International Construction Law Review
IS THERE A PLACE FOR THE OPERATOR-LED HOSPITAL PPP IN AUSTRALIA? AN ANALYSIS OF THE PAST, PRESENT AND FUTURE
Rebecca Eyers1
Technical Director, Health Sector Lead – Victoria, AECOM
ABSTRACT
The use of Public-Private Partnerships (PPPs) to deliver social infrastructure in Australia is not new, and the bundling of contracts for design, construction, finance and maintenance, can provide value for money for suitable projects. A full outsourcing model, where the private sector also provides core services, such as clinical services for a hospital, may provide further benefits. This article considers whether improvements to the PPP model and the performance of the Northern Beaches Hospital (NBH) PPP, the first operator-led PPP in 15 years, mean it is time to revisit the operator-led model for the delivery of public health services.
INTRODUCTION
Public-Private Partnerships (PPPs) are one of several models employed for the procurement of public infrastructure. Representing approximately 10 per cent of public infrastructure investment in Australia,2 PPPs have been used to deliver over 1653 projects across transport, water and sewerage, energy, justice, health, education, and housing sectors.
The use of the PPP to deliver social infrastructure in Australia, including public hospitals, corrections facilities and schools is not new, and the bundling of contracts for design, construction, finance, maintenance, and ancillary services, such as building management, waste management
1 An earlier version of this paper was submitted for assessment in the University of Melbourne’s Master of Construction Law programme for the subject “Public-Private Partnership Law”. Email: reyers@student.unimelb.edu.au/Rebecca.Eyers@aecom.com.
2 Improving Public-Private Partnerships: Lessons from Australia, (Infralegal (2020) 8) https://documentcloud.adobe.com/link/review?uri=urn:aaid:scds:US:a136d8ac-6760-4228-80f5-7fe872383319 (last accessed 2 December 2021).
3 Public-Private Partnerships by Jurisdiction, (Infrastructure Partnerships Australia) https://infrastructure.org.au/chart-group/public-private-partnerships-by-jurisdiction/ (last accessed 2 December 2021); Bianchi, R, Drew, M and Whittaker, T, “When Public-Private Partnerships (PPPs) turn sour: Australian evidence” (Working Paper Series, CSIRO-Monash Superannuation Research Cluster, 20 April 2017) 1 (hereafter “When PPPs turn sour”).
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and disposal and cleaning, has been demonstrated to provide value for money for suitable projects. A full outsourcing model, where the scope of the PPP agreement is extended to include core services, such as clinical services in the case of a public hospital, may achieve further benefits for government and taxpayers, including access to private sector management and organisational efficiencies, further value for money and greater risk transfer and/or sharing with the private sector partner.
The full outsourcing model, also referred to as the operator-led model as it is often led by the private sector operator rather than equity investors, has been used with reasonable success in the justice sector, with several corrections facilities across the country4 operating under this model. However, its application to hospitals has been only moderately successful, such that, until December 2014 when the NSW government signed the contract for the NBH PPP, no Australian government had contracted for an operator-led hospital PPP in almost 15 years.
This article considers whether improvements to the PPP model in recent years mean that it is time again to contemplate the operator-led model for the delivery of public health services. It provides an overview of Australia’s hospital PPP history, including reasons for the failure of several earlier operator-led hospital PPP projects. It then considers NBH PPP, including project arrangements, likely reasons for government pursuing the operator-led model, and the findings of the 2020 government inquiry into the operation and management of the hospital.5 With consideration to past and contemporary hospital PPPs, including brief comparison with several international operator-led PPPs, the key risks, opportunities and challenges faced by the modern operator-led hospital PPP are identified and strategies to overcome or mitigate risks and enhance opportunities for the benefit of the project, government and taxpayers are evaluated. Finally, the article considers if the benefits of the operator-led hospital PPP outweigh the risks and challenges and whether there is indeed a place for the operator-led hospital PPP in Australia.
On initial review, the operator-led PPP appears to be a robust and feasible option for the delivery of public health services in Australia. However, it is the diametrically opposed purposes of the private and public sectors – the former motivated by profit and the latter by the provision of equitable access to health care, and the inability of government to transfer accountability
4 Victorian Correctional Facilities, (Victorian Department of Treasury and Finance) https://www.dtf.vic.gov.au/partnerships-victoria-ppp-projects/victorian-correctional-facilities (last accessed 2 December 2021); Ravenhall Prison Project, (Victorian Department of Treasury and Finance) https://www.dtf.vic.gov.au/partnerships-victoria-ppp-projects/ravenhall-prison-project (last accessed 2 December 2021); NSW Department of Treasury, Project Summary, New Grafton Correctional Centre, https://www.treasury.nsw.gov.au/sites/default/files/2017-09/New%20Grafton%20Correctional%20Centre%20-%20Project%20Summary.pdf (last accessed 2 December 2021).
5 Portfolio Committee No 2 – Health Parliament of NSW, “Operation and management of the Northern Beaches Hospital” (Final Report No 52, 27 February 2020) (hereafter “Operation and management of NBH”).
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for the provision of public health services, that presents the greatest challenge to the success of the operator-led model. The outcomes of the recent inquiry into the operation and management of NBH, including the recommendation “that the NSW government not enter into any public-private partnerships for future public hospitals”,6 is further evidence that the operator-led PPP is not appropriate for the delivery of public health services in Australia.
AUSTRALIA’S HOSPITAL PPP HISTORY
Governments have used various models to partner with the private sector for the provision of public health services. However, the establishment of Victoria’s Infrastructure Investment Policy in 1994,7 and the emergence of the PPP model, signalled a change in approach. Since this time, Australia’s state and territory governments have contracted for some 20 hospital PPPs, with these projects falling into two categories: those contracted prior to 2000 and those contracted after 2000, following the establishment of Partnerships Victoria8 and the subsequent development of a harmonised national PPP policy framework.
The primary difference between the pre- and post-2000 PPPs is the approach of government policy to risk allocation and the role of the private sector during the operating term, with the focus of the pre-2000 model on maximum risk transfer and the focus of the post-2000 model on value for money, optimum risk allocation and the public interest test.9
The Pre-2000 Hospital PPP
In the period to 2000, Australian hospital PPP projects were led by the private operator and involved government contracting with a private sector consortium to design, build, finance, maintain and operate the hospital, with all services, including clinical services, outsourced to the private sector. These projects were characterised by an almost complete transfer of risk to the private sector, with government only assuming risks associated with state-initiated modifications during construction and changes in demand during operation.10 Further, any payment, including for the design and construction of the asset, was delayed until the commencement of service
6 “Operation and management of NBH” (see fn 5) 166.
7 New Zealand Office of the Auditor-General, “Achieving public sector outcomes with private sector partners” (February 2006) 73 (hereafter “Achieving public sector outcomes with private sector partners”).
8 Victorian Department of Treasury and Finance, “Partnerships Victoria” (June 2000).
9 English, L, “Public-Private Partnerships: Modernisation in the Australian Public Sector” (PhD Thesis, University of Sydney, 2008) 66–67 (hereafter “Modernisation in the Australian Public Sector”).
10 Ibid, 68–69.
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delivery.11 Pre-2000 project examples include Port Macquarie Base Hospital (PMBH) in NSW, Latrobe Regional Hospital (LRH) in Victoria, Noosa Hospital in Queensland and Joondalup Hospital in Western Australia (WA).
A success feature of past and current PPPs is the ability of the private sector to design, construct, and commission the asset on time and on budget.12 However, it was during the operating phase that the pre-2000 projects encountered difficulties, with government assuming ownership and operation of three of the seven13 hospitals procured under this model before the end of the contract term. Of the remaining hospitals, government assumed ownership and operation of one following the expiry of the contract,14 and the remaining three, Noosa Hospital, Joondalup Hospital and Hawkesbury Hospital in NSW, continue to operate under extended agreements.
While the commercial-in-confidence nature of contracts with the private sector means that the precise reason for government takeover of these contracts is not public knowledge, the reasons are individual to each project. For example, in 1998 the Queensland government entered into separate PPP contracts, with different operators but under similar terms, for Robina Hospital and Noosa Hospital.15 While Robina Hospital was brought under government control before the end of the contract term,16 government renewed its contract with the private operator of Noosa Hospital in June 2020 for a further 10 years.17
Several government inquiries and reports18 identify various problems with these early PPP contracts. These problems include a lack of private
11 “Achieving public sector outcomes with private sector partners” (see fn 7) 73.
12 Duffield, C, Saeed AM and Tamburro, N, “Measuring the value and service outcomes of social infrastructure PPPs in Australia and New Zealand” (Infrastructure Partnerships Australia, 2020) 30 (hereafter “Measuring the value and service outcomes of social infrastructure PPPs”); English, L, “Using public-private partnerships to deliver social infrastructure: the Australian experience” in Hodge, G (Ed.), The Challenge of Public-Private Partnerships: Learning from International Experience (Edward Elgar Publishing Ltd, 2005) 294 (hereafter “Using public-private partnerships to deliver social infrastructure”).
13 State governments assumed ownership and control of PMBH, Robina Hospital, and LRH prior to the expiration of the contract term.
14 Testa, C and Hollingworth, K, “Mildura Base Hospital and hundreds of its staff back in public hands as Victorian government takes over”, ABC Mildura-Swan Hill, https://www.abc.net.au/news/2020-09-15/victorian-government-takes-control-of-mildura-base-hospital/12665834 (last accessed 2 December 2021).
15 “Public Works Committee, Legislative Assembly of Queensland, Robina and Noosa Hospital Projects” (Report No 59, August 1999) (hereafter “Robina and Noosa Hospital Projects”).
16 Duckett, S, “Public-private hospital partnerships are risky business”, Grattan Institute https://grattan.edu.au/news/public-private-hospital-partnerships-are-risky-business/ (last accessed 2 December 2021).
17 “Noosa Hospital’s future secure”, Sunshine Coast Hospital and Health Service https://www.health.qld.gov.au/__data/assets/pdf_file/0030/980445/200608-schhs-noosa-hospital.pdf (last accessed 2 December 2021).
18 Senate Standing Committee on Community Affairs, Parliament of Australia, “Healing our Hospitals: A report on public hospital funding” (December 2000) 104 paragraphs 6.78–6.80 (hereafter “Healing Our Hospitals”); “Robina and Noosa Hospital Projects” (see fn 15).
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sector understanding of government hospital funding models;19 insufficient economic analysis and benchmarking of the cost of public health services delivery;20 a belief that the private sector could deliver health services more efficiently than the public sector;21 optimism bias and an expectation that government would renegotiate financial terms for troubled social infrastructure projects rather than suffer the political and social risk of failure;22 a guaranteed rate of return to private sector investors;23 and a flawed tender evaluation process focused on cost as the measure of value for money.24
While it cannot be said that all hospital PPPs brought under government control were financially troubled, this was the case for LRH and PMBH. Flawed tender assumptions resulted in extensive financial losses to the operator of LRH, placing the availability and delivery of public health services at risk and leading the Victorian government to terminate the contract.25 In the case of PMBH, the NSW government entered into a contract under which availability and service payments far exceeded the cost of a publicly funded and operated hospital, and under which it guaranteed an annual, risk-free return to the private sector partner.26 Additional costs incurred by government for the termination of these contracts totalled AUS$1 million for LRH and AUS$35 million for PMBH.27
In undertaking research for this article, information was found to be readily available regarding the reasons and cost to government and taxpayers of the failed pre-2000 PPPs; however, little information was found regarding the performance of those pre-2000 PPPs that continue to operate under extended contracts. In the absence of this information, it is reasonable to question whether these PPP contracts continue to provide value for money.
While Joondalup Hospital PPP is held by its supporters to be a success,28 a 1997 WA Auditor-General report challenged the robustness
19 English, L, “Modernisation in the Australian Public Sector”, 72.
20 “Achieving public sector outcomes with private sector partners” (see fn 7) 74.
21 English, L, “Using public-private partnerships to deliver social infrastructure”, 297, “Healing our Hospitals” (see fn 18) 93 paragraph 6.32.
22 Gilmour, T et al., “Social infrastructure partnerships: a firm rock in a storm?” (2010) 15(3) Journal of Financial Management of Property and Construction 256 (hereafter “A firm rock in a storm?”); English, L, “Using public-private partnerships to deliver social infrastructure”, 297.
23 Russell-Weisz, D, “The Australian Experience: Public-Private Partnerships (PPPs)”, (May 2013) 30 https://www3.ha.org.hk/haconvention/hac2013/proceedings/downloads/S7.2.pdf (hereafter “The Australian Experience”) (last accessed 2 December 2021); “Achieving public sector outcomes with private sector partners” (see fn 7) 73.
24 English, L, “Using public-private partnerships to deliver social infrastructure”, 297.
25 “Healing our Hospitals” (see fn 18) 106.
26 Russell-Weisz, D, “The Australian Experience”, 30.
27 Bianchi, R, “When PPPs turn sour”, 18.
28 Russell-Weisz, D, “Public-Private Collaboration: A Successful Case in Australia – WA Health: Joondalup & Midland Experiences”, (May 2013) 36 https://www3.ha.org.hk/haconvention/hac2013/proceedings/downloads/P2.2.pdf (hereafter “A successful case in Australia”) (last accessed 2 December 2021).
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of capital cost benchmarking for public sector procurement of the facility, bringing into question the substantial capital cost savings predicted under the PPP.29 The report further observed that the contract did not provide for cost savings during the operating term.30 A follow-up report31 completed three years into the operating term concluded that the contract, valued at AUS$50.8 million for the 1999–2000 year, produced operating cost savings of only AUS$400,000. Further, these savings did not consider public sector costs associated with the management of the contract.32
While the problems identified with these early hospital PPP contracts are various, their lack of success ultimately stemmed from government entering into contracts that did not include mechanisms for review and renegotiation,33 private sector inexperience in the provision of public health services, government pursuit of maximum risk transfer,34 and government confidence that it could successfully transfer accountability for the provision of public health services to the private sector.35
The Post-2000 Hospital PPP
The establishment of Partnerships Victoria in 2000 and the National PPP Guidelines in 2004 saw the public sector reassess its approach to risk and the outsourcing of public services. This was on the basis that there was insufficient evidence to support assertions that the private sector could deliver public healthcare more economically than the public sector,36 and “when appropriate adjustments are made … the public sector provides care at lower cost per case”.37 Like the UK Private Finance Initiative model, optimal rather than maximum risk transfer, value for money, including non-financial benefits, and the public interest test became the means by which the suitability of a project for the PPP model was measured,38 and the delivery of core health services again became the responsibility of the public sector.
29 Western Australia Auditor-General, “Private Care for Public Patients – The Joondalup Health Campus: Performance Examination” (Report No 9, November 1997) 3.
30 Ibid, 4.
31 Western Australia Auditor-General, “Private Care for Public Patients – A follow-on examination of the Joondalup Health Campus Contract” (Report No 4, June 2000) (hereafter “A follow-on examination of the Joondalup Health Campus Contract”).
32 Ibid, 17.
33 Russell-Weisz, D, “The Australian Experience”, 30.
34 “Achieving public sector outcomes with private sector partners” (see fn 7) 74.
35 English, L, “Modernisation in the Australian Public Sector”, 48–49.
36 “Healing our Hospitals” (see fn 18) 96 paragraph 6.43.
37 Ibid, 95 paragraphs 6.40–6.41.
38 “Achieving public sector outcomes with private sector partners” (see fn 7) 74; English, L, “Modernisation in the Australian Public Sector”, 64.
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While the National PPP Guidelines allow jurisdictions to decide to what extent core services are provided by the private sector,39 until December 2014 all post-2000 hospital PPP contracts excluded the delivery of core services. Absent a private operator, these modern PPPs were led by a variety of investor types who, motivated by the need to provide a financial return to shareholders, were focused on the delivery of the asset on time and on budget and its availability and performance during the operating term.
The Contemporary Operator-led Hospital PPP
The success of the post-2000 hospital PPP is well known in Australia, with several exemplars, including Royal Women’s Hospital (RWH) and Royal Children’s Hospital (RCH) in Victoria, Sunshine Coast University Hospital (SCUH) in Queensland and Royal North Shore Hospital (RNSH) in NSW.
These positive outcomes can be attributed to the increased sophistication of government agencies and the market in the delivery of PPPs. Benefits of private sector involvement include private sector ability to access capital, delivering public infrastructure earlier than what would be possible via public sector funds; the use of private finance to promote private sector innovations and efficiencies in design and construction and enhance value for money; increased due diligence and scrutiny by equity investors and financiers; improved budgetary certainty; synergies achieved by bundling D&C, finance, and maintenance contracts;40 the use of key performance indicators (KPIs) and abatements to incentivise performance; and the capacity of the private sector to manage risk.
These benefits and recent track record of hospital PPPs in Australia have led some state governments to consider whether further benefits might be yielded by expanding the current model to include the private sector provision of core services.41 In December 2014, 15 years after any Australian government last contracted for an operator-led hospital PPP, the NSW Liberal government signed a contract with private sector operator, Healthscope to design, build, finance, maintain and operate the Northern Beaches Hospital (NBH) in Frenchs Forest.
39 Department of Infrastructure and Regional Development, “National Public-Private Partnership: Policy Framework” (October 2015) 6 (hereafter “PPP Policy Framework”).
40 “Healing our Hospitals” (see fn 18) 93 paragraph 6.32.
41 NSW government entered into a contract with Healthscope for NBH PPP: NSW Department of Treasury, “Contract Summary, Northern Beaches Hospital Public-Private Partnership”, (29 June 2015) (hereafter “NBH Contract Summary”); Queensland Health commissioned a report to investigate outsourcing options for SCUH, announcing the recommendation for a full outsourcing model; however, the incoming Labor government did not proceed: “KPMG, Sunshine Coast University Hospital: Review of Options for the Outsourcing of Clinical and Support Services” (June 2013) (hereafter “SCUH: Review of Options for the Outsourcing of Clinical and Support Services”).
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NORTHERN BEACHES HOSPITAL PPP CASE STUDY: THE RE-EMERGENCE OF THE OPERATOR-LED HOSPITAL PPP IN AUSTRALIA
Opened on 30 October 2018, NBH is a level 5 tertiary hospital that provides care to public and private patients within a single, integrated facility. Under the PPP agreement, Healthscope will operate the public and shared portions of the facility for 20 years, after which ownership and operation will return to government at no additional cost.42
Several features of this contract differ from previous operator-led and equity investor led hospital PPPs. While these features are evidence of the application of lessons learnt from previous PPPs and the increasing sophistication of government PPP agencies, NBH has not been without controversy, with a NSW government inquiry into its operation and management launched approximately eight months after its opening.
The following sections describe the specifics of the NBH PPP including the PPP structure, contract features, and value for money outcomes; as well as matters raised in the inquiry into the operation and management of the hospital.
PPP Structure
The PPP structure for NBH differs from a typical services payment PPP. The special purpose vehicle (SPV) is wholly owned by the operator, Healthscope, rather than multiple equity investors. Healthscope has established two SPVs, Operator Co and Operator B, which are both party to the Project Deed with the State; and the project is financed via a syndicated loan facility, with equity provided by Healthscope via an intercompany loan.43 A third SPV has been established for the car park; however, this SPV is party to a separate Car Park Management Deed and is outside the scope of this review. Figure 1 shows a simplified representation of the PPP structure for NBH.
42 “NBH Contract Summary” (see fn 41) 6.
43 Ibid, 23; “Project Deed: Northern Beaches Hospital” (11 December 2014) cl 16 (hereafter “NBH Project Deed”).
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![](http://static.i-law.com/ilaw/ICL/images/ICL_20220028a.jpg)
Figure 1 Simplified Operator-Led PPP Structure – NBH
Equity investors have greater appetite for risk than debt financiers on the basis that they will receive a commensurate return on their investment; however, this risk appetite is conditional on them having ownership and control of the SPV.44 This lack of interest from equity investors, together with recognition that profit under an operator-led PPP is made during the operating phase rather than by investment in the physical asset, was likely a consideration in government’s commitment to make a capital payment, equal to the SPV’s debt to its financiers, following commencement of operations.45
Under the two-SPV structure, Operator Co provides the finance for the design and construction of the asset and provides all services during the operating term, and Operator B is responsible for the design and construction of the hospital. This arrangement limits the risk exposure of the parent company, Healthscope Operations, arising from its involvement in both D&C and operating phase activities. Project finance is provided on a limited recourse basis and the establishment of the SPV (Operator Co) limits the recourse of the debt financiers to the assets of Operator Co.
The Contract
Several features of the contract warrant discussion. These features include the State Capital Payment; a mechanism for the annual review of various scope and payment parameters, and the use of the national public hospital
44 Russell-Weisz, D, “A successful case in Australia”, 27.
45 Jones, R, “Healthscope repays AUS$690M hospital debt”, Finance News Network https://www.finnewsnetwork.com.au/archives/finance_news_network211414.html (last accessed 2 December 2021).
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funding model to calculate monthly service payments; and substantial risk transfer on the basis that Healthscope is responsible for all aspects of the hospital’s operation.
State Capital Payment
The NBH contract includes provision for a State Capital Payment equal to the SPV’s debt to its financiers. This payment was made soon after the hospital commenced operating, and its purpose was to minimise financing costs and improve value for money.
While it is not uncommon for governments to make capital contributions to reduce financing costs, it is unusual for the State to enable the SPV to repay its liability in full at this early stage. For example, monthly state capital contributions totalling AUS$300 million were made during the construction of the AUS$1 billion Victorian Comprehensive Cancer Centre,46 and an AUS$820 million47 state capital contribution, equivalent to approximately 50 per cent48 of the capital cost was made on SCUH.
The arrangement on NBH is unique to the contemporary operator-led PPP and would not have been acceptable in an equity investor led PPP where the motive of the SPV is to earn a return on investment over the period of its investment.
The Annual Notice and Monthly Service Payment
Flexibility is fundamental to an agreement with a 20-year operating term when activity volume, casemix and model of care are likely to change. For NBH, much of this flexibility has been achieved through the Annual Notice49 which allows the State to review and reset various parameters for the year ahead, including clinical activity profile and volume, state price per treatment, maximum payment amount for the year, and KPIs.50
The Services51 component of the monthly service payment is calculated based on activity volume, which is subject to an annual limit, and clinical casemix. The National Weighted Activity Unit (NWAU), which is reset annually with reference to the actual cost of public health services delivery, is used to fund public hospitals. This is the basis for the operational funding
46 Victorian Department of Treasury and Finance, “Project Summary – Partnerships Victoria: Victorian Comprehensive Cancer Centre” (May 2012) 26–27 (hereafter “Project Summary – VCCC”).
47 Queensland Parliament, “Sunshine Coast University Hospital: Project Agreements Summary” 2.
48 Thomas, D, “Public-Private Partnerships in QLD”, Choose Brisbane https://www.choosebrisbane.com.au/invest/brisbane-economic-series/articles/public-private-partnerships-in-queensland (last accessed 2 December 2021).
49 “NBH Project Deed” (see fn 43) 24 (definition of “Annual Notice”).
50 “NBH Contract Summary” (see fn 41) 25; “Project Deed: Northern Beaches Hospital”, Schedule 16 – Activity Schedule (11 December 2014) cl 1.
51 “NBH Project Deed” (see fn 43) 80 (definition of “Services”); “NBH Contract Summary” (see fn 41) 24.
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of NBH52 and is discounted to account for economies of scale and shared workforce across public and private hospital facilities. The monthly fee for Services is then adjusted for such things as additional services requested by the State, indexed lifecycle payments, abatements for failure to meet KPIs, and penalties payable because of the inappropriate transfer of patients to other facilities.53 The end result is the monthly services payment to the private operator.
Scope and Risk Allocation
For NBH, much of the risk transferred to the private sector in the delivery phase and in relation to the availability, performance, residual life, and handover risk of the asset, is the same as for an equity investor led PPP. However, the inclusion of clinical services under the contract leads to additional risks, including clinical volume management risk,54 and workforce and industrial relations risk,55 being transferred to the private partner. Further, the scope of the risks transferred to the private party under the equity investor led PPP, including change in law or policy, tax risk, operating cost risk and KPI risk, are substantially expanded to apply to the provision of clinical services and the employment of clinical and non-clinical staff. A review of the NBH contract summary indicates that almost all delivery and operating phase risks are transferred to the private sector partner.56
The advantages and disadvantages of the operator-led PPP, and the implications of the operating phase risk transfer arrangements, considered in the recent inquiry into the operation and management of NBH, are described below.
Value for Money Outcomes
The suitability of the PPP model for a project is determined based on several key principles57 including value for money and the public interest test. It is evident from a review of the financial value for money assessment58 that NBH PPP is unique. Table 1 shows the results of the comparison between the Public Sector Comparator (PSC) and private sector cost of delivery, indicating that the operator-led model provides significant value to the State – AUS$1.526 billion or 39 per cent when compared with the
52 “NBH Contract Summary” (see fn 41) 6.
53 Ibid, 30.
54 Ibid, 20.
55 Ibid, 26.
56 Ibid, 26.
57 “PPP Policy Framework” (see fn 39) 11–12.
58 “NBH Contract Summary” (see fn 41) 15.
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net present cost of the PSC. Further, government confirmed that the public interest test supported the PPP procurement model for this project.59
PSC NPC (AUS $m) | The Operator Proposal (AUS $m) | Difference (AUS $m) | % Difference | |
Capital costs | 463 | 296 | −167 | −36% |
Lifecycle costs | 54 | 70 | 16 | 30% |
Operating costs | 2,585 | 1,775 | −810 | −31% |
Total raw costs | 3,102 | 2,141 | −961 | −31% |
Competitive neutrality | 97 | 0 | −97 | |
Project risk – transferred | 468 | 0 | −468 | |
Project risk – retained | 211 | 211 | 0 | 0% |
Total | 3,878 | 2,352 | −1,526 | −39% |
Table 1 Financial value for money comparison between public sector and private sector project delivery60
Two things bear mentioning. First, previous studies have shown that, at best, the private sector can deliver public health services at the same cost as the public sector. Secondly, since the disbanding of government public works departments, the public sector has partnered with the private sector, using a variety of procurement models, such that cost of construction should be similar regardless of procurement model. While there is no recent operator-led hospital PPP example, it is interesting to compare the financial value for money of NBH with other hospital PPPs of similar size and complexity where the private sector was contracted to design, build, finance, and maintain the asset. RNSH in NSW, and RCH and RWH in Victoria, are three examples. Available information indicates private sector benefit of 1.2 per cent for RNSH,61 and a 6.9 per cent and 0.67 per cent improvement on the PSC for RCH and RWH, respectively.62
While it might be suggested that the exceptional capital and operational benefits of NBH are a result of private sector efficiencies and innovations, it is more likely that these savings are a result of the efficiencies and benefits realised by the integration of public and private facilities.63 These benefits
59 “NBH Contract Summary” (see fn 41) 15.
60 Ibid.
61 Estimated “PSC most likely case”: NSW Department of Treasury, “Royal North Shore Hospital and Community Health Services – Public-Private Partnership: Summary of contracts” (28 October 2008) 13 (hereafter “RNSH Summary of contracts”).
62 Victorian Auditor-General, “The New Royal Children’s Hospital – a public-private partnership” (May 2009) 16; Victorian Auditor-General, “The New Royal Women’s Hospital – a public-private partnership” (June 2008) 37.
63 “NBH Contract Summary” (see fn 41) 5; “Operation and management of NBH” (see fn 5) 25 paragraph 2.37.
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include optimisation of building area and the sharing of common areas; the sharing of capital and operating costs for infrastructure and support services; a common workforce across public and private facilities; and the inclusion of profit generating commercial facilities64 such as retail, private consulting suites and a general practice clinic.65
It is fundamental that PPPs should be applied only where they suit the needs of the project, deliver value for money and are in the public interest. Based on these metrics alone, NBH appears to be a perfect candidate.
NSW Government Inquiry into the Operation and Management of the Northern Beaches Hospital
Since the announcement of the NBH PPP, there has been strong resistance from parts of the community to the private sector operation of the public hospital. This resistance, together with “teething problems” experienced during the early months of operation, led to the establishment of a NSW government inquiry into the operation and management of the hospital.
There were several themes throughout the inquiry that are of relevance to this article, including a perceived misalignment of public sector and private sector interests; lack of transparency and loss of community and stakeholder trust; and the important role of the public sector in monitoring the performance of the private operator.
Tellingly, one recommendation of the inquiry was “that the NSW government not enter into any public-private partnerships for future public hospitals”.66
Misalignment of Public and Private Sector Interests
That the private sector needs to earn a profit cannot be disputed; however, the question is whether this profit motive can coexist with a commitment to the provision of equitable healthcare. In the case of NBH, several operational matters were used to support submissions to the inquiry that these motives are mutually exclusive. These matters included a perception that private patients received preferential treatment and greater access to some procedures; allegations that staff were financially incentivised to encourage patients to use their private health insurance, and that waiting lists were manipulated to influence patients to “go private”; and a reduction of free services and increased out-of-pocket costs.67
The inquiry also heard that the culture at NBH was distinctly that of a private hospital providing public health services rather than a public hospital
64 Revenue from commercial facilities is shared between the Operator and government: “NBH Contract Summary” (see fn 41) 30.
66 “Operation and management of NBH” (see fn 5) 166.
67 Ibid, 72 paragraph 4.17; 75–77, paragraphs 4.30–4.40; 100, paragraph 4.133.
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run by a private operator, and this culture was central to every aspect of the procurement process and the management and initial operation of NBH.68
Interestingly, some of the observations made in relation to the culture and profit motive of the private operator may be a result of the structure of the PPP contract itself. While encouraging patients to use their private health insurance is at odds with the express purpose of the partnership to provide the same levels of service to public and private patients,69 it is the Project Deed that also places an obligation on the hospital to “… maximise the number of patients who elect to use their private health insurance …”.70 Further, the decision to provide a different mix of services within NBH to what was previously available to the community, including the cancellation of some public health clinics, was a government decision made during planning rather than a measure taken by the private operator to save cost and divert public patients to private clinics.71
Transparency and Community and Stakeholder Trust
The perception of a two-tier system, where private patients receive preferential treatment and greater access to health services, and community concerns regarding the financial cost of NBH to the public, have been exacerbated by a lack of transparency. During the inquiry, the commercial-in-confidence nature of the PPP and the private licensing of the hospital were identified as barriers to the disclosure of information including the efficiency discount applied to the NWAU, the operator’s performance against KPIs, and applied abatements. Information typically available in relation to public hospital facilities, including governance and management structure and key executive staff, is also not easily found for NBH.72
Several recommendations of the inquiry related to improving transparency. These recommendations included prominent signage related to the right to treatment as a public patient at no cost;73 publication of services available to public and private patients, including out-of-pocket costs;74 and increased performance reporting.75 However, these recommendations could not extend to public disclosure of commercially sensitive information including cost structure, payment arrangements, projected activity schedule and certain terms in relation to KPIs,76 and the true cost to the taxpayer remains unknown.
68 “Operation and management of NBH” (see fn 5) 29–31 paragraphs 2.52–2.64.
69 “NBH Contract Summary” (see fn 41) 6.
70 Ibid, 25.
71 “Operation and management of NBH” (see fn 5) 101–102 paragraphs 4.135–4.137.
72 Ibid, 97 paragraph 4.115; “Northern Beaches Hospital by Healthscope” https://northernbeacheshospital.com.au/ (last accessed 2 December 2021).
73 “Operation and management of NBH” (see fn 5) 101 paragraph 4.134.
74 Ibid, 99 paragraph 4.125.
75 Ibid, xiii paragraph 126.
76 “NBH Contract Summary” (see fn 41) 23–24.
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Oversight and Public Sector Accountability
The committee explored the ongoing roles of NSW Health and North Sydney Local Health District (NSLHD) during the operating phase and argued that to consider the relationship between the parties to the contract as limited to Contract Manager and Operator “… created an at arm’s length scenario that is not in the interests of patient care”.77 It stressed that it is the responsibility of the public sector partner to actively monitor performance, proactively use the Annual Notice to adjust activity profile to reflect need, and enforce the contract, including via abatements and other contractual mechanisms,78 to ensure high quality, equitable public healthcare is delivered and maximum value for money achieved. The committee also observed that the true cost of this operating phase oversight role was likely underestimated.79 It is reasonable to question whether the financial value for money assessment of the PPP would have been less favourable if this cost had been fully appreciated at business case stage.
Many of the matters identified during the inquiry as leading to community and stakeholder distrust in the PPP process and the operation of NBH can be distilled to three key issues: a lack of transparency regarding the scope of the agreement; insufficient community engagement regarding the role of the hospital in the community and the parties’ obligations under the Project Deed; and insufficient public sector oversight.
AN INTERNATIONAL PERSPECTIVE
Until recently, several high-profile international operator-led PPPs including one in Lesotho, two in Peru, four in Portugal and five in Spain were held as evidence of global success of the operator-led PPP. However, since 2018, three of four hospitals in Portugal80 and two of five hospitals in Spain81 returned to government control at the end of their contract term. Further, the government of Portugal has confirmed that the contract for a third hospital, due to expire in January 2022, will not be renewed,82 and the government of Valencia, Spain has reiterated its commitment to take
77 “Operation and management of NBH” (see fn 5) 68 paragraph 3.136.
78 “NBH Contract Summary” (see fn 41) 30, 34–35.
79 “Operation and management of NBH” (see fn 5) 165 paragraphs 7.59–7.61.
80 Schreck, I, “Government ends PPP of Hospital de Loures. Only Cascais remains”, JN Direct https://www.jn.pt/nacional/governo-acaba-com-ppp-do-hospital-de-loures-so-resta-cascais-14309754.html (last accessed 2 December 2021).
81 Pitcarch, S, “Ribera Salud paralyses the purchase of the privatised hospital in Manises from Sanitas due to the coronavirus crisis”, elDiario https://www.eldiario.es/comunitat-valenciana/ribera-salud-sanitas-privatizado-manises_1_1214603.html (last accessed 2 December 2021).
82 Schreck, I (see fn 80).
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over operation of all remaining hospital PPPs when their contracts expire in 2024 and 2025.83
While PPP structure, payment regime, contract term and political and social context vary between contracts and countries, lessons learnt from these PPPs, and those that still operate, are consistent with those of the pre-2000 Australian PPPs and NBH. Themes include insufficient stakeholder engagement during project planning,84 community resistance to the private provision of public health services,85 lack of transparency in relation to financial performance,86 a false belief that the private sector can deliver public health at a lower cost than the public sector,87 inadequate government oversight and contract management,88 and insufficient mechanisms for contractual review and renegotiation.89
Though not directly related to Australian operator-led PPPs, other issues identified in relation to these international PPPs and their particular social and political context, are worth noting. These include disparities between existing public hospitals and the PPP facility, leading to demand exceeding forecast;90 difficulty monitoring and enforcing clinical quality and performance standards;91 and insufficient competition, leading to a monopoly market.92
83 Pitcarch, S (see fn 81).
84 Abuzaineh, N et al., “PPPs in healthcare: Models, lessons and trends for the future. Healthcare public-private partnership series, No 4” (The Global Health Group, Institute for Global Health Sciences, University of California, San Francisco and PwC, 2018) 41 (hereafter “PPPs in healthcare”).
85 Comendeiro-Maaloe, M et al., “Public-private partnerships in the Spanish National Health System: The reversion of the Alzira model” (2019) 123(4) Health Policy 410 (hereafter “The reversion of the Alzira model”).
86 Ibid, 409.
87 “End of PPP at Braga Hospital benefited users and professionals”, Esquerda https://www.esquerda.net/artigo/fim-de-ppp-no-hospital-de-braga-beneficiou-utentes-e-profissionais/68191 (last accessed 2 December 2021); Romero, M, “What lies beneath – a critical assessment of PPPs and their impact on sustainable development”, (2015) Eurodad, 7.
88 Pereira, M, Ferreira, D and Marques, R, “A critical look at the Portuguese public-private partnerships in healthcare”, (2021) The International Journal of Health Planning and Management (36)2 311 (hereafter “A critical look at the Portuguese public-private partnerships in healthcare”); Downs, S et al., “Health System Innovation in Lesotho: Design and Early Operations of the Maseru Public-Private Integrated Partnership. Healthcare public-private partnership series, No 1” (The Global Health Group, Institute for Global Health Sciences, University of California, San Francisco and PwC, 2013) 8.
89 Pereira, M, “A critical look at the Portuguese public-private partnerships in healthcare”, 311–312; Schreck, I, “Cascais PPP extended for another year and €80 million”, JN Direct https://www.jn.pt/nacional/ppp-de-cascais-prolongada-por-mais-um-ano-e-80-milhoes-de-euros--14291475.html (last accessed 2 December 2021); Schreck, I (see fn 80).
90 Abuzaineh, N, “PPPs in healthcare”, 32.
91 Ibid.
92 Pitcarch, S (see fn 81); Comendeiro-Maaloe, M, “The reversion of the Alzira model”, 409.
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THE CONTEMPORARY OPERATOR-LED HOSPITAL PPP: RISKS AND OPPORTUNITIES
While the market has matured to a point where the operator-led hospital PPP may be the logical progression, and indeed the NSW government has already taken this step with NBH, any contemplation of an operator-led model must include lessons learnt from the moderately successful pre-2000 model, and consideration of how a contemporary operator-led model influences risk allocation.
Risks typically associated with social infrastructure PPPs fall into several categories93 and some are considered more likely to be impacted under an operator-led model. These specific risk categories are D&C risk, operating risk, default and termination risk, and political and social risk. This article considers each of these risk types, how they are impacted by the operator-led model and how they are allocated and managed, including via the service payment calculation, express provisions in the contract, or via contractual mechanisms for regular review and renegotiation.94 Also considered is the extent to which the transfer of any public sector risks to the private sector is illusory.
D&C Risk
Standard PPP risk allocation transfers all D&C risk, including design, construction, fitness for purpose and commissioning risks to the private sector, with government assuming responsibility for construction risk only where it is caused by State initiated variations, government breach or a specified relief event.
While D&C risk allocation will remain the same under an operator-led PPP, the involvement of the operator throughout the delivery phase provides opportunity for the private sector partner to mitigate risks to the benefit of both parties. For example, the operator will have a keen interest in the development of a facility design that is not only cost-effective to construct, operate and maintain, but that also supports the efficient delivery of health services. This may result in reduced operating costs, the benefits of which will be shared with government. The involvement of the private operator in the design process may also mitigate fitness for purpose risk.
Like an equity investor led PPP, provisions in the contract will incentivise the private sector partner to achieve timely completion. These provisions include the delay of payment until commencement of service delivery, and liability for general damages for breach,95 and this risk will be passed
93 Gilmour, T, “A firm rock in a storm?”, 253.
94 APMG International, “5.2 Preliminary Risk Allocation” https://ppp-certification.com/ppp-certification-guide/52-preliminary-risk-allocation (last accessed 2 December 2021).
95 “NBH Contract Summary” (see fn 41) 27.
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through to the D&C contractor via the liquidated damages provisions in the D&C contract.
The completion and handover of hospital PPPs largely on time and on budget96 has demonstrated the private sector’s capacity to manage D&C risk and this is not compromised under an operator-led model.
Operating Risk
Under the operator-led model, the private sector’s operating phase responsibility is expanded to include all aspects of the hospital’s operation. With this responsibility comes additional risk, including performance and service level risk, clinical volume management risk, operating cost risk and workforce and industrial relations risk. This almost complete transfer of risk to the private operator presents it with the greatest opportunity to optimise public health service delivery by applying private sector innovations, processes, and management techniques.
Notwithstanding matters raised during the inquiry, the NBH is an example of how the operator-led PPP can provide capital and operational savings unlikely to be achieved via traditional models. For NBH, this is achieved by the integration of public and private facilities, shared infrastructure and support services, and a common workforce.
While operating phase risk is transferred to the private sector, the public sector retains accountability for public health services delivery97 and it is in the interests of government that it establishes the foundations for a successful PPP, doing what it can to ensure that its private sector partner is able to manage its operating phase risks and including in the agreement mechanisms for regular review and renegotiation, reducing the risk of a repeat of the circumstances that led to the failure of LRH and PMBH. For example, market engagement is essential to ensure that proponents understand public hospital funding arrangements and can price accordingly; consultation with employees and unions during planning and procurement is necessary to manage workforce and industrial relations issues; and benchmarking of public hospital operating costs, rigorous analysis of private sector financial proposals, and the use of contractual mechanisms for regular review and renegotiation, is necessary to ensure contracts are flexible and financially sustainable for the operating term.
The public sector must also commit the necessary resources and take an active role during the operating phase, including working collaboratively with its private sector partner, proactively using mechanisms within the contract, such as the Annual Notice used on NBH, to ensure government
96 Duffield, C, “Measuring the value and service outcomes of social infrastructure PPPs”, 30.
97 “PPP Policy Framework” (see fn 39) 12.
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continues to receive value for money, closely monitoring performance and enforcing the contract.
Financial Risk
The failure of several earlier operator-led hospital PPPs was found to be largely a result of flawed assumptions related to government funding models, the cost of public health services delivery, and a belief that private sector efficiencies could deliver operational savings. A tender evaluation process that focused on lowest cost and absolute risk transfer to the private sector meant that many of these flawed assumptions were not challenged, leading parties to enter long-term contracts that were unsustainable.
Public concern regarding the financial viability of the private provision of public health services is not without basis. First, the assumption that the private sector can deliver public health services more efficiently than the public sector has been found to be incorrect: when adjusted to reflect casemix and cost reporting discrepancies, it has been found that, at best, the private sector can deliver health services for the same cost as the public sector. This brings into question the feasibility of the operating cost savings predicted for NBH. Secondly, the private sector must understand the limitations of public funding arrangements, and previous PPPs have shown this to not always be the case. For example, it was well-known by public providers that Victorian casemix funding at the time of the LRH PPP was not sufficient to cover operating costs, and that top-up funding was available to public hospitals. This top-up funding was not available to the private operator of LRH and the gap between operating cost and payment ultimately led to the failure of LRH PPP.98 Finally, it is not uncommon for private providers, motivated by their obligation to provide a dividend to shareholders, to reduce access to services that are unprofitable. In an operator-led PPP, this is a risk if the cost of health service delivery consistently exceeds payment for services. Funding arrangements for the operating phase must be realistic and clearly understood so mistakes of the pre-2000 operator-led hospital PPPs are not repeated.
Notwithstanding the failure of several early operator-led hospital PPPs, public hospital funding arrangements have been successfully used to purchase clinical services from private providers in public hospitals.99 Further, public hospital funding, including the NWAU, is the basis of operational funding for NBH. This allows the cost of the public health services provided under the PPP to be benchmarked against publicly operated peer facilities. It acknowledges the equivalence in cost of health
98 English, L, “Using public-private partnerships to deliver social infrastructure”, 294–295.
99 For example, Peel Health Campus, Mandurah, “A follow-on examination of the Joondalup Health Campus Contract” (see fn 31); Mater Adult Public Hospital, “SCUH: Review of Options for the Outsourcing of Clinical and Support Services” (see fn 41) 92.
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services delivered by public and private sectors and provides a balance between incentivising performance and ensuring quality, availability and access to public health services.
Contract Management and Flexibility over the Operating Term
In an operator-led PPP, the contract is the only mechanism by which the public sector can control the quality and volume of services delivered. The use of abatements to incentivise performance is fundamental; however, with operating terms of up to 20 years, the contract must also provide a mechanism for the parties to regularly renegotiate aspects of their agreement. This may prevent the costly exercise of early termination for convenience because the PPP no longer meets government or community needs and cannot be augmented.
The Annual Notice and the use of a discounted NWAU as the basis of the monthly services payment calculation for NBH addresses many of the issues encountered on previous operator-led PPPs, including LRH and PMBH, where the parties had entered unsustainable contracts with limited mechanisms for review.100
The Annual Notice is a key feature of Joondalup Hospital PPP and is likely a key reason for its success.101 While operational funding is not strictly based on public hospital funding arrangements, it is reviewed and adjusted annually based on benchmarking against actual costs, and with consideration to average costs at publicly operated peer facilities. In addition to price determination, the Annual Notice is used to set activity profile and casemix, volume discounts and to adjust KPIs and reporting targets.102
Contractual mechanisms, like the Annual Notice that provide for regular review of service payments, and gain-sharing provisions that ensure that gains achieved by re-tendering service elements are shared between the parties, provide a means by which the private sector can manage much of its operating risk and government can ensure that it continues to receive value for money.
Workforce and Industrial Relations Risk
Workforce and industrial relations risks are heightened under an operator-led PPP. Under previous PPPs non-clinical staff either remained public sector employees, managed under a Labour Services Agreement,103 or were
100 English, L, “Using public-private partnerships to deliver social infrastructure”, 293.
101 Russell-Weisz, D, “A successful case in Australia”, 13.
102 Ibid, 15–16; “A follow-on examination of the Joondalup Health Campus Contract” (see fn 31) 16.
103 NSW Department of Treasury, “Newcastle Mater Hospital Project – Public-Private Partnership: Summary of contracts” (30 December 2005) 10; NSW Department of Treasury, “Orange and Associated Health Services – Public-Private Partnership: Updated Summary of contracts” (30 June 2010) 3; “RNSH Summary of contracts” (see fn 61) 2.
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migrated to the private sector, with conditions and entitlements protected under the PPP contract.104 It is not feasible for staff to remain public sector employees in an operator-led PPP. However, if not managed appropriately, the migration of public sector employees to the private sector has the potential to trigger industrial relations risks that will remain heightened throughout the initial years of operation and as the culture of the hospital is established.
While the private sector operator is responsible for workforce and industrial relations matters during the contract term, the role of government during the planning stages is vital to the success of the PPP. Government must consult with affected groups and develop strategies to manage impacts or address concerns, including via ongoing engagement and contractual provisions and protections.105 The recent application by the Health Services Union of Australia to the Fair Work Commission in relation to the Frankston Hospital PPP106 is an example of the sensitivities around the privatisation of public hospital services and the importance of early engagement with affected parties. Without engagement, misalignment between the expectations of staff, unions and the private operator may lead to industrial action, threatening the availability of public health services.
Default and Termination Risk
Default is a risk for any contract, particularly those that are complex, high value and long-term. The greatest risk in an equity investor led PPP is the risk of D&C contractor default or insolvency. Where the D&C contractor’s liability is capped, the private finance provided by equity investors and financiers provides a buffer that protects government from the risk of D&C contractor insolvency and default. To minimise its losses, Project Co will seek to remedy the default, including by re-tendering the works. It is only where the impact of contractor insolvency or default causes Project Co to default or become insolvent, that government will be exposed to risk.
The risk to government of D&C contractor default or insolvency is unchanged in an operator-led hospital PPP. However, it is during the operating phase that government risk is increased. If losses cause the private operator to default or become insolvent or compromise the availability and quality of public health services, as was the case with LRH, government must step in. The extent to which government is exposed to such risk is determined by the organisational structure of the PPP and may be impacted by financing arrangements.
104 Victorian Department of Treasury and Finance, “Partnerships Victoria Project Summary: The new Royal Children’s Hospital Project” (February 2008) 15; “Project Summary – VCCC” (see fn 46) 18.
105 Partnerships Victoria, “Partnerships Victoria public interest test template” (November 2016) 4 (hereafter “PV public interest test template”).
106 Health Services Union of Australia v Peninsula Health Service Pty Ltd [2021] FWC 1420.
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In a PPP it is not unusual for government to make a capital contribution; however, if the capital contribution repays the full liability, as was the case for NBH, the debt financiers no longer have a financial interest in the asset, limiting the extent to which Project Co can protect government from the operator’s default or insolvency. Further, the structure of an operator-led PPP, where the SPV is established and wholly owned by the operator, puts Project Co in conflict of interest if it is required to remove the operator for default. This leaves government in the position where, if the default is not remedied by Project Co, or if the operator becomes insolvent, its only option is termination of the contract. In this respect, the PPP provides no protections over an arrangement where government contracts directly with the private hospital operator. This is the structure of the agreement for NBH.107
It is in the interests of all parties that the contract remains on foot and that termination is considered in only the most extreme circumstances, such as persistent breach, unremedied default or insolvency of the private operator, force majeure, or uninsurable risk. Contractual provisions, including abatements, and set-off of debts or claims for damages reasonably made by government, and mechanisms, like the Annual Notice, should be used to incentivise performance, ensure the PPP meets the changing needs of government and the public, is financially sustainable and continues to provide value for money. Used to their full extent, these provisions should limit the circumstances under which government might consider the financially and politically costly exercise of termination for convenience.
Political and Social Risk: Public Sector Accountability and the Public Interest Test
Regardless of the contractual arrangements, the public sector is ultimately responsible for the delivery of public health services and cannot transfer this accountability to the private sector.
The failure of several earlier operator-led hospital PPPs increased public sensitivity around private sector provision of public services, and the recent inquiry into the operation and maintenance of NBH is evidence of the public’s ongoing distrust and resistance to the operator-led PPP model. National PPP Guidelines require that the suitability of the PPP procurement model for a project be tested against key principles,108 and while each of these principles is important, it is the public interest evaluation that is considered most critical.
The purpose of the public interest evaluation is to ensure that the PPP procurement model is not contrary to the public interest, and while each
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jurisdiction has implemented its own process for evaluating public interest issues, the themes are common.109 Of the attributes evaluated as part of the public interest test, there are several that have heightened importance in the context of an operator-led PPP. If not addressed via contract, or not appropriately monitored, these issues may expose government to increased risk. These attributes include community consultation, particularly in relation to consumers, employees, and unions; equity and consumer rights in relation to equitable, free access to public health services, a core value of Australian society; and the uninterrupted supply of public health services, even in the event of private sector default or failure to perform.
The contract summary for NBH noted that the public interest test completed at tender evaluation did not preclude PPP procurement, and the inquiry made no mention of the public interest evaluation. However, several of the issues raised during the inquiry point to possible misalignment of aspects of the NBH PPP with the NSW government’s public interest evaluation,110 including community consultation, consumer rights, accountability and transparency, and public access.
The public interest evaluation highlights two issues. First, regardless of the formal risk allocation, government must maintain an active role at all stages as a means of meeting its accountability obligations. Social infrastructure PPPs are particularly sensitive in this regard. Secondly, if public interest issues cannot be managed or mitigated to an acceptable level, alternative procurement models must be pursued.
IS THERE A PLACE FOR THE OPERATOR-LED HOSPITAL PPP IN AUSTRALIA?
The operator-led hospital PPP offers many benefits, and many of the risks associated with this model can be effectively allocated to, and managed by, the private sector party. However, government accountability for the provision of public health services cannot be transferred to the private sector. While the contract will include various protections such as express provisions and mechanisms for review and renegotiation, it will be government that will be held accountable if the PPP fails to meet the expectations of the community in relation to access and quality of service, and if it fails to provide value for money. And while a small number of pre-2000 PPPs continue to operate under extended contracts, the lack of transparency in relation to their ongoing performance, means their success does little to support the operator-led model.
109 “PV public interest test template” (see fn 105); NSW Department of Treasury, “NSW Public-Private Partnership Guidelines 2017: Preparation, Procurement and Contract Management” (2017) 50–51.
110 Public interest evaluation current at the time government called for expressions of interest: NSW Department of Treasury, “NSW Public-Private Partnerships Guidelines” (2012) 25–26.
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The NBH inquiry is evidence of the public interest in the role of the private sector in the provision of public services, and the expectation that government actively hold the private sector accountable to its obligations under the contract. The demands of this role for NBH were likely underestimated at business case, when budgets were set, and were likely not appreciated until the early stages of operation. Moving forward, the operation and management of NBH will be subject to intense scrutiny and it is in the interests of government and the private operator that it does not fail. Only time, and rigorous monitoring and accounting, will tell if the contract delivers the substantial savings predicted by the financial value for money assessment.
Notwithstanding examples of successful private sector delivery of public health services in public hospitals, and that several pre-2000 hospital PPPs continue to operate under extended contracts, the benefits of this model and its moderate success both in Australia and overseas do not outweigh the risks to government. There are several reasons why government should not enter into future PPP contracts for the provision of public health services. First, while the primary obligation of the private operator is the provision of health services, if profit is threatened, this obligation may become subordinate to its obligation to provide a dividend to shareholders. Secondly, the commercial-in-confidence nature of the PPP agreement is not consistent with the expectations of the public in relation to transparency. Thirdly, the operator-led PPP structure, where the SPV is wholly owned by the operator, provides no real protections to government over an arrangement where it contracts directly with the operator. Finally, it is the public sector that is ultimately accountable for health service delivery, and to protect its interests, it must invest significant resources into the management and enforcement of the contract.
It is important to distance the largely successful equity investor led PPP, where the private sector is contracted to design build, finance and maintain the asset, from the operator-led PPP. The former has been demonstrated over the last 20 years as a successful model for the cost-effective and on-time delivery and operating phase maintenance of public health assets across Australia and should continue to be considered for suitable projects.
CONCLUSION
The use of the PPP in Australia to deliver health infrastructure is not new, and the bundling of contracts for design, construction, finance, and maintenance services can provide value for money for suitable projects.
This article considered whether improvements to the PPP model are sufficient to warrant consideration of a contemporary operator-led model for the delivery of public health services. It provided an overview
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of Australia’s hospital PPP history and reviewed the NBH PPP, including the findings of the 2020 inquiry into is operation and management. With consideration to past and contemporary hospital PPPs, both in Australia and internationally, key risks, opportunities and challenges of the modern operator-led hospital PPP were identified and evaluated. Finally, the article considered whether the benefits of the operator-led hospital PPP outweigh the risks and challenges of the model.
While the operator-led PPP appears to be a robust model for the delivery of public health services, the opposed purposes of the private and public sectors, and the inability of government to transfer accountability for the provision of public health services, present the greatest challenges to its success. The outcomes of the inquiry into the operation and management of NBH, including the recommendation “that the NSW government not enter into any public-private partnerships for future public hospitals”111 is further evidence that the operator-led PPP is not suitable for the delivery of public health services in Australia.