When Close is Not Enough

In an announcement on April 10, the Israeli government awarded the development of a new hospital in Ashdod to Assuta Medical Center.  Assuta is a quasi-private company which owns four hospitals and four outpatient medical facilities in Israel.  It is wholly owned by Maccabi Health Services, Israel’s second largest government health fund.  Basically, the government awarded the project to ITSELF.

The Ashdod hospital will be the first new hospital in Israel in 36 years.  That is longer than half of the very existence of the state, itself.  Even more precedential, it is being touted as the first development award of a public health facility to a non-governmental development consortium.

This deal is similar to a PPP or PFI, but it falls short in several areas.  Private Finance Initiative (PFI), also termed Public Private Partnerships (PPP or P3), is a financing structure whereby a consortium of private companies partner with local government entities. The consortium is comprised of private sector financial, design, construction and facility operations partners who provide the various components of the project. Together, they deliver a completed product which is occupied/utilized by the local government agency and is paid for as an ongoing operational expenditure. Most PFI structures are formulated with a pay-down period (through capital expenditures) and are owned by the local authority at the end of said period (typically 30 years).

PFI funding initiatives are commonly utilized in Europe and Canada for infrastructure projects such as toll roads and energy production and waste management plants. They are also being implemented in schools, hospitals and government buildings. The United States has shown limited interest in this financial structure, for toll roads in the states of Texas and New Jersey.  It is not as common in public healthcare because most hospitals are privately owned as non-profit or for-profit entities.  State or City owned hospitals generally finance their projects through special issue bonds or direct government funding.

PPP’s and PFI’s are desirable to private companies, because they allow them to  invest in government projects. In return for their investment, the government guarantees them a high fixed rate of returns. Typically, the government takes ownership of the project after thirty years’ time. Until that time, the investors continue to receive regular income as interest repaid on their investment.

The Israeli healthcare system is a socialized service similar to Canada or England.  However, it provides a much higher quality of service than most other countries.  Its primary drawback is its lack of facilities.  Only 62 years old, Israel has 38 hospitals containing 13,000 licensed beds.  This past winter, at the height of the flu season, occupancy reached 200% and prompted much criticism of the government.  The Ministry of Health responded with the promises of 10 Urgent Care Centers and an additional 1,300 beds over 10 years.  Truly a case of treating a gunshot wound with an aspirin.

The government does not have the funding sources to expand existing hospitals or to build new ones.  It does have the funding and accepts the responsibility, however, to provide healthcare if these facilities would somehow materialize.  Enter PFI/PPP financing mechanism.  This would be the perfect solution for such a short-term fiscal challenge.  It is a system yet to be understood or accessed by the Israeli government.  Surprising, considering that the prime minister, Bibi Netanyahu has a Masters degree from MIT’s Sloan School of Management.

The key to a successful PPP/PFI process is the tender documents.  They need to be prepared by a knowledgeable government and submitted responses must be from experienced consortiums.  This is where the Ashdod project fell short of its mark.  The tender was not issued as a true PPP/PFI and the responses came from an assortment of individual players and not a consortium or combination of all of them.  Respondents included Clalit Health services and Africa-Israel, the country’s largest commercial developer. Ultimately, the government awarded the project to itself.  A true balagan (Hebrew for chaos), if ever there was one.

What next?  My next blog will address solutions for Israel’s healthcare system.  It is an excellent study in the expansion and advancement of a truly successful socialized healthcare system.  Take note, President Obama.

Additional PPP/PFI Resources:

Public Private Partnerships (PPP) Bulletin
Private Participation in Infrastructure (PPI) Project Database
The Canadian Council for Public Private Parterships
Private sector industry body for PFI/PPP
Federal Highways Administration – PPP website
International Project Finance Association
Community Health Partnerships – delivery agency for health and local authority services

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