72933 MAY 2012 ABOUT THE AUTHOR White Elephants1 Are NOT an Endangered Species ROBERT TAYLOR is a Chief Industry Specialist PPP Transaction Advisory Services in the Health Sector with IFC’s Public-Private Partnerships (PPP) Advisory Services Business Line. He has Health is the fastest-growing segment of IFC’s PPP Transaction Advisory been working on transactions Services business, with 20 completed transactions, a strong pipeline of active in the health sector for over a decade and in the World Bank and potential projects, and new requests from client governments every Group for 27 years. He previously worked with week. Nevertheless, identifying the best project for a country is not always Federal and Provincial easy. We are frequently asked to either deal with white elephants which Ministries of Finance in his native Canada. already exist or to help create them. This SmartLesson provides some candid APPROVING MANAGER lessons for avoiding this. Laurence Carter, Global Business Line Leader, Public-Private Partnerships Lessons Learned Lesson 1: New hospitals aren’t always One government even suggested that they needed.1 divert to their new hospital all the funds they were now paying to lower-cost private Often, we are asked by governments to help hospitals for treating public patients. Sorry, “find someone� to operate a hospital which but how can IFC displace existing lower-cost has been built with a grant or soft loan. efficient private hospitals with some expensive Sometimes, these hospitals are state-of-the- huge new hospital? art and often large (too large for a modern hospital), but the government has no money And one country showed me a large new to run them. And sometimes they are in a “mothballed�2 hospital which they had built poor location vis-à-vis demand. And often, through public procurement and wanted me they are both. to find private management. Then they told me they had 19 such mothballed hospitals. In these cases, we will figure out how much it will cost to operate it, then assess the feasibility Lesson 2: But some existing hospitals aren’t of attracting private-paying patients, and needed, either then figure out the gap that will have to come from government. But we are not miracle When I first started in the business of PPPs for workers. If there is no ready private-patient health, 11 years ago, it came as a surprise to market nearby and the government has no me that there are far more hospitals around money, we won’t have a solution. the world than I ever imagined. It came as an even greater surprise that the global trend in We frequently hear that such-and-such facility medical care is toward fewer hospitals, with will: (a) stop nationals from flying abroad for far fewer beds, more outpatient space, and treatment because high-quality treatment much more medical care being delivered will now be available at home; and (b) it will outside of hospitals. This is due in part to attract all sorts of potential patients from advances in medical technology and changes nearby countries (and sometimes not-so- in provider payment systems which no longer nearby). Some investors have, indeed, been pay on the basis of beds and hospital days. successful at doing this, but mostly via private hospitals for private patients. Adapting a Some countries, mostly in Central and Eastern white elephant to this market is much more Europe, have 3-4 times the number of difficult. hospitals and beds than they need in a modern 1 The term ‘white elephant’ is used to describe a burdensome pos- 2 The term ‘mothballed’ means anything which is put into storage session that the owner cannot dispose of and whose cost (par- or whose operation is suspended. ticularly the cost of upkeep) is out of proportion to its usefulness or worth. SMARTLESSONS — MAY 2012 1 medical setting, all built in a different time and era. Their the government the need to conduct a proper feasibility plan for disposing of them has been to ask IFC to privatize study and, if potentially viable and beneficial, to have a them. We have tried but so far never succeeded. competitive tender. But a tender doesn’t necessarily eliminate bad projects, particularly if the government is Why has this been so difficult? There are several factors to guaranteeing payment. That is why a closer look at the explain it. First, there are already too many hospitals project’s need and its relative cost is crucial. competing for scarce government or national health insurance payments. But the ones they want privatized are Lesson 5: Don’t be bamboozled by the doctors. often the most dilapidated and overstaffed. Second, staff are resistant to the idea of private management. It will Most hospitals we visit are managed by doctors, and either threaten their job security or their informal (and within that hospital every department is also managed by illegal) payments which they may now be receiving directly a specialist. Typically, as public sector employees, they lack from patients. And lastly, investors don’t want the headache the resources to update and modernize their facility and of taking on an existing facility and staff. They would much equipment. They quite naturally want more modern rather build a new efficient facility and hire their own staff. equipment. So when we visit to discuss the possibility of Provided they can secure a contract with the public insurer, PPPs, they see this as an opportunity to get new buildings this will be far more competitive at attracting patients and and equipment. more efficient than operating an existing hospital. But this misses the very essence of a PPP, which is about The best solution is typically to close several old hospitals improving efficiency and quality through private sector and replace them with one new one.3 But globally, it has delivery, rather than simply off-balance-sheet financing. proven very difficult to close hospitals anywhere. Community resistance often scuttles these efforts. This dialogue and assessment are the toughest part of our job, because most of us are not from the medical In Mexico, we were able to implement PPPs for two new profession. We have a set of performance benchmarks we hospitals which will, when open, replace two old ones. In use to evaluate hospital efficiency and quality, such as this case, the improvement will be significant and obvious. average length of stay, hospital infection rate, re-admission Our client spent considerable time building consensus for rate, case-mix-adjusted mortality rate, occupancy rate, and this modernization solution. outpatient/inpatient ratio. And we always tour the entire facility (and as many other public and private facilities as Lesson 3: White elephants can come in many forms and we can). The indicators and the tour generally give us an from many sources. idea of the real needs. But it still helps to have one medical specialist on our team who can debate the more technical While hospitals seem to predominate in the white elephant points with the hospital docs. herd, we have seen other species. These typically come via equipment suppliers and other sponsors selling their latest Lesson 6: The Ministry of Finance is our ally. high-priced medical technology. Often, this technology does indeed have an important medical use. But can every country Most Ministries of Health, and in fact most sector ministries, afford a cyclotron?4 And should a country pay for one when naturally push their projects and, if the projects end up it has so many other pressing health needs? becoming PPPs, the funding will often come from the Ministry of Finance. So there is little incentive for the But many white elephants are homegrown, straight from the Ministry of Health to vet and prioritize. We have a natural Ministry of Health. They often reflect a political objective. A ally in the Ministry of Finance, because we are both new hospital in an important political district will undoubtedly interested in getting the best project possible (in terms of help secure votes. impact and affordability). They need our help, and we need theirs, in selecting and pruning the optimal projects. Lesson 4: Back-of-the-envelope. Lesson 7: Buy services, not equipment (or buildings). When faced by white elephant proponents from within the government, the best response is a quick assessment PPPs should be about buying services, not equipment or that not only shows the estimated cost to the government, buildings. In the narrow project sense, this means that the but translates that cost into terms everyone can PPP operator will be responsible for delivering an all-in understand. A real example: If you build this facility, we service­ —capital financing, construction, equipment, estimate the end cost will be $75,000 per patient. With maintenance, staffing and service delivery (clinical and those funds, you could treat X patients in the primary nonclinical services). So ministries need to think in terms care center or Y patients in the emergency department of of the outputs and services they need, not the equipment the nearby hospital. and buildings they want. In practice, this is incredibly difficult, as most officials have been used to public When faced with potential white elephant invaders from procurement where they specify every nut and bolt they outside the country, the best response is to emphasize to want. And even when they do grasp the difference, there is still an element of mistrust. How can I trust them to use 3 A provincial governor once said to me: “We don’t need another hospital.� I replied: “No, but you need a new one.� the proper inputs, materials, dimensions, staff, equipment, 4 A cyclotron is used to produce radioactive isotopes for medical use. etc? 2 SMARTLESSONS — MAY 2012 Many governments have accepted the need of the current and future market. In one to provide input flexibility to the bidders, but country, the public health insurer requested typically within the context of: “We want a bids for health services for its insured hospital of 250 beds, located at Y, with these population for a specific catchment area, but services and performance targets.� And most gave bidders flexibility to come up with its want to at least see a concept design from own solutions. each bidder at the time of bidding, so that they can confirm that the design meets the Over time, we expect a transformation, as functional requirements set out in the tender public insurers expand their contracting and documents. governments transition from a service delivery to a policy/regulatory role. This While this is a massive step forward from transformation will likely involve three traditional public procurement, it may not be elements: (a) a definition of standard services sufficient to prevent white elephants. If or packages of services; (b) the setting of medical technology and delivery continue to standard reimbursement rates, regardless of change, a hospital built today could readily provider (public or private);5 and (c) an be obsolete in, say, 10 years. Of course, if the accreditation mechanism so that only PPP operator is willing to bear the full market accredited providers are eligible for contracts. and downside demand risk (i.e., funding Under this system, all accredited providers drops if demand drops), then potential would be treated equally and be eligible for obsolescence would not be as big a problem reimbursement by the government or public for the government. But this is rarely the insurer. Providers would be free to choose case. I visited one hospital PPP two years ago their location (market forces would dictate) (not IFC-advised) that had an occupancy rate and facility size (subject to accreditation of 10 percent (through no fault of the PPP requirements). operator). Yet the government was paying the full cost of the hospital’s operations. Conclusion Nevertheless, the private operator was still worried, as bad press would diminish future Countries that effectively integrate their PPP opportunities in the country. public and private health care systems through large-scale contracting will provide their Ultimately, we want to encourage market residents with the greatest choice and quality solutions where the private sector adjusts its standards. White elephants may then truly offerings and delivery to match its assessment become an endangered species. DISCLAIMER SmartLessons is an awards program to share lessons learned in development-oriented advisory services and investment operations. The findings, interpretations, and conclusions expressed in this paper are those of the author(s) and do not necessarily reflect the views of IFC or its partner organizations, the Executive Directors of The World Bank or the governments they represent. IFC does not assume any responsibility for the completeness or accuracy of the information contained in this document. Please see the terms and conditions at www.ifc.org/ smartlessons or contact the program at smartlessons@ifc.org. 5 Some reimbursement premium may also be needed to attract providers to more remote and rural areas. SMARTLESSONS — MAY 2012 3