No. 25: Public-private Partnerships

January 2010

Background

Over the past several years, some Canadian Provinces have undertaken, or have considered, fundamental changes to the design, building, finance, maintenance and operations of hospitals by moving from traditional public financing and procurement to public-private partnerships (P3s).  Ontario, Quebec and British Columbia have been most notable in this momentum, although Alberta has repeatedly used P3s for building schools and has regularly considered this approach for new hospitals and long-term care facilities.  This e-Rounds examines the conceptual basis underlying P3s, the potential benefits and associated risks for Canada’s health care system, and actual outcomes of completed P3 projects.

Methodology and Limitations

This e-Rounds is drawn from a two-part series published in CMAJ in 2008 authored by the CMAJ editorial staff and Ann Silversides.  There is no empirical work carried out in these two papers, which draw from previously published literature and reports, though no bibliography is provided.  We have selected this work because of its timeliness, relevance, and Canadian origin.  We review and précis the narrative comments detailing the why, what, who, where, and risks of P3s.

Commentary

The report notes that 19 facilities are being financed and constructed through P3 contracts in Ontario with 7 more deals in progress.  Moreover, the long-awaited and massive McGill University Health Center in Quebec, arguably one of the largest hospital construction projects in the world, is likely to be a P3 project.  The authors note these developments are occurring with a minimum of public scrutiny, let alone debate. There is, however, experience with P3s elsewhere in the world and it is worthy of analysis.

The United Kingdom, for example, has embraced the P3 model (there called Private Finance Initiative or PFI) for over a decade.  Yet, the BMA has issued “dire warnings” about this approach, believing it has resulted in an exodus of resources from health care service delivery.  A UK public-accounts committee report in 2008 concluded that “money that was needed for patient care has been directed from the frontline and into the hands of private companies”.  Our CMA, aware of the UK experience, has raised concerns around value-for-money, transparency, capacity-building and risk-sharing, leading the CMA to call for the development of guidelines on the issue.

What are P3s?

P3s typically comprise a consortium of private companies that bundle together their services and bid on hospital projects.  The bids include provisions to design, build, and finance projects over prolonged periods and, at times, additional terms regarding maintenance and/or even operations (known as DBFO projects if all four components are included).  The private consortium fronts the money and the building in return for a long-term contract and repayment, with an added substantial return on investment and often a lease-back agreement.  Advocates claim the building is done sooner and the financial risk of construction delays is “absorbed” by the consortia.  Opponents claim that the financing costs are always higher, given that governments have access to the cheapest capital possible, thus saddling future generations with enormous debt. They further argue that the risks are not transferred or shared because, as evidenced by the recent global financial crisis, responsible governments will always ride to the rescue when essential public services are threatened.

Who are the P3s?

This is international business, often involving firms from the UK, Australia, Germany or the United States.  Their capital is derived from large international financial institutions and pension funds.  At least three provinces have created provincial agencies to deal with these firms, thus advancing the P3 agenda.

Where are P3s?

The first Canadian P3s were in Ontario and BC (2001).  At the time of the CMAJ article, Ontario had 23 hospital projects “in the works”.  In the Abbotsford Regional Hospital and Cancer Centre in BC, the hospital board balked at abandoning traditional procurement methods in favour of a P3 but was ordered by the province to accept DBFO bids. In the end, there was only a single bidder, and both the scope and project costs increased substantially.  A hospital in Brampton, Ontario, and a mental health centre in Ottawa have also proven controversial.  One problem cited is the “bifurcated hospital management” because of which the hospital and the private consortium each have conflicting interests.

Why P3s?

So, why is this happening?  Not surprisingly, the debate is strongly polarized.  Some governments appear convinced of the benefits of P3s, claiming that they need to embrace the expertise and financial leverage of the private sector.  With such partnerships, governments assert that they can be clearer about scope, costs, and risk up-front.  More importantly, they get much-needed facilities sooner, rather than later (or never).  Opponents see these developments as progressive privatization of health care, arguing that costs are always higher and public control is substantially relinquished to private interests.  Rather than the hospital board calling the shots, P3 financiers have substantial influence and, of course, exist to maximize profit and rate of return on their investment.

Summary

Governments in Canada appear to find P3s appealing for hospital design, building, finance, and even operation.  Despite the fact that the cost of government-borrowed capital is always lower, governments appear more willing to pay a private consortium more money, amortized over a longer term, than to make an upfront and publically visible (viz. politically risky) commitment.  There is no argument that costs are higher when borrowing is spread over time – this is no different than paying upfront for a home as opposed to carrying a long-term mortgage.  The argument for faster procurement is arguably valid, but at what cost?  Of particular relevance, the claim of risk transfer from governments to the private consortium—risk here having to do with cost control and time targets—appears to be shaky at best.  The counter-argument, of course, is that government (viz. the public) is always on the hook to bail out risky mortgages, as the recent US financial crisis clearly indicates.  Moreover, sound accounting methodologies and clarity around risk transfer and acceptance seem to be conspicuously absent.

What is most disturbing is that P3s represent a sea change in hospital procurement.  And these P3s are developing across Canada with essentially no public debate and very little awareness or understanding.  In fact, a recent BMJ article warns:  “just as Canada is embracing this approach to hospital development, it is being discredited in the UK.  This is the first threat in the privatisation of health care….we always thought you Canadians were more savvy.”

Ann Silversides. “Public-private Partnerships, Part 1: The Next Hospital Wave.” Canadian Medical Association Journal.  179(9) (Oct. 21, 2008): News Section.

Ann Silversides. “Public-private Partnerships, Part 2: Calculations of Risk.” Canadian Medical Association Journal.  179(10) (Nov. 4, 2008): News Section.

Click here to read the pdf of e-Rounds #25.

P3

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