Lesotho Public-Private Partnership

1. Lesotho Public-Private Partnership Financing a New National Referral Hospital for Results

2. Topics • What is PPP? • Background of Lesotho Hospital PPP • Why PPP • PPP Financing & Arrangements • PPP for Results

3. Definition of PPPs • Public Private Partnership • Public = Government (national, district, municipal, local) • Private= anything other than government (private company, NGO or other not-for-profit organization) • Partnership= formal agreement between the parties for the private provision of public infrastructure and/or public services

4. Definition of PPPs • A contract between government institution & private party • Private party performs a public function according to output specifications • Substantial project risk (financial, technical, operational) is transferred to the private party • Government becomes purchaser of services and/orenabler • Payment received by private party – either: • Fees from government budget • User fees • Some combination of government fees and user fees

5. Why embark on a PPP? Changing role for modern Governments • Old model: Govt plan, finances, and provides public services everything, • New model: Focus on high level priorities Regulate, design & implement sector policies, quality standards Contract out for specific services and infrastructure Private sector expertise and resources provide efficient, effective public services and infrastructure

6. PPP as RBF: Performance-Based, Output-Driven Contracts • Transparent bidding/negotiations • Objective ranking/selection criteria • Criteria to evaluate compliance with output needs to be clearly defined • Service-oriented • “What” controlled by buyer (Government) • “How” controlled by seller (private sector) • Responsibility for performance is clear • Allows the bidders to apply expertise and innovation to lower costs A clear regulatory environment as well as skilled contract monitoring is KEY for success

7. PPP Options Risk Public Private Service Contracts Service Contracts Service Contracts Mgt Contracts Rehab ROT BOT DBOM DBFO • Detailed design and construction • Medical equipment • Capital financing • Management • Operate • (FM, support svcs, clinical) • Varied • Design and Rehabilitate • Upgrade and Re-equip • Management • Operate • (FM, support services, clinical) • Clin. Specialist • Dialysis • Oncology services • Day surgery • Other specialist services • Varied • Primary care • Public health • ART clinics • Mgt of new, • existing facilities • Mgt of entire • Hospital or • Hospital / clinic • network • Non-Clinical • IT equipment & services • Billing • Maintenance • Food • Laundry • Cleaning • Clinical Support • Lab analysis • Diagnostic tests • Medical equipment maintenance

8. Hospital PPP PPP Models match needs by country: • Countries with primary need for infrastructure alone, have opted for the PFI model (UK, Canada, others) • Countries with need for infrastructure, know-how and trained staff have opted for full PPP models and purchase specified services from their PPP Partners (Brazil, Australia, US and countries in Eastern Europe, Latin America, Asia) • Projects include new and refurbished hospitals, clinical and support services, primary care, national insurance and contracting for other health services • Lesotho hospital PPP will be the first of such in IDA countries

9. Background • With a population of 1.89 million (2006 Census), and a GDP per capita of US$960, Lesotho is a small and landlocked economy, completely surrounded by the Republic of South Africa. • Two great challenges hindering economic growth and poverty reduction: -A HIV/AIDS epidemic and a heavy disease burden • HIV prevalence in the adult population estimated to be the third highest rate in the world. • Life expectancy at birth in 2004 was estimated at 36.81 years. • For a total population of about 1.8 Million (Census 2006), 108,700 children are orphaned due to AIDS and 270,272 people are reported to be living with HIV and AIDS. • There are an estimated 62 new HIV infections and 50 deaths from AIDS each day in the country. • Poor health status and heavy disease burden, featuring fifth highest TB incidence; high maternal and child mortality and malnutrition. • Lesotho is not on track to reach the health MDGs.

10. Queen Elizabeth II Hospital • The only national referral hospital and important part of the health care system. • The hospital, built in the early 1900s, is no longer fit to serve as the national referral hospital • Major problems: collapsing structure, obsolete systems, limited service space and capacity, and overcrowding of patients. • It even poses a real risk of cross-infection. • Nonetheless, the hospital continues to consume a significant share of the national health budget, and its budget has tripled in the last five years.

11. The Need for a New Hospital As part of the ongoing Health Sector Reform program, Government is replacing the Queen II hospital with a new referral hospital. Government’s objectives for the new hospital project include: • A new public hospital with a higher level of service and quality; • Maximizing the value for money spent – more services! • Reliable services, affordable and predictable costs for the budget; • Accountability for results • Benefits from new hospital to all Basotho and throughout health sector. The New Hospital cannot solve all issues in the health sector, but it will help to address many of them.

12. Financing options • Public only (the traditional way) • Private only • Public-Private Partnership

13. Why the PPP Model? • Increased need for better services as expressed by both the public and government • Private Sector can deliver the results Government and the public are seeking • Government is increasingly focusing on accountability and results • Government intends the New Hospital PPP Project to provide - -Modern approaches to health management, clinical procedures, medical equipment -Training for the health sector -Predictable expenditure – to stay within Government’s Unitary Payment

14. Decision • Government began considering PPP options in late 2004; in late 2005 it requested the IDA and IFC to review the strategic options for a New Hospital PPP, to prepare for rapid implementation • In September 2006, Cabinet approved moving to market with the New Hospital PPP as a Design-Build-Finance-Operate project for a 390 bed hospital to be constructed on a greenfield site • The contract is anticipated to be for 18 years, during which the PPP Partner will initially refurbish and operate the filter clinics while constructing the new hospital, then fully manage and operate the clinics and hospital

15. $ $ PPP at Work: New Hospital PrivateOperator Ministry of Health PPP Agreement New Hospital • Detailed designs • Capital financing • Construction • Medical supplies & equipment • Clinical services • Maintenance • Non-clinical services • Staffing and Training • Sector Policies and Strategy • Service Package • Reimbursement for all clinical and non-clinical services • Performance monitoring • Joint Services Committee

16. Lesotho: New Referral Hospital PPP The Project • Greenfield public hospital of 390 beds + 35 private beds • Refurbishment, upgrade and operation of 3 large filter clinics • Design, construction, partial finance, full operation for 18 years – significant risk transfer to the private sector • Operational services include: • Non-clinical services - administration, building & facilities management, IT, etc. • Clinical Support Services - biomedical engineering, labs &pharmacy, imaging, etc. • Clinical Services - Tertiary hospital, with fewer referrals to South Africa • Private wing

17. Guiding Principles New Public Hospital serves two equally important functions: • High quality services for all Basotho • Training resource for health sector • Balance what is needed with what is affordable • Suitability, durability, ease of maintenance and minimum life-time cost for the building and equipment • Maximum value for money spent on this project

18. World Bank Contributions • Strong sector and country support, e.g., Health Sector Reform Program Phase II • World Bank has approved a GPOBA grant of $6.25m / M43.75m to “top up” the budget for the first 5 years of the PPP project, allowing additional patients to be seen for most needed services • IFC is providing TA to the PPP • IDA agreed to provide a PRG to mitigate the risks associated with the PPP and to attract bidders

19. Services offered: Queen II v New Hospital PPP

20. Design ofNew Hospital

21. Financing New Referral Hospital PPP • Estimated cost – US$ 68m • Govt capital contribution ($46m) • Private sector capital contribution • Partial Risk Guarantee (World Bank) attractive to bidders • GPOBA: output based grant for service delivery ($6.25m) • Co-pay per patient does not change (~$1.25 per patient) • Unitary Payment • Guarantees service to 20,000 inpatients & 310,000 outpatients per annum • Escalated only by CPI – ensuring budget certainty for Government • Local Economic Empowerment • Strong contractual commitment - 20% at project start, 30% by year 12

22. Lesotho New Referral Hospital PPP • Goal: Maximize value for money – better quality and more services for similar budget • Bidders provided with • Set annual operating budget (“Service Payment”) • List of services (required & optional) to be provided at the new hospital • Set quality parameters for services and minimum patients to be seen p.a. • Bidders required to specify the volume of each service to be provided from list, within the specified budget and quality standards • PPP Agreement allows for changes in the service mix, to meet future needs, changes in demographics and disease profiles • Operator required to gain and maintain hospital accreditation

23. PPP for Results • Operator must manage services within set budget, adjusted for inflation • Hospital building required to have minimum 50 year lifespan • PPP Agreement includes equipment replacement schedules, maintenance and servicing levels to manufacturers standards • Equipment replacement schedule means that at handover, Government receives equipment in good operational condition • Staff may choose to transfer to Operator or be reassigned by Govt • New hospital must attend all patients who present • New hospital required to provide practical and ongoing professional training opportunities for health professionals throughout the country (medical and nursing students, district hospitals, clinics) • Operator committed to attracting and retaining health professionals – key constraint for Government

24. How will the New Hospital Affect the Health Sector? • Higher level of medical services at New Hospital – fully functioning hospital with required staff, training and equipment • Greater access to services – more patients can be seen, and at higher level of service & quality • Better referral resource for district hospitals • New Hospital will serve as a training resource for the health sector, complementing existing programmes – this is a contractual obligation – students from NHTC will have placements, District hospital staff will also have training rotations • Fewer referrals expected to South Africa over time • Fits in Government’s affordability envelope – similar budget, on net basis, to existing hospital, rising only for inflation

25. Accountability for Results • IFC Baseline Survey – measured services and quality today • Contractual Performance Indicators (clinical and support svcs) • Ramp up from current baseline to targets (equipment availability, charts, etc) • Indicators based on review of Government’s health targets (e.g., MCH MDG) and international best practices for quality of service • Failure to meet performance indicators invokes penalties (up to 10% of UP p.a.) • Performance Monitoring – 5 levels • Independent Monitor – quarterly assessment against performance indicators • Operator’s internal monitoring • Government monitoring • Joint Services Committee • COHSASA Accreditation

26. Transaction Structure Due Diligence Asses Investor Interest Phase IPreparation Identify PSP Objectives Financial Modeling Legal/Regulatory Review Assess PSP Options QEII ReplacementHospital PPP - Preparation Phase

27. Closing InformationMemorandum Phase IIImplementation Bidding Pre- qualification Final Bidding Documents Bidder Due Diligence Draft Bidding Documents QEII Replacement Hospital PPP - Implementation Phase Implementation will begin in with the marketing program and Investors Conference, and will be completed with bid evaluation, bid award and closure later this year.

28. Ongoing Process • Bidding process was completed and private operators have been selected • PPP arrangement signing is scheduled for October 2008 • Financial closing by the end of 2008 • Construction will start in January 2009 • The new hospital is expected to be operational in 2011