As a result, the health infrastructure sector is also encountering a significant change in both the type of projects and services being procured by health systems and, with it, their funding and financing structures.
Health system rebirth
Across the spectrum, healthcare infrastructure is experiencing somewhat of a rebirth and health systems around the world are now facing two distinct challenges: ‘pains of old age’ or ‘growing pains’.
In the more mature markets of North America and Europe, the pressure of aging populations and demographic shifts has led many governments and health systems to focus either on the renewal of existing infrastructure or – more predominantly – the decentralization of healthcare delivery into the community. In part, this trend has been catalyzed by the recent introduction of new approaches such as telehealth or telemedicine which – enabled by cloud computing and IT advances – is fundamentally changing the existing healthcare delivery model.
As a result, some of the most significant infrastructure challenges in these regions relate to the need to rationalize many of the massive assets currently on the books, either by scaling them back or redirecting their use away from those services which can be better delivered in community-based facilities.
While the drivers for change in the developing world are somewhat different (rapid urbanization and the extension of universal healthcare), the change in infrastructure delivery is no less pronounced. Looking at recent announcements of planned hospital developments in areas such as the Middle East, Eastern Europe, Africa, Asia and Latin America, it seems clear that a massive program of development is now underway.
For example, Turkey plans to build between 15 and 30 hospitals, some in excess of 1,000 beds; South Africa has more than five new replacement hospitals in the pipeline; Romania has six government-funded projects and up to 20 local government projects on the books. And programs currently being mooted in China and India may well dwarf these announcements by a long shot.
However, there are clearly signs that Public Private Partnerships (PPPs) in healthcare are moving from what has largely been a very well understood and defined procurement model with clear risk transfer approaches to instead embark on an era of locally-managed estates procurement that often embraces a new array of models such as joint ventures and leasing arrangements.
Approaches to health finance
The eventual success of many of these programs is going to be entirely dependent on the ability of governments and system administrators to find sustainable sources of long-term finance. It is clear that the global financial crisis and in particular the current European Sovereign crisis is putting a huge strain on the project finance bank market which is under regulatory pressure and may prevent long term lending (for example above 10 years). In turn, this will start to influence the way policy makers approach healthcare funding, with some now exploring the potential of offering some form of value/debt underwrite or other medium-term assurance that can unlock the bank’s ability to offer shorter-term funding that can be more easily refinanced at a later time.
With public-private partnership models coming under greater pressure and scrutiny in the sector, we have started to see a significant move towards new approaches. For example, there has been a growing interest in structures that essentially wrap together infrastructure with clinical services to increase innovation, cooperation and accountability between the construction contractor and the operator (Portugal, for one, has evidence of success in this area).
However, this approach, which makes sense in terms of delivering value, may be derailed by the growing risk version of funders (principally banks). With banks facing increasing pressure from regulation and restrictions on risk, bundling the risk of operations into construction risk will raise project risk profiles above the long-term funding appetite for most banks, regardless of the value delivered to governments and investors.
Of course, a number of governments, particularly in the emerging markets in the Middle East and Asia, are choosing instead to fund fully the development of health facilities without the assistance of international investment or private finance. Eventually, China will likely lead this trend as the country strives to bring basic health services to large swaths of previously under-served populations, even while Royal or Government-backed funds are largely financing developments in places like Saudi and Jordan.
Taken together, these rapid and transformational changes in the health sector have led to a turbulent yet exciting time for the infrastructure development community as growth moves into new markets, redevelopment takes hold in more mature jurisdictions and finance continues to muddle on in the face of increasingly restrictive regulation.
What is clear is that – while opportunities certainly exist in markets around the world – infrastructure developers, governments and system administrators will need to change their approaches to infrastructure development dramatically if they hope to meet the growing demand for health services.
By Matthew Custance, KPMG in the UK