New South Wales pioneering the use of operator-led PPP procurement model in healthcare

The operator-led PPP procurement model, adopted by the New South Wales government, is different from traditional PPPs in that it involves private sector operators delivering healthcare services.

The model can facilitate competition in the market and deliver good outcomes for patients, but public opposition to private sector involvement in healthcare and capacity constraints must be overcome if it is to be successful.

The operator-led PPP model

Recent trends suggest that operator-led PPP models are becoming more favoured in the healthcare sector in Australia, particularly in New South Wales (NSW). As Australia’s population continues to grow and more health infrastructure needs to be both built and redeveloped, other state governments may turn to this kind of model.

The traditional PPP model focuses on the design, construction, financing, operation and maintenance of an asset by the private sector, with operational risks of providing relevant public services, after completion of construction, such as custodial services in the case of a prison PPP and clinical services in the case of a healthcare PPP, retained largely by the state.

The operator-led model differs from this traditional approach. Under the operator-led model, the private sector operator partner is consortium lead and is responsible for the delivery of relevant public services over the concession period. This is also known as an outcomes-based approach to PPPs, whereby a large part of the operation risk is transferred to the private sector operator partner. Operational performance is then judged against agreed key performance indicators and other specified criteria.

Under this model, private sector operators’ work closely with government and other partners to establish performance models from an early stage, and there is a focus on outcomes-based solutions.

Benefits of an operator-led approach

There are a number of reasons for a government to move towards an operator-led PPP procurement model.

In Australia, private sector consortia bidding on PPP projects have traditionally been led by equity investors, many of whom have no long term interest in the ownership of often significant public assets, and others who are more interested in securing the long term revenue streams investment in these types of assets brings rather than being focused on the provision of important public services.

In the healthcare sector, private sector operators Ramsay and Healthscope dominate the healthcare PPP landscape. Moving toward an outcomes-based approach appeals to a broader array of service providers who have the skills needed to deliver clinical services and innovative care models. In particular, credible operators in the not-for-profit sector who may not have the balance sheet to be considered competitive under traditional PPP models are likely to be better placed where significant weight is placed on the ability to provide clinical services over the concession period.

The transfer of risk to the private sector is also thought to generate better value for money outcomes, and encourage operational innovation, driving significant social and economic benefits. Private sector operators have greater flexibility to determine how they meet their performance targets, which allows for the optimisation of outcomes. Central to the success of this model is structuring of the contractual terms such that this flexibility is preserved.

In addition, having the project’s private sector operator partner involved long term means that its interests are directly tied to the success of the project, with the resulting incentive to make long-term investments in the facility to meet evolving operational standards and care models.

The use of the operator-led model in New South Wales

The operator-led model has been put into practice in NSW. The NSW government recently entered into a PPP agreement with Healthscope, a private hospital operator, for the new Northern Beaches Hospital.

Under the agreement, Healthscope will operate the hospital providing both public and private clinical and non-clinical services for an initial period of 20 years. After the initial period, it may hand back the public portion of the hospital at no cost to the NSW government. Healthscope will continue to provide private services in the hospital for another 20 year period, before handing back the rest of the facility to the state.

Last year the NSW government committed AUS$5 billion ($3.8bn) to health infrastructure. It announced at the time that it intended to utilise the PPP model of 'Health Partnerships' in the redevelopment and operation of five public hospitals across the state, and estimated that it would save AUS$1.5bn ($1.14bn) over the life of the contracts. The Health Partnerships are expected to be similar to the Northern Beaches Hospital model.

Originally, the hospitals selected for 'Health Partnerships' were: Bowral, with the hospital to be upgraded, and then handed to a private operator; Goulburn; Shellharbour; Maitland; and Wyong. However, due to intense regional public opposition, and a lack of sufficient interest from the private sector, the NSW government has since scrapped plans to redevelop and operate Goulburn hospital as a PPP.

The other four projects are still listed on the NSW Health Infrastructure website as PPPs, though there has also been some public opposition to these projects. More recently, the new NSW health minister refused to confirm that the new Maitland Hospital will go ahead as a PPP, voicing concern that the project was not adequately funded to meet the region's fast growing health needs.

Expressions of interest for those hospitals were due in October 2016. Interested parties were advised to focus on the development of care models. The Australian healthcare industry is very aware that NSW Health is speaking to a number of operator-led consortia that submitted expressions of interest, including a number of not-for-profits. Shortlisted proposals, if any, will be named some time in 2017.

It will be interesting to see if the NSW government can get around real issues such as lack of balance sheet strength and serious capacity constraint, to successfully deliver these projects with different private sector operators, who are all focused on outcomes-based solutions.

Simela Karasavidis and Margaret Cole are infrastructure experts at Pinsent Masons, the law firm behind Out-Law.com. A version of this article first appeared in Global Opportunity Healthcare.

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