Right to consider funding model

Dunedin hospital. Photo: ODT files
Dunedin hospital. Photo: ODT files
What does a PPP for Dunedin hospital mean? Infrastructure New Zealand chief executive Stephen Selwood explains.

That a PPP (public-private partnership) is to be considered for the new Dunedin hospital is no surprise. All major public infrastructure builds these days must consider PPPs, simply as a matter of good public policy. But what is a PPP, and what might one mean for Dunedin Hospital?

A PPP is one of several ways governments here and overseas buy (or more precisely ``procure'') infrastructure. We've already seen the model used to deliver roads, schools and prisons in New Zealand, but not yet a hospital.

In industry jargon, a PPP is a long-term contract to design, build, finance and, in this case, maintain the hospital. To understand what this means in practice, it's helpful to look at the alternative.

Under a ``traditional'' procurement approach, the government (or DHB) will pay a designer to design a hospital then pay a builder to build it and finally contract maintenance companies to keep it working.

This standard type of approach works well most of the time, but problems can arise when projects are especially large and complex. Sometimes the designer and builder won't agree. Costs will go up and timeframes slip. Other times, the client or the builder might cut back on quality to save money, increasing maintenance costs down the track. Often, a government agency won't have money available and so will defer a new build or cut back on maintenance, with the result being a shoddy or rundown asset. The current Dunedin Hospital would be a case in point.

The design, construction and maintenance of Dunedin's new hospital will be a complex project with many risks. Under conventional procurement it will be the taxpayer who picks up the tab if things go wrong, either in higher long-term charges or substandard public services. Substandard facilities will not only impact patient care but they will also affect working conditions for doctors, nurses and caregivers.

PPPs are designed to get around these issues.

Having the private sector integrate finance, design, construction and maintenance and manage all associated risks in a PPP may prove beneficial if the benefits exceed the higher costs of using private capital.

The public sector, in this case the Southern District Health Board, will have just one contract to sign and its formal relationship will be with one party (a private partner representing a consortium of different companies) for the life of the agreement (usually 30 years).

Whether a PPP or not, doctors and nurses will continue working for the DHB - it's just the building and its maintenance which is being procured. But a well-managed PPP will ensure extensive up-front consultation with patients, doctors, nurses and caregivers to ensure the hospital's design, construction and maintenance will meet everyone's needs.

In return for delivering and maintaining the hospital to the required standard, the private partner is paid a fixed amount every month until the contract is complete. If the hospital isn't meeting the contracted expectations, the private partner will be paid less until performance is back up to scratch.

At the end of the term, when all the capital has been repaid, the hospital becomes a public asset. It's sort of like a lease-to-own agreement but with strong performance requirements attached.

This arrangement can be attractive to governments because there is no large upfront capital cost to deal with, meaning public money can be used elsewhere, and if the hospital building has problems it's the private partner which is liable, not the taxpayer.

Enabling private sector innovation and managing whole of life risks effectively is what PPPs are designed to achieve. It's the reason why multiple studies from Australia to Canada and even the UK (where a number of flawed PPPs were contracted) have shown that, when procured properly, PPPs do deliver value.

They don't always, and authorities are diligently looking at whether a Dunedin PPP will or won't, but it is right and proper they are asking the question.


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