The experience of public-private partnerships hospitals in UK: what can we learn in Spain?

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1 XXI International Conference on Industrial Engineering and Operations Management 9th International Conference on Industrial Engineering and Industrial Management International IIE Conference 2015 Aveiro, Portugal. July 6-8, 2015 The experience of public-private partnerships hospitals in UK: what can we learn in Spain? Rionegro O 1, Rodríguez-Monroy C 2 Abstract Most developed countries maintain important relationships with the private sector. The best-known case is United Kingdom, whose many years of experience developing public-private partnerships for the construction projects and management of hospitals has turned UK into a reference for others countries. In the case of Spain, with its limited experience, there is still no certainty whether this model has been beneficial for society or not. Based on the conclusions of the last official audits by the British public authorities, this paper presents the situation of the Spanish model in relation to the two most committed aspects of such systems: the cost-profit ratio and risks. Keywords: Public Private Partnerships; Project Finance Initiative; Hospital Management; British National Health System; Spanish Healthcare. 1 Introduction The delivery of health services in most OECD countries involves some kind of model of public-private partnership (PPP). In systems with an investment that is mostly public, they are provided with pharmaceutical products and services from the private sector. Meanwhile, in the mostly private, the State influences through capital injections and regulations. But in the case of hospital management this 1 Oscar Rionegro Sotillo ( rionegro.sotillo@gmail.com) Dpto. de Ingeniería de Organización, Administración de Empresas y Estadística. Escuela Técnica Superior de Ingenieros Industriales. Universidad Politécnica de Madrid. C/ José Gutiérrez Abascal, Madrid. 2 Carlos Rodríguez-Monroy ( crmonroy@etsii.upm.es) Dpto. de Ingeniería de Organización, Administración de Empresas y Estadística. Escuela Técnica Superior de Ingenieros Industriales. Universidad Politécnica de Madrid. C/ José Gutiérrez Abascal, Madrid.

2 2 kind of symbiosis as these functions and level of detail increase becomes more complex: care service, maintenance, training, research and development, among others. The privatization of many public services became widespread after 1980, with the development of liberal movements to reduce the role of the state. In the health sector, this system was rejected due to the existence of market failures. Instead, quasi-market models were developed with two differentiated agents: the private sector and the public sector. In this article we are going to analyze the British and Spanish models in projects of public-private partnership for the construction and management of hospitals, in order to know how the relation between both agents is and the results that it generates. 2 Historical Developments in the UK The United Kingdom was the first country in the world to develop the concept of public-private partnerships for public services by allowing the provision of efficient, cost effective and measurable services within modern facilities. This fact has become UK in the world leader of the development of public-private partnerships in the health sector. The development of this model in public hospitals began in 1992 with the introduction of the 'Private Finance Initiative' (PFI) by John Major s Conservative Party as a way to make use of the capacities of management and business experience in the private sector, leading discipline in the delivery of public infrastructure (HM Treasury, 2012). In 1996 the first contract for the construction, funding and operation of a hospital of thousand beds in Norwich was signed. Five years later this hospital was delivered five months before the planned completion date and within the budget. Since then the National Health System (NHS) in the UK has developed a considerable experience in the management of this type of public-private partnerships in the healthcare sector, with more efficient procurement systems that minimize costs when establishing the contract with diverse agents for the construction and the management of the service contracts. The results show that the PFI model has been the dominant formula for the development of large projects of the NHS, with more than 10.4 million pounds sterling invested in the last decade to build hospitals in the UK (European Commission, 2014). The fact is that 75% of new hospitals built between 1997 and 2008 were financed privately (House of Commons, 2011).

3 3 3 The Audit The first reports were realized in the initial stage of the implementation of hospitals under the PFI model and yielded positive data. It was found that this system allowed to increase significantly the advance in hospital actions over the possibilities offered by the traditional financing, allowing payments along the life cycle of the infrastructure without representing a high initial impact in the public finances. They also found, in contrast of the conventional government contracts, a higher guarantee in complying with the deadlines (since only 24% of projects suffered delays, in opposition to the 70% that had taking place before), a lower deviation costs (22 % of cost overruns, compared to 73% in the conventional system) and even in non-clinical services savings in costs between 5 and 10% during the periods of construction and operation were even reflected (Mattocks, 2006). However, since 2008 a higher number of criticisms related to the hospitals under the PFI model began to appear when it started to collect an unclear and inexplicit form the justification and evaluation for the use of PFI models in terms of profitability (Parliamentary Treasury Committee, 2011), being able to understand that the public authorities did not assess in a correct form the different alternatives for the construction of new hospitals. 3.1 National Audit Office 2011 The consequences of this option to seize the future budgets appear in this report, with the knowledge of the existence of unmanageable pressures of debt to which the UK Ministry of Health had to respond in 2012 with an additional financial support of more than 1,500 million pounds for only 22 hospitals, and maintaining other 16 in the state of specific financial review. They also presented the existence of risks for the long-term profitability of these contracts (National Audit Office, 2011) due to the complexity of managing them, where the capacity was limited to generate savings due to efficiency in some areas and the promotion of continuous improvement. The long-term agreements, between 30 and 60 years generally, made the reconfigurations and the adoption of new models enormously difficult. Finally it was stated in this report that the maintenance of the lifecycle of the infrastructure, which represented the key benefit of this model, was not satisfied in more than 20% of the expectations.

4 4 3.2 Parliamentary Treasury Committee 2011 In this report it was found that hospitals under the PFI model were turning out to be always more expensive than the public borrowing (Parliamentary Treasury Committee, 2011), especially from the economic crisis when the cost of private equity was 8% while that of the government was 4%, representing a significant cost for the taxpayers. Besides the concern not only focused on the financing costs, but also on the inability to find evidences of savings and benefits in other areas of PFI that compensate these costs. Only in some cases savings in the construction and in some of the services were found. In this report the existence of any signs of real innovation was not noted either, although it was appreciated that the quality in the infrastructure was worse in general terms in the PFI hospitals. This report concluded by giving the only benefits of PFI hospitals models were not related to qualitative or financial issues, but with the possibility that the authorities could leverage their budgets without using the one they had assigned (Moreno, 2013). 4 The Spanish Case In 1991 the first reflection on the sustainability and the future of the NHS was performed in Spain. Four years later a new phase began in the development of private management models under the Law on Foundations of 1994, with four hospitals in Galicia, one in Mallorca, one in Madrid and another in La Rioja. This model was not developed due to its inability to demonstrate its advantages over traditional management system. The biggest turning point in public-private partnerships for hospitals in Spain took place in 1999 in Alzira. In this year, in this Valencia village, Alzira Hospital was started up, initiating a new stage of administrative concessions where a private company built a hospital and then it was in charge of its maintenance and, in some cases, the healthcare assistance in an area. Although in the first moment it only included specialized care, from 2005 onwards primary and geriatric care was also introduced (López, 2013). From 2007 Spain began to adopt the British model of PFI hospitals in Madrid, Baleares, Castilla y León and Galicia. This model is more advantageous for the public sector because it is not necessary to make a large down payment at the start (López and Gonzalo, 2013). The results in Spain of public-private partnerships in the construction and management of hospitals in Spain are conclusive: at the end of 2012 there were a total of 22 PFI hospitals and over 3,300 million Euros investment (Mendoza, 2013).

5 5 5 Challenges and Opportunities In Spain does not exist, nor has existed, an effort by the government to inform the public opinion about the reasons for public-private partnerships and their potential benefits, contrary to what the UK has been doing. To this day in Spain, we cannot find comparisons within the public sector, the publication of the contracts, monitoring reports, etc. It is a fact that, in the words of analysts as Gayle Allard, this generates a significant risk of opacity and information asymmetries that may prevent the public sector from obtaining value for money (Allard and Cheng, 2009). 5.1 Cost-benefit ratio Being a public hospital, the search for efficiency is focused on minimizing the payments recognizing that risks transfer to the private sector and the inclusion of incentives for the same one compensates higher financial costs. The assessment of the suitability of a financing system over another, it is usually realized with the analysis of the future cash flows of the project. Due to the mentioned lack of transparence, especially in something as simple as the financial aspects of a hospital project, it is found that a high number of publications in relation to this aspect with opposite conclusions. It is also surprising that in Spain the value for money is taken into account in contracts for public-private partnerships but not in public concession contracts. In favor of the justification of value for money in public-private partnerships projects for hospitals we can highlight the conclusion given by a simulated model for a hospital with an investment of 100 million Euros by a regional government and that with a discount rate the social marginal return on investment, has as result that the profits overcome 10% in respect of direct production by the public sector (Contreras, 2008). Especially relevant when the Autonomous Communities are the promoters, which currently have the competences in this matter. It is necessary to emphasize in this section the existence of different situations that although in the studies they are not included, they exist and have taken place in reality. For example the fact that public authorities begin easily the construction of hospitals that, due to the economic difficulties of putting them into operation, they have not been opened while the taxpayers have had to realize committed payments without receiving any services. Others question the efficiencies that these models present in the hospital management raising for the new Hospital of Vigo an analysis of future cash flows for three types of contracting: conventional financing, through a public company and under the PPP model. This analysis concludes with results that reflect the lowest costs for the conventional system where the public company has 14% higher amounts and the costs for

6 6 the public-private partnership model are multiplied by 2.4 for the regional healthcare service (Reyes, 2012). 5.2 Risks The risk transfer to the private initiative is one of the fundamental pillars of the public-private partnership models. Through this obligation, which is imposed in the context of the European Union, the need to avoid taking excessive risk by the public sector during the lifetime of the infrastructure is expressed, especially in the appearance of future effects on debt and national deficit. This motivates the public-private partnerships the search for optimizing risk by transferring it to the most prepared party to bear it with the minor cost. There are mainly three risks that must be managed in projects of public-private partnership of hospitals: construction, availability and demand (Masso and Horta, 2008). The demand risk, which is supported mainly by the private sector, was the first to be addressed. An example is the case of the first seven PFI hospitals in Madrid, where the expected data were lower than the real demand, forcing the regional government to increase the annual fee (Sánchez, 2014). A risk also evidenced in the British experience is the replacement of the initial private partner for a wider array of actors through the creation of secondary markets. This possibility is not regulated in Spain and it is possible that this condition occurs identically. In other risks, the majority supported by the private sector, there still have not taken place situations in the context of the construction and management of hospitals by private entities. Furthermore, for a better risk transfer, a series of sanctions are set forth in the contractual relations in case of qualitative or quantitative non-compliance. Although the reality indicates that these actions are executed with difficulty by the public sector, giving a sense of impunity to the system. This aspect supports the idea of many authors who consider the hospital concession as too big to fail (Minue and Martín, 2013). Thus it results in a fictitious risk transfer, where the public sector is always the one which should assume them ultimately (Sánchez et al, 2013). 6 Conclusions The lack of transparency is the biggest criticism of public-private partnership models in Spain. Not only because the damages that this level of opacity involve of sociopolitical statements, which are many and varied, but also the disad-

7 7 vantages that this situation creates for the public sector itself to encourage the creation of situations with asymmetric information. This hinders the creation of value for the public sector through the comparative study and the mistakes and successes analysis based on their experiences. Therefore it is intended to outline in this article the main self-criticism that the British do on their system, with the aim of bringing it to the Spanish reality on the field. On one hand, the main concern is the cost-benefit ratio. In the case of Spain, only simulated studies justify this option. These studies have not taken into account the effects of the crisis on the cost of capital, which in the British case were fundamental to justify the loss of interest in this type of project. Also it is necessary in these studies to include various alternatives which imply the payment of additional amounts and which have occurred in reality. The main potential of these models is to minimize the risks in the construction, as it has been verified in the United Kingdom. In Spain, although it is not currently available in the official data, the contracts collect payment systems to the private sector related to the situation of the construction, so in this case the public sector is protected against these risks. Concerning the other risks transfer, the Spanish model has similar characteristics to those in the UK. Even existing abundant literature related on the importance of generating contractual relations with clarity and high level of detail, we share the idea that this point is the Achilles heel of the public sector when these projects are considered too big to fail. One of the biggest criticisms of the model is that the implementation of a significant number of outsourcing projects generates budgetary obligations hardly manageable in the future, as it has already been seen in the UK. In the case of Spain, the absence of a shield on the traditional health system can generate in the medium term a transfer of funds from it to face the payment of the acquired obligations. Finally we consider that it is necessary to create in Spain a State office that coordinates public-private partnerships projects for Spanish hospitals. This office should serve to inform the public opinion and the public sector itself, in order to minimize the shortcomings that asymmetric information has today for public administrations. 7 References Allard G and Cheng A (2009) Public-Private Partnerships in the Spanish Health Care Sector. Journal EPPPL Contreras C (2008) Análisis económico financiero de la colaboración público-privada en hospitales: el caso español. Financial Analysis Review, 106. European Commission (2014). Health and Economic Analysis for an Evaluation of the Public- Private Partnerships in Health Care Delivery across Europe. Brussels.

8 8 House of Commons (2011). Private Finance Iniciative. London HM Treasury (2012) A new approach to public private partnerships. London López JM and Gonzalo L (2013). Producción pública, gestión privada y eficiencia económica del Servicio Nacional de Salud. Doctoral thesis. UNED, Barcelona López JM (2013) La gestión privada de los servicios sanitarios públicos: los modelos Alzira y Madrid. Quarterly journal from the Faculties of Economic Sciences and Law ICADE. 2013:90: Masso G and Horta M (2008) La colaboración público-privada en el sector público español. PWC Mattocks R (2006) PFI. La experiencia británica. Management and evaluation of medical costs review. Vol. 6 - Number 4 Mendoza MJ (2013) Privatizaciones en el País Valenciano. La Catarata Books. Madrid Minue L and Martín JJ (2013) Gestión privada: más eficiente?. Economy and Health Journal. 78. P Moreno M (2013) Experiencias en el ámbito de la gestión sanitaria de las fórmulas de colaboración público-privadas. Extraordinario XXII Congress Law and Health. 26: Health Lawyers Association. June Toledo Murillo J (2009) Diez años del modelo Alzira. Association for the Advancement of Management Journal 240:38-39 National Audit Office (2011). Lessons from PFI and other projects. London Parliamentary Treasury Committee (2011) Private Finance Initiative. 17th Report. London Reyes F (2012). Análisis económico-financiero de la colaboración público-privada (PFI) del nuevo hospital de Vigo. Salud 2000 Journal, 2012:137:10-18 Sánchez F, et al (2013). Gestión pública y gestión privada de servicios sanitarios públicos: más allá del ruido y la furia, una comparación internacional. Real Instituto Elcano, T4/2013 Sánchez M (2014). La privatización de la asistencia sanitaria en España. Laboratorio de Alternativas. Working document 182/2014