FEASIBILITY STUDY AND ECONOMIC ASSESSMENT FOR AL-QADISIYAH UNIVERSITY HOSPITAL OF SPECIALIZED SURGERIES

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1 International Journal of Civil Engineering and Technology (IJCIET) Volume 9, Issue 9, September 2018, pp , Article ID: IJCIET_09_09_009 Available online at ISSN Print: and ISSN Online: IAEME Publication Scopus Indexed FEASIBILITY STUDY AND ECONOMIC ASSESSMENT FOR AL-QADISIYAH UNIVERSITY HOSPITAL OF SPECIALIZED SURGERIES S.A. Hasan Civil Engineering Department, College of Engineering, University of Al-Qadisiyah Al-Diwaniyah, Iraq A.D. Albdiri Civil Engineering Department College of Engineering, University of Al-Qadisiyah Al-Diwaniyah, Iraq A.H. Mohsen Civil Engineering Department College of Engineering, University of Al-Mustansiriyah, Baghdad, Iraq ABSTRACT A feasibility study was conducted to evaluate investment opportunities for establishing a university hospital of 50 beds capacity. The hospital is intended for providing healthcare services and teaching purposes. The healthcare services focus on advanced (specialized) surgeries. The investment opportunity is based on the concept; Build, Operate, and Transfer (B.O.T). Net present value, recovery period, and internal rate of return were used for the financial analysis and profitability of the hospital project. Results show that internal return rate (IRR) of (10.6%) and recovery period of (6) years are achievable. The project is considered economically feasible. Key words: feasibility study, B.O.T, Investment, Economic analysis, University hospital. Cite this Article: S.A. Hasan, A.D. Albdiri and A.H. Mohsen, Feasibility Study and Economic Assessment for Al-Qadisiyah University Hospital of Specialized Surgeries. International Journal of Civil Engineering and Technology, 9(9), 2018, pp INTRODUCTION The University of Al-Qadisiyah has realized the ultimate needs of the population of the Al- Diwaniyah province for healthcare, and its role to meet these needs through establishing a university hospital to provide both the public healthcare and the teaching purposes. Unmet health needs of populations has been recognized by the World Health Organization (WHO) 63 editor@iaeme.com

2 Feasibility Study and Economic Assessment for Al-Qadisiyah University Hospital of Specialized Surgeries due to critical funding gap, as only 30.4% of the required funding was received in the year 2017[1]. Al-Diwaniyah province is not far from this poor health situation. Health facilities are still losing essential health staff due the cumulative and recent spikes in departures to Europe [2], and the WHO continues to find many hospitals throughout Iraq in a poor state of repair [3]. This has called for a responsible response from the university of Al-Qadisiyah, and a proposal to utilize available resources to tackle the enormous health challenges in the province of Al-Diwaniyah through a new strategy for investing in health [4] was evaluated. An area of 2500 m2 belongs to the university of Al-Qadisiyah and located in an emerging commercial and residential area was chosen to construct and operate a 50 beds hospital. It was suggested to adopt the B.O.T model as an investment approach and a detailed feasibility study was carried out to demonstrate the profitability of the proposed hospital. The proposed economic assessment for the B.O.T approach has shown that 10.6% IRR and 6 years recovery period are achievable. This certainly encourages investors to invest in health sector and the university of Al-Qadisiyah will benefit of the establishment of the proposed hospital. 2. PROJECT DESCRIPTION The hospital consists of 11 surgical units (ENT surgery, Chest and blood vessels surgery, Ophthalmology surgery, Kidney surgery, orthopedic surgery, Face and Jaw surgery, Neurological surgery, Endoscopy tract surgery, Toxicology unit, Radiology department, Intensive care unit). The project is a 4-stories building of 1725 m2 each, located in the district of UM Al-Khail at (4/4175) area number as shown in Figure (1). The total available area for the project is 2500 m2. Out of the total area, 775 m2 is available for landscaping and service Figure 1 Project site The project has been announced by the university of Al-Qadisiyah for investment to meet the need of the university for a teaching hospital and to participate in compensating the 64 editor@iaeme.com

3 S.A. Hasan, A.D. Albdiri and A.H. Mohsen shortage in the specialized surgery services to the people of Al-Diwaniyah. The recommended model of investment is the B.O.T model, in which, the university offers the land and medical consultation, while the investor is responsible for the construction, medical equipment, operational costs, and running services. Both partners (the university and investor) benefit of the hospital services. The partnership is governed by the investment law number (13/2006) and related regulations. 3. THE B.O.T MODEL The BOT model consists of the following contracts and agreements; [5], [6]. 1. Concessionaire contract. 2. Loan Agreement. 3. Shareholder Agreement and Shareholding Agreement. 4. Construction Agreement. 5. Supply Agreement. 6. Off-take Agreement. 7. Operation and Maintenance (O&M) Agreement. The BOT model was successfully applied in many countries as shown in Table (1). Table 1 BOT investment successful experiences for the period ( ) [7], [8]. Country Project B.O.T model Cost (million dollars) France -Britain Channel Tunnel B.O.T 55 year Taiwan Highway Traffic System / Taipei B.O.T Malaysia Highway Road B.O.T30 year 3400 Mexico Coal power plant B.O.T 3000 Thailand Metro Suspension System B.O.T 30 year 2981 Japan Kansai International Airport B.O.T Argentina Water and sewage services for the B.O.T 30 year 4000 city of Buenos Aires Thailand Asia Network Communications B.O.T 25 year 4000 China Nuclear Power Plant B.O.T RESEARCH METHODOLOGY The methodology of research adopted for this work covers the following stages; Stage I: conducting a technical feasibility and Marketing Studies. Stage II: conducting a strategic analysis (SWOT analysis). Stage III: conducting economic assessment and feasibility studies. Stage IV: conclusions 5. SWOT ANALYSIS SWOT analysis was carried out to determine the impact of strength, weakness, opportunity and threats on the profitability of the project. [9] Strengths: The following points were considered as the strengths of the project; Rare competitive projects within the area of the project. Providing advanced surgery services. Excellent location editor@iaeme.com

4 Feasibility Study and Economic Assessment for Al-Qadisiyah University Hospital of Specialized Surgeries Exempting medical equipment from income tax. Medical staff availability. Weaknesses New investment experience in the Al-Diwaniyah province. Opportunities Contributing to unemployment reduction. Providing teaching opportunities for the students of the college of medicine/ University of Al- Qadisiyah. Providing medical services for the nearby governorates. Threats: No threats 6. COST AND REVENUES Fixed costs: fixed costs can be divided into capital and annual fixed costs. The cost of capital Table (3) summarizes the capital costs of the project. Table 3 Summary of capital cost of project No 1 2 Item Cost ($) Land Available Buildings and utilities installations ground floor (1725) m 2 1,725,000 1,380, ed floor (1725) m 2 1,380,000 3ed floor (1725) m 2 1,380,000 Service facilities and gardens 98,000 Cost of medical equipment 4,000,000 Constituent costs 37,000 Total of capital fixed cost Annual fixed cost: depreciation, maintenance and repair represent the constant annual costs as detailed in Table 4. Table 4 estimated annual fixed cost (1) Item (2) Cost $ (3) Rate of Dep. Dep. ($) (4) Annual percentage of Main. Annual Main. ($) Buildings 5,865,000 3% % (Machines and medical equipment) including setting cost 4,000,000 10% % Sum Total sum $ Variable costs: variable costs included staff salaries and annual costs. Staff salaries: The estimated salaries of the staff are presented in Table (5) editor@iaeme.com

5 S.A. Hasan, A.D. Albdiri and A.H. Mohsen No Table 5 Salaries of the staff service type No. Monthly wages ($)/one hospital director Resident doctor Radiologist and sonar Doctor of Laboratory Analyst Nurse medical assistant Accountant Service workers administrative employee Generator operator Electric and mechanical workers Total sum. 51 Annual wages ($) Annual variable cost: Table (6) details the annual variable costs. Table 6 Annual variable cost Item administration costs A specialist Surgeon doctor costs Advisory and consultation costs Electricity fees Water fees Running cost of the generator Cost of sanitary materials and supplies Total annual variable costs Cost ($) The variable costs are assumed to increase by 3% every five years. The inflation rate is assumed to be 2% as it has not exceeded 2% since 2012.Table (7) shows the distribution of fixed and variable project costs over the life of the investment project. Year Fixed costs $ Table 7 distribution of fixed and variable costs Variable costs $ Total cost $ Current value of costs at 10% discount rate Current value of costs at 50% discount rate editor@iaeme.com

6 Feasibility Study and Economic Assessment for Al-Qadisiyah University Hospital of Specialized Surgeries Revenues Admission annual revenue = $ 6,000,000 Outpatient revenues = $ 90,000 Emergency services revenues = $ 60,000 Total annual revenue = $ 6.15 million Table (8) details the project revenue analysis, assuming 5% inflation rate every five years. Table 8 Project revenue analysis Year Revenue $ Current value of returns at 10% discount rate $ Total cost $ Current value of $ at 50% discount rate ECONOMIC FEASIBILITY STUDY 7.1. Net Present Value (NPV) The net present value (NPV) is defined as the sum of the present value (PVs) of incoming and outgoing cash flows over a period of time [10]. Based on the current rate of interest, adopted by the Iraqi banks, the present value of the costs and revenues until the target year were calculated using equation (1). [10] (1) At a rate of 10%, the net present value of the invested money in this project turned to be positive as shown in Table (9). As NPV is positive, the project is economically feasible. Table 9 Comparison of discounted costs and revenues NPV ($) Discounted Cost($) Discounted Returns ($) Discount rate % % 68 editor@iaeme.com

7 S.A. Hasan, A.D. Albdiri and A.H. Mohsen 7.2. Internal Rate of Return (IRR) The discount rate, which is often used in capital budgeting, makes the net present value of all cash flows from a particular project equal to zero. [10] Table (9) shows the difference between the net discounted revenue and the net discounted cost of the same discount rate through which the net present value and the discount interest rate can be calculated. From the adoption of different discount rates, the internal rate of return can be calculated by interpolated. Internal Rate of Return (IRR) was estimated to be10.6%.table (10) shows the annual Profit of the project. Table 10 Annual profit Year Total Annual Annual Annual Costs $ Revenue $ Profit $ Capital Recovery Period The internal rate of return of investment is 10.6%, on which profits are measured. The period of capital recovery was calculated using equation (2). [11]. Recovery period = Investment cost of the project + (investment cost minimum required rate of return on investment) Net annual cash flows (annual profit) (2) Since the total cost of the project is $ 10,000,000, the annual profit during the first five years is $ The original refund period of the investment = 6 years from the start of the operation. This is after adding the additional amount that represents the minimum return on investment that the project accepts to overcome the problem of ignoring cash flows after the redemption period. Figure 2 Break- even point diagram 69 editor@iaeme.com

8 Feasibility Study and Economic Assessment for Al-Qadisiyah University Hospital of Specialized Surgeries Consideration that the project is sensitive to the increase in variable income by a certain percentage as the internal rate of return increases in this case, the amount invested in less than 6 years from the start of operation, which is not far from the investor's perspective. Figure (2) explains the break even point, in which, costs and revenues are equal and the profits of the project are taken beyond it Evaluation of Benefit Cost Ratio B/C Benefit Cost Ratio `is defined as present value of net positive cash flow divided by net negative cash flow at discounted i. If B/C 1, Alternative is economically feasible [12].as per equation (3) [13] : Where: B: benefits of the project; I: initial capital investment; O&M: operating and maintenance costs. Table 11 shows calculation for B/C ratio. (3) Table 11 Shows the calculation for B/C ratio PV of net positive cash flow PV of net negative cash flow B/C Sensitivity Analysis Sensitivity analysis allows for some data and information on key variables and the extent of their respective contribution degree of risk [14]. The four most important factors that affect are the discount rate, the construction cost, the operation and maintenance Cost, and the total benefit value. Revenue is estimated as little as possible, so the increase in revenue leads to an increase in the present value and the benefit-to-cost ratio. This is in the interests of the project. The lack of certainty in determining the costs of increase or decrease also affects the feasibility of the project. Table 4 shows the percentages of increase and decrease in cost and their impact on the feasibility factors of the project The decision is sensitive to the benefits. When the benefits increase, the choice becomes more feasible, but when the benefits decrease, B/C ratio becomes less than unity The purpose of this analysis is to observe if a change in any of these factors may cause the project unfavorable or be favorable. Since the assumptions and estimates have a wide range of uncertainty, the change in the cost will range from -5% to +5% of the originally estimated value. With discount rate, changing from 8% to 10.5%, the PWV varies from $ to $ and B/C ratio varies from 1.03 to 1 but when discount rate must not be increase than 10.6%, the project becomes less feasible. When the revenue vary - 10% to +10%, PWV varies from $ to $ and B/C ratio varies from 0.9 to So the project is sensitive to the revenue editor@iaeme.com

9 S.A. Hasan, A.D. Albdiri and A.H. Mohsen With the construction cost changing from -10% to +10%, the PWV varies from to and B/C ratio varies from 1.33 to1.328, the project stay feasible. Therefore, when the revenue increase, the project becomes more feasible. It is only when the total annual revenue reach -10% of their base value (decrease) that the B/C ratio for the project becomes less than unity. Hence, it can be concluded that the project is feasible as long as its associated benefits are considerably high. The decision is sensitive to the revenue. 8. CONCLUSIONS The Build, Operate and Transfer (B.O.T) model has shown a considerable participation in mitigating the state's financial crises and can be adopted to raise the level of health services. The results confirm that the use (B.O.T) investment system for the construction of the 50 beds hospital is feasible. The new hospital can improve the quality of the healthcare in the city of Al-Diwaniyah. Considering the project is sensitive to the inflation rate, the revenue is expected to rise 5% or more per five years. At a 10% discount rate, the net present value of future cash flows will be positive. This shows that the project is economically feasible. As the expected IRR is 10.6 %, there will be encouragement for the establishment of the project. It was also determined that from the calculation of the capital recovery period, the payback period is 6 years. The project is feasible as long as its associated benefits are considerably high. The decision is sensitive to the revenue. REFRENCES [1] [2] =1 [3] [4] a=1 [5] ASHISH P. WAGHMARE, S. S. Financial Analysis of Infrastructure Project - A Case Study on Built-Operate-Transfer Project (1) in India International Journal of Engineering and Advanced Technology (IJEAT) ISSN: , Volume-1, Issue-5, June 20. International Journal of Engineering and Advanced Technology (IJEAT) ISSN:, Volume-1, Issue-5., [6] Nassar, d. J. BOT Contracts and Modern Development of the Commitment Contract,. Cairo: Arab Development House, [7] Al Mubarak, S. Build, Operate and Transfer (BOT) Project Delivery System in Saudi Arabia. Saudi Arabia. [8] Alberto, m. Public Financing into Build-Operate-Transfer Hospital Projects in Italy. Journal of construction engineering and management, 2012, Volume 138, Issue 11 ( ). [9] Team, F.SWOT Analysis Strategy Skills. E-book.. Retrieved 2016, from (2013, March 2) editor@iaeme.com

10 Feasibility Study and Economic Assessment for Al-Qadisiyah University Hospital of Specialized Surgeries [10] Blank L., T. A. Engineering Economy, Seventh Edition. McGraw Hill. New York, USA: McGraw Hill. (2012) [11] Sarker, S. A. Feasibility of producing Nano cement in a traditional cement factory in Iraq. Case Studies in Construction Materials, (2017), [12] Samaan, NabilA, Feasibility Study for a Sustainable Public Transit Network linking to Beirut city in Lebanon. International Journal of Civil Engineering and Technology (IJCIET), ISSN (Print), ISSN (Online), (2014). Volume 5, Issue 5, May (2014), pp IAEME [13] Shuzhong Zhang, Man Hong.,Robust Approach to Risk Management and Statistical Analysis, Thesis Department of Industrial & Systems Engineering, College of Science & Engineering, University of Minnesota. [14] Hasan,Sada Alyasri and Alhamidi,Ibtisam.(2017), Engineering Economy.1st ed.baghdad.isbn editor@iaeme.com