The Risks Of Private Public Partnerships To The Health System
- Bill Rosenberg, CTU Economist
A version of this article was published in The Specialist, the quarterly newsletter of the Association of Salaried Medical Specialists which represents salaried senior doctors and dentists in District Health Boards.
The Canterbury District Health Board has been instructed by the Government to consider using a Private Public Partnership (PPP) to rebuild Christchurch Hospital following the earthquake damage it sustained. Clinicians at the hospital have publicly expressed their concern at this development. Dr Mike Beard, a former clinical director of haematology and general medicine at Christchurch Hospital, looked at the UK experience (called the Private Finance Initiative or PFI there) and found that “the way PFI has been introduced in Britain verges on a gigantic scam”.(1). Haematologist Dr Ruth Spearing, chair of the Canterbury Hospitals’ Medical Staff Association, concluded that: “We hope those considering the future of our Canterbury health system don't make the same mistakes of our British cousins and other countries by locking us into expensive, inflexible and inefficient private arrangements, which primarily serve the interests of financiers not patients”. (2)
PPPs take a variety of forms, but in general hand over the financing, design, construction, maintenance and operation of a facility to a private operator. What “operation” means can vary. It provides services that are in theory not related to health, leaving health professionals and managers to provide the medical services. But it is often difficult to draw hard lines: cleaning, catering and orderly services can all have important impacts on patient health, safety and recovery, for example. Operators often control retailing and vending machines in the building, with implications for advertising and the health impacts of food and other goods sold.
Learn From UK’s Mistakes
PPPs have been hugely controversial in the UK. Introduced in large numbers into many areas of the public sector including health, education, prisons, courts and roads by Tony Blair’s New Labour government, it is significant that they are now being severely criticised by conservative politicians and media as a waste of public funds. The conservative Daily Telegraph reported in December 2011 for example (3) that Andrew Lansley, the Health Secretary in the Conservative-led UK government, had complained that hospitals are “being forced to spend extortionate sums on private contractors rather than spending that money on helping sick patients get better”. The Telegraph reported that: “Official figures show that taxpayers are committed to pay £229 billion for new hospitals, schools and other projects with a capital value of just £56 billion. Much of the additional spending goes on expensive maintenance contracts”. It gave examples: “North Staffordshire National Health Service (NHS) Trust paid £242 to put a padlock while North Cumbria University Hospitals NHS Trust paid £466 to replace a light fitting and £75 for an air freshener. A trust in Salisbury paid £15,000 to ‘install a laundry door following feasibility study’”.
Unfortunately, these are by no means unique. There has been a series of critical investigations by the Public Accounts Select Committee of the UK Parliament. In 2011 it reported that: “In the present public expenditure climate there are legitimate concerns being expressed about the continuing financial cost of PFI for public organisations such as NHS Trusts. Some of Government's case for using PFI has not been based on robust analysis, but on ill founded comparisons and invalid assumptions… At present, PFI deals look better value for the private sector than for the taxpayer”. (4)
The Treasury Select Committee found: “Private finance has always been more expensive than Government borrowing, but since the financial crisis the difference between the costs has widened significantly. The cost of capital for a typical PFI project is currently over 8% – double the long term government gilt rate of approximately 4%. The difference in finance costs means that PFI projects are significantly more expensive to fund over the life of a project. This represents a significant cost to taxpayers. We have not seen clear evidence of savings and benefits in other areas of PFI projects which are sufficient to offset this significantly higher cost of finance. Evidence we studied suggests that the out-turn costs of construction and service provision are broadly similar between PFI and traditional procured projects, although in some areas PFI seems to perform more poorly. For example we heard that design innovation was worse in PFI projects and we have seen reports which found out that building quality was of a lower standard in PFI buildings”. (5)
A Nuffield Trust report looking at the financial pressures on the UK National Health Service, “Can NHS hospitals do more with less?”, noted the inflexibility of PFIs: “PFI schemes can commit trusts to substantial annual payments for up to 30 years. They usually cost more than the equivalent public provision – perhaps because they provide a higher standard of service … The Audit Commission (2006) has identified an association between large new building projects (mostly PFI schemes) and financial deficits in the NHS. There is relatively little flexibility in PFI contracts, and because of this it has been suggested that there will be pressure to concentrate hospital activity on PFI sites at the expense of non-PFI sites if there is contraction”. (6)
Taxpayers Stuck Paying PPP Debts For Decades
This last point is a poignant one in the current circumstances. PPP contracts are typically for 25-30 years. They give the PPP private consortium a 25-30 year monopoly over the operation of the buildings which enables it to charge extraordinary amounts for minor changes requested after the building has been completed. The Government is legally obliged to pay regular instalments on the contract in the same way as a household must pay interest on a mortgage. During recessionary times like the present, governments try to reduce spending by reducing maintenance and closing or making more efficient use of underused facilities. However these contracts are in effect privileged: payments cannot reduce, leaving less Government revenue available for other services. Even if there is no longer a need for a facility, payments must continue. According to another UK newspaper investigation in 2010: “Balmoral High School in Belfast closed six years after it was built, when pupil numbers halved. However, the Northern Ireland Department of Education owes the contractor £370,000 a year for the next 18 years” (7). As the UK government makes severe cutbacks, privatises increasing parts of the health services and moves care out of hospitals, the Telegraph says: “experts fear that PFI-built hospitals could be left half empty while trusts still have to pay millions every year in interest payments on the ‘mortgages’” (8).
One of the advantages of PPPs is said to be that the risk of building and owning facilities is shifted to the private sector. As has been seen, it may shift some of the risk around availability but not all risk. In any case, ultimately all risks in practice remain with the Government which cannot simply walk away from the failings of what remains, in the public’s eyes, a public hospital. The Government will be forced to intervene as it did in New Zealand in failed privatisations such as rail, Air New Zealand and banking which were similarly supposed to transfer risk to the private sector.
In fact, over a three decade contract, the risks of underuse or major change of use are high because changing medical practices, technology, demography and local health and population pressures change the nature and size of facilities that are needed. In addition, while a force majeure such as the Christchurch earthquakes may be insured against and provided for in PPP contracts in a general sense, it is almost impossible to anticipate and provide for all consequences such as the loss of population from Christchurch, and the change in its distribution. A Government could be left paying the cost of a hospital facility which is being used far below its planned capacity – or have no choice but to increase the capacity of a hospital controlled by a private operator.
Undoubtedly we will be told that in New Zealand we will learn from previous mistakes. But the evaluation of PPP deals is biased here as it was in the UK. In comparisons of public versus PPP provision, the cost of public provision is required to be based on private sector interest rates (which are much higher than those available to the Government) in the interest of “neutrality”, and public provision has an additional cost loading (usually 20%) for so-called “deadweight costs” of raising taxes, regardless of whether the public is happy with paying taxes for a satisfactory health system (9). Thus, when we are told that the saving on the recently let PPP for Hobsonville School was “about 1% over the (25 year) contract period”, it is likely that in practice it will significantly more expensive (10).
Surprise! “Savings” Due To Cutting Pay For Workers
In fact many of the cost savings in the UK have been due to lower pay for staff. The Centre for Public Services in the UK found that staff in private prisons were paid 25% less on average than their State counterparts and had inferior non-pay entitlements (11). Castalia, the self-described “pioneer in PPPs” (12) which was the consultancy which recommended PPPs in New Zealand schools, says they “assume a PPP contractor (in New Zealand schools) will improve the efficiency of caretaking and cleaning by 20% including through contracting out and stronger labour bargaining” (13).
PPP contracts can be designed to anticipate many possible contingencies, and we would hope they do learn from international experience. However, because of the complexity of the facilities being created and the very long period of the contract, they are hugely complex contracts. The new PPP prison in Auckland, at Wiri, will cost $21 million before construction even begins (14). The cost of setting up the Hobsonville School PPP has not been released but could have been as high as $6 million according to Castalia (15). A PPP for the London Underground which ultimately failed to get underway cost £445 million in negotiating the contracts (16). Lawyers and accountants clearly are winners in these deals. But ultimately, everything cannot be anticipated, there will be loopholes, unforeseen circumstances and difficulties in enforcement.
TPPA Will Make It Worse
With large sums like these at stake, it should be no surprise that arrangements like PPPs are likely to be encouraged by the Trans-Pacific Partnership Agreement (TPPA) currently under negotiation between New Zealand, the US and seven other countries. There is not space here to go into detail, but a number of provisions could affect our ability to control and back out of PPP arrangements in future. A Government procurement chapter is likely to include PPPs, and District Health Board (DHB) and Ministry of Health contracts would fall under it unless specifically exempted. In bidding for contracts over a certain value (and hospital PPPs would almost certainly be over the threshold), overseas suppliers from the TPPA countries would have to be treated at least as well as local suppliers. The design, project management, maintenance and operation of facilities which are all likely to be part of a PPP contract, would be subject to the Services chapter of the TPPA. Even if health as such is exempted, these services are unlikely to be. Once they are open to commercial provision, we have to allow any commercial operator with an operation or subsidiary somewhere in the TPPA countries equal rights to run them. These requirements would prevent us favouring local providers – whether part of a PPP or not – let alone requiring public provision.
The US is also insisting on a new type of requirement that has not been in agreements New Zealand has signed before: one on State Owned Enterprises. It is not clear yet which parts of central or local government this would cover, but it would certainly cover DHBs if they are not specifically exempted. The aim of such a requirement in the Agreement would be that if a Government-owned operation competes in any way with a subsidiary of a transnational corporation with a presence in the US or any other TPPA country, it would have to compete on a purely commercial basis with no public interest, economic development or other non-commercial objectives. Provision of Government funding – even capital at the low interest rates governments can borrow at – are likely to be disallowed. The parts of a DHB currently responsible for the maintenance and running of its hospitals would, once opened up by a PPP, be regarded as commercial competitors. They would have to operate on a for-profit basis from then on, increasing costs and compromising their public service ethos.
Transnationals Will Be Able To Sue Government
Finally, the US is insisting that the TPPA contains enforcement processes that would allow investors to sue the Government if their profits or asset values were threatened. A contract like a PPP would be regarded as an “investment” under the wide definitions that are standard in these agreements. If a PPP began to go wrong – perhaps because a DHB wanted to change the use of the hospital or because of unforeseen demographic changes or natural disaster – the Government could be faced with hugely expensive actions against it before private international dispute panels of trade lawyers with potentially tens or even hundreds of millions of dollars at stake. Such actions have been used against public health measures like plain packaging of cigarettes, against failed water privatisations, and in many other cases involving government regulatory action including on toxic chemicals, protecting the environment, and following financial crises.
While some staff may initially welcome the new facilities associated with a PPP, and the fact that they no longer have to worry about maintenance and other day to day tasks, in the longer run many regret the waste, loss of flexibility and impact on their patients. From a cost effectiveness point of view, it seems inevitable PPPs will be regretted. In the end that must rebound on the availability of funding for the rest of the health sector.