ppp problems & pitfalls: how to avoid them

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PPP Problems & Pitfalls: How to Avoid Them. April Harding. Mazowiecke Voivodeship January 28 2010. Key points. PPP design to suit goals PPP design to fit context You will get things wrong (managing implementation is critical) The partnership is critical. Outline. UK Case and Lessons - PowerPoint PPT Presentation


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PPP Problems & Pitfalls: How to Avoid ThemApril Harding

Mazowiecke VoivodeshipJanuary 28 2010

1Key points2PPP design to suit goals

PPP design to fit context

You will get things wrong (managing implementation is critical)

The partnership is critical


Outline3UK Case and Lessons

Spain Case and Lessons

Conclusions3UK starting point 1992: directly administered hospitals4UK national government directly administers hospitals

National Health Service (NHS) owns the hospitals, and funds their operation

Rigid public services rules undermines effective, responsive operation.

Low spending, run-down facilities

4PPP infrastructure model gets adapted for hospitals5In infrastructure sectors (power, transport, water, rail) tendered for finance, facility & serviceslarge amounts of capital upfront; risks are big, but there are many payers efficiency gains captured in full range of activities (facility design and operation)

When applied in health, one big change: services omitted.In health: another key difference, only one payer, the NHS.more risk, higher cost5Model started in infrastructureIn infrastructure was FACILITY and SERVICES

Largely seen as successful, though where multiple contracts were involved (e.g. Rail Track).serious problems and performance failure

Decided to roll out into hospital sector in 19??

But public sector labor unions are very powerful.They succeed in getting services pulled out, and kept in public operation.

So model in health was different: Government tendered for a consortium to take public asset (often land, or existing facility) and build or upgrade, and then provide a facility to operate a hospital in. Facility availability services were bought in the service contract.Since significant capital investment needed, service contract had to be 20-25 years to provide revenue flow assurance for long enough to pay back loan (BIG investment upfront, cant be sold to anyone else, and if problem with customer, cant use assets for other purposes easily).

Omitting services, limits efficiency gains

Average % of hospital operating budget by cost category




Support Services




54%Building Design & Constr.6In infrastructure, the PPP model included services, and allowed efficiency gains captured in full range of activities (facility design and operation)But not so in health, omitted services

Services costs are dominant in health Limited efficiency gainsDesignsBuilds

Non-clinical servicesDesignsBuildsFinancesNon-clinical services, for 25-30 yearsPUBLICLY-FINANCED DESIGN & BUILDPRIVATELY-FINANCED DESIGN, BUILD, FINANCE AND OPERATEWhat the private sector does....7PFI benefits90% of all PFI projects delivered on-time

Within budget projects

Better maintenanceTraditionalPrivate contractors selected by competitive tenderDesign and build increasingly commonCost and time overruns average 7% and 8% in late 1990s

PFIPrivate contractors selected by competitive tenderDesign, build and operate for 25-40 yearsOverruns limited by contract terms

8PFI costsTransactions costs are higher for PFI than traditional procurement:

external advisers for all parties

longer duration of tendering and contract negotiation

costs of PFI contract negotiation have been estimated to be seven times higher than for traditional tendering. Bromley Hospitals Trust spent 3m on PFI negotiations.9Higher Cost of CapitalPUBLIC FINANCEGovernment borrowsGovernments cost of capital paid(Future taxpayers bear risks)

PRIVATE FINANCEBorrow from banks, bond and equity markets Higher cost of capital10PFI offers:Slightly lower construction costsFewer construction time overrunsLittle difference in support servicesBetter maintained hospitalsHigher transactions costsHigher costs of borrowing

Privately Financed versus Well-Managed Publicly Financed11Result: in most cases, not value for money12PFI model used less often after budget reform compelling the costs to be properly accounted for (e.g. on capital account)

Main driver may have been getting around budget constraints on capital investment

Insight: PPP model didnt fit the objectives of cost savings, and services improvement

Insight: Poor accounting misrepresented value for money

12Valencia government applies a comprehensive PPP model13

13Valencia starting point14State (sub-national govt) directly administers services

Universal coverage; tax finance

Lacking facilities

Rigid public services rules undermines effective, responsive operation.14Alzira community needed a hospital15Alzira community 230,000 peopleNearest hospital: Valencia, > 30 milesPolitical promise to build a new hospital15PPP for finance, facility & servicesPUBLIC FINANCINGALZIRAMODEL


Builds new premises Employ medical staff Management know how Free & public healthcare servicesReturns to the Local Government after 10 years16Innovative services purchasing: money follows the patient

CAPITATION PAYMENTYearly capitationpayment for each personAnnual review:CPI or % health budget Hospital pays 100% of the cost of patients who go elsewhereHospital is paid an 80% of the cost of treatingpatients from other area 17Alzira: phase 118Alzira Model I (Hospital Care): 1999/2003Contract #1: lease of facility/ landContract #2: concession for 10 years, extendable to 15 for the operation of hospital services for people in catchment areaCapitation fee: $300 + CPI (1999)Investment commitment ($95M) - build new hospital

18Impacts:Accelerating capital investmentImproved, more flexible organization and operationBetter services

2002: Alzira model clearly not working19Consortium cant cover costs

Cant constrain costs because PHC referrals are high, and they cant influence them

Cant deliver investment, and new facility

Renegotiation - PARTNERS

19Alzira II: integrated with PHC to enable cost control20Alzira Model II (Integrated Care): 2003/2018Contract #1: lease of facility/ landContract #2: concession for 15 years, extendable to 20Covers management of primary and hospital care in catchment areaCapitation fee: $570 + % yearly increase in the health budgetInvestment: $115 M during the 15-year period


Redesigned model achieves good results21Increasing activity, services availability

Substantial increase in patient satisfaction

New facility offers sizable upgrade in capacity and quality

Ranked most years in top 20 general hospitals in Spain21More and more services and facilities provided with this PPP model22Valencia Community: 25% of the populationAlzira (1999)Torrevieja (2006)Denia (2008)Manises (2008)Crevillente (2009)Madrid CommunityValdemoro (2008)Portugal:Braga ( 2006)

22Insights: the services are critical23Private sector (flexible) management and staffing enables:

Incentivizing performance of staff incentivizing team work and coordination Incentivizing uptake of use of new organizational models and technology supports widespread use of chronic disease management systems23Human Resources Management: promoting professionalsStability at workDoctors manage their own time: OP, theatre, IP visits, within the hospital needs and objectives.Professional Development: Functional Units, Research Units, etcContinuing Medical Education and Research Committee Incentives System: Greater incomes:Objectives achievement related (individual). Outcome related: More activity, better results, less complicationsEfficiency achievement related (Management Units): Savings sharingDoctors Mean Income is 25% higher than the public sector doctors

Insight: monitoring and dealing with problems as partners is critical24Extensive collaboration and cooperation was required to bring about the successful redesign24PPPs work when model fits goals and context25Services taken over by private operator allowed efficiency and quality gains

PHC added to enable cost containment

Capitation (money follows patients) worked within the Spanish health finance context to incentivize performance25PPPs can be fixed26Even with lots of effort

Everyone gets things wrong

The partnership is critical