that the enquiry documentation describes in detail the various clinical models of care, the activity assumptions and the future demographics to provide the comfort that there will be a strong partnership.

SHP would propose to develop individual service descriptions with an overarching statement of the service vision.

This will enable the Bidder’s Designers to respond in the built form to the aspirations of the clinical body.

Clarity over non-clinical issues The Healthcare Provider must identify the range of clinical support and non-clinical support that is to be included in the contract and those services it wishes to retain inhouse. This is often a subject that is given insufficient attention to detail.

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Over the life of the concession this is the one area of the cost envelope that will be the most significant and overshadow the capital cost of the building.

SHP would introduce an appropriate level of professional input to ensure the correct design of those services to a similar level of detail as the clinical descriptions.

Clarity of design requirements There are 2 different approaches to this requirement each of which is equally valid depending on the overall ethos to that which the Healthcare Provider wishes to adopt.

1. an ‘Output based’ brief and invites innovative solutions from the Private Sector, 2. predetermined Design Solution that seeks a Develop and Construct model.

Both methods have equal merit and are a response to the different attitudes from the Healthcare Provider.

They both require the same level of information to be prepared that will enable the Bidder to consider the risks to which he may be exposed.

As a minimum the following should be provided or demonstrated:

§ § § § §

The Robustness of the Demographic data that supports the clinical need; The clinical model; The conversion of the clinical model into Functional Units; The Development of the Functional Units into a physical solution – Strategic Design; The Development of the Functional Units into a physical solution – Detailed Design;

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The two models each have their own different routes to project delivery:

§

Innovative model

• • • • • • §

Determine how much innovation is required Typically procure the site Develop a ‘Comparator Design’ for evaluating any proposals Selection process – long list / short list / preferred partner Bidder proposals including design, operation, build and finance Design development process

Design & Build Model

• • • •

Site predetermined Design solution at a strategic level predetermined Bidder selection essentially based upon lowest cost Design development process

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Clarity of process The route to delivery has a defined process that includes:

§ §

Determine the clinical need

§ § § § § §

Decide which services are to be sought from the Private Sector

Decide on whether, or how much this need is to be developed into a physical solution by the Private Sector Determine the legal framework Select Private Sector preferred partner Financial & legal agreement Build, equip and commission Operate

SHP would advocate that these are best determined on a step-by-step basis, each stage giving a greater level of certainty on which the Hospital can make strategic decisions and move forward in a structured manner based upon robust outcomes;

§

Initial Feasibility Study to determine the need, the function scale and the economic parameters,

§

Preparation of a Business Case to develop the recommendations of Feasibility Study with specific proposals and outputs,

§ § § § §

Develop a masterplan and detailed floor plans to support the Business Case, Engage with the Private Sector to invite proposals for consideration, Determine the preferred private sector and entre into a commercial agreement, Complete the detailed design and build the facilities, Deliver Clinical Services for the concession period.

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The role of the Strategic Healthcare Planning Members of Strategic Healthcare Planning have been involved in the delivery of over 20 major healthcare PFI projects in the UK and therefore capable of assisting in Private Hospitals Association of successfully proceeding through the complexities of the procurement process.

The Turkish Ministry of Health PPP Division is invited to consider the contents of this paper and to determine the extent to which it would wish to explore the process further.

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John B Clarke

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Strategic Healthcare Planning LLP August 2013

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