The Essentials of Public-Private Partnerships for an Owner
Public-Private Partnerships (PPP or P3) are a popular topic in healthcare today when it comes to developing and delivering large scale projects. The basic definition for a PPP is a relationship between the public and private sector to facilitate the application of private sector expertise and resources to the delivery of public services. These partnerships can take many forms and have existed for quite some time having their origins in services outside of healthcare.
There are many benefits to pursuing a PPP approach. When properly executed, these benefits may include:
Optimizing the public sector/governments role in providing services to the community.
Public Private Partnerships can enable projects to move forward in cases where resources are insufficient to be delivered solely by the public sector. In many cases, the private sector’s contribution includes financial vehicles necessary to support project.
Where private financing is incorporated into the PPP, the term Private Finance Initiative (PFI) is often used. In the end, the primary objective is to maximize the value to the public sector/owner and thereby the value to the community.
The allocation of responsibilities and risk to the party best able to execute.
For example, part of the arrangement may be for the specifying, purchasing and maintenance of equipment. Given the complex and costly nature and the likelihood that the government would have limited expertise, the responsibility could be shifted to a private sector expert with the public sector overseeing to ensure objectives are met.
Improved communication and execution of projects.
Large scale projects require a team that includes engineers, architects, builders, consultants and more. This usually means that several firms are involved and communication and responsibilities can often become challenged. By uniting the teams under the PPP umbrella, the sharing of risks demands close collaboration and coordination.
When united in a consortium to participate in a PPP initiative, the private sector firms will normally create what is called a Special Purpose Vehicle (SPV) to provide the oversight for the collaboration and be the contracting arm with the government. Organizations that often fall under SPV’s include banks and/or private equity for financing, architects, construction firms, service providers and equipment/Information Technology providers.
The formation of Special Purpose Vehicle can often be a highly complex exercise given the scale and scope of projects, ensuring all client needs are met and the proper deliver structure and management is established. For this reason, the actual bidding process for PPP projects can be very long.
Case Example – Barts & The London NHS Trust
HOK is the architect on what is believed to be the largest PPP healthcare project in the world – the redevelopment of Barts and The London NHS Trust Hospitals. The opportunity was threefold: to combine the operations of two historic teaching hospitals, develop a corporate identity for each hospital yet a single one for the trust, and deliver healthcare provision for the people of the City of London, East London and beyond.
The consortium is responsible for building, maintaining and operating the buildings of the new hospitals, and the contract extends for 30 years from construction completion. At the end of this period, the buildings will revert to NHS ownership.
Throughout each phase, Barts and The London NHS Trust will continue to be responsible for the delivery of all healthcare services to patients, while the private-sector partner is responsible for the design, building or refurbishing, and maintenance of the buildings. HOK’s work has focused on best practices and envisioning what a modern hospital should look like in the context of the evolution of healthcare.
When construction is complete, The Royal London will be the largest new hospital in the United Kingdom. The construction program is worth £1 billion and the combined facilities will provide a total of up to 1,248 patient beds. The design and construction project on the two sites covers a built area of 200,000 square meters, and comprises new construction and refurbishment of some of the existing facilities.
Since commencement of the Barts and The London project, the different models and approaches for PPP arrangements have continued to evolve. Markets where PPP has gained the most traction include Canada, Europe and the Middle East. The PPP does not exclude the development of hospitals aimed at the medical tourism market and would be beneficial in situations where the government sees an opportunity to attract foreign patients and wants to encourage this growth.
Challenges & Risks
Given the complexities and relatively short track record of PPP in healthcare, several challenges exist. A few major ones are highlighted below:
- As the relationships often involve 20-30 year terms, ensuring that the long term strategic and operational objectives are maintained can be difficult
- Unless the original specifications are clear and logical, owners have often had insufficient numbers and poor quality of responses to PPP proposals. Obviously the goal is to have a competitive bidding process where each proposal can be easily compared; otherwise the value can be compromised. Having a sufficient response rate is also challenged by the fact that there is a limited number of firms that are able to partner and deliver on work of this size and scope – especially when they require international partnerships
- Even with shared financial considerations, governments are often still challenged to find adequate funding to execute on large scale projects
- The PPP contract becomes very challenging where the project program has significant changes – either in the development of the project or during the delivery of services over time. This inflexibility has led to situations where members of the consortium team have faced significant financial hardship through no fault of their own.
Keys to Success
The PPP approach can be an invaluable tool for developing healthcare projects and delivering services over the long term. The model and contracting methods will continue to evolve with changes in the industry as well as based on the unique needs at the country and owner levels. As one considers this approach and potentially moves forward, there are several ways in which success can be better guaranteed.
The input of strong advisors cannot be overemphasized.
The level of need is dependent on the project size and your experience in developing and managing PPP initiatives. In particular, the development of the Request for Proposal (RFP) documentation, legal specification and ongoing management and execution of the relationship are major areas of focus.
Do not overlook the initial feasibility and needs analysis.
Whether performed internally or by external consultants, properly determining the need you are trying to address is critical to the survivability of the PPP relationship. The estimation of demand and the impacts of changes in care delivery can have a material effect on results – particularly where 20-30 year operating contracts are being implemented.
As these services often occur prior to the release and contracting of PPP, they are supported through public sector funding. For this reason, they are often inadequately funded and scoped, but could cost the organizations involved millions of dollars down the road. Proper and clear definition of the owner’s intent is a strong indicator of long term success.
Be detailed and clear in the specifications and performance expectations.
This is both to ensure a proper response and contract from the consortium as well as helping to ensure the long term objectives of the owner (such as their commitment to providing for community health) are met.
Maximize competition in the bidding phase.
When the RFP documentation is poorly scoped or terms overly restrictive, owners have faced situations where only a single bidder came forward. This challenges the ability to evaluate different approaches and ensure the value for the work being received is maximized.
By providing clear and detailed needs and instructions, allowing a sufficient amount of time for response and enabling all participants to benefit, the likelihood of many teams coming to the table is increased. The more transparency that can be provided during the procurement process, the better.
Properly allocate risk and reward to each party.
In order for the PPP to achieve the optimal results, each organization needs to have the proper incentives and disincentives for performance. For those components that are involved over the long term, for example service providers, there needs to be mechanisms in place that enable them to adapt and deliver as expected in the face of the evolution of care delivery.
Appoint or hire a Compliance Consultant.
This individual participates in the entire bidding process and remains as an advisor to the owner through each phase of the project. The optimal skill set of the Compliance Consultant includes:
- Skills in medical business planning
- Forward-thinking medical planning
- Experience in writing compliance specifications
- Experience in dealing with consortia teams
Many of these suggestions revolve around knowing your organizational limitations and supporting with outside assistance where appropriate. Expertise in this area remains limited, but is growing at a rapid rate as more and more projects pursue PPP and PFI approaches.
Public Private Partnerships are here to stay in healthcare and should be considered, particularly for major publicly directed projects. When properly managed and planned for, the PPP approach can provide tremendous value to the public sector by leveraging the expertise and resources of the private sector. Hopefully this article provided a strong foundational understanding of these arrangements and the associated challenges and opportunities that can be found.
Todd Fitz is a Principal at HOK and the Director of Healthcare Consulting. In this role, he is responsible for developing and implementing HOK’s global health care consulting strategy. In his 14+ years of health care experience, Todd has developed expertise in finance, strategy and operations and worked in a variety of settings, including academic medical centers, community hospitals, insurance organizations, government agencies, physician groups and medical device companies. He may be reached at Todd.Fitz@hok.com.
HOK’s Health Care planning and design services create patient care innovations. Our work with clients including academic medical centers, hospitals and other health care organizations, redefines modern care environments that support fast-changing requirements while anticipating future needs. With the largest team of LEED Accredited Professionals globally, HOK’s health care team emphasizes the need for health care facilities that are expertly functioning, sustainable or regenerative, and to be spaces that promote health while remaining aesthetically pleasing. Our teams have extensive experience in the delivery of P3 projects and are global leader in this area. Our design process is sophisticated, community-oriented, partnership-driven, and we commit to the satisfaction of patients, families and staff. To learn more about health care at HOK, visit: www.hok.com/healthcare.