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The South Africa PPP ProgramThe South Africa PPP ProgramThe Inkosi Albert Luthuli Hospital

TransactionTransaction

Cairo, May 25 – 26, 2008

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USAID Support (1999-2005) to:

• Establish the PPP Unit (2000)• Develop the policy/regulatory framework for PPP p p y g y• Prepare guidelines and manuals on the regulatory

requirements• Establish a Project Development Fund to improve• Establish a Project Development Fund to improve

quality of PPP• Build a portfolio of transactions• Launch a highly effective stakeholder awareness

campaign to educate the public and private sector in procurement requirements

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The National Treasury's PPP Unit

• Develops, formulates, and promotes PPP policy • Evolve as a dynamic and sustainable center of excellence for

PPPs: Ensures that international best practice for PPP arePPPs: Ensures that international best practice for PPP are followed

• Drives the flow of PPP deals• Gives technical assistance to public institutions through project

f ibilit t d tfeasibility, procurement, and management• Promotes an enabling environment for PPPs by:

– facilitating certainty in a regulatory framework– developing best practices guidelines: National Treasury PPPdeveloping best practices guidelines: National Treasury PPP

Manual ; Standardized provisions of PPP/agreements– providing training for both the public and private sectors– disseminating reliable information

driving black economic empowerment in PPPs

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– driving black economic empowerment in PPPs

Regulatory framework for PPP

• 1999: Public Finance Management Act (PFMA):– A Strategic Framework for Delivering Public Services through PPP– National/provincial dep. accountable for value-for-money decisions and p p y

delivery– National Treasury maintains budget oversight, guidance

• 2000: Treasury Regulation 16 for PPPs– national departments– provincial departments

• 2003: Municipal Finance Management Act:– Provides for municipal PPPs and requires Treasury view and

recommendations on their feasibility• 2004: Code for BEE in PPPs provides for a BEE scorecard in each

project, with targets in the private party's:– Equity/Management and employment– Subcontracting

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Regulatory framework for PPPs – Reg 16

• A PPP is defined in South African law as: – A contract between government institution and private partyg p p y– Private party performs an institutional function and/or uses

state property in terms of output specifications for a significant period of timeg p

– Substantial project risk (financial, technical, operational) transferred to the private party

– Private party benefits through: unitary payments fromPrivate party benefits through: unitary payments from government budget and/or user fees

– The public sector retains a major role either as main purchaser of the services or as main enabler of the project

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purchaser of the services or as main enabler of the project.

Key PPP regulatory features

• Regulation 16 requires all PPP deals to obtain Treasury Approval (TA) for:y pp ( )– Affordability– Value-for-money

Appropriate allocation of Risk– Appropriate allocation of Risk

• Applied within set PPP project cycle:– Inception– Feasibility– Procurement– PPP agreement management

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PPP agreement management

“Several years ago the main issue in the PPP market was that tooSeveral years ago the main issue in the PPP market was that too few deals had been closed. This has changed dramatically with eighteen successfully concluded PPP deals in the market. However, with new successes also come new challenges which need to be

t h d T d f th k h ll f i PPP i

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met head on. Today, one of the key challenges facing PPPs is ensuring that the concluded deals are successfully implemented according to the terms of the final agreement…” Dec 2007

PPP projects as of December 20072625

30

15 1220

25

1818

8610

15

3

0

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Inception: 18Feasibility: 26Procurement: 6

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Negotiations: 3Closed deals since Treasury PPP Reg. in May 2000: 188 closed PPP deals prior to Treasury PPP Reg.: (N3 and N4 toll roads, two prisons, SANParks)

The Inkosi Albert Luthuli HospitalLuthuli Hospital

Sponsor: Kwa Zulu Natal Department of Health (DoH)of Health (DoH)

A 846-bed, tertiary care, referral-only hospital situated in pDurban

Opened in June 2002

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The Inkosi Albert Luthuli Hospital

• The first hospital in South Africa to enter into a PPP for the delivery of all its non-clinical services

• It was also the first South African PPP to be conducted according to Treasury Regulation 16 and the first at the Provincial level

• The hospital provides highly specialized services for the entire population of KwaZulu Natal and half of the Eastern Cape Province (Population 12.5 million)

• The hospital is fully computerized and works on paperless principles. It uses leading-edge medical equipment, from MRIs to surgical instruments

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Project Context

• Create a central hospital that was comparable to the best in the world, with the following constraints/needs in the public sector:

Li it d f di ithi th KZN D H f l t f– Limited funding within the KZN DoH for replacement of equipment;

– Lack of expertise within the public sector in facilities management;g ;

– Lack of expertise within the public sector to sustain the IT systems;

– A public sector hospital management skills shortage, which d i d i bl f i h hmade it desirable to outsource non-core functions so that the

department could focus on the core medical functions of the hospital

– Need to ensure cutting edge technology

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Need to ensure cutting edge technology

Scope of the PPP Project

• 15 year PPP/concession for the delivery of all the hospital’s non-clinical services:– supply of “state-of-the-art” equipment and information managementsupply of state of the art equipment and information management

and technology (IM&T) systems and replacing the equipment and IM&T systems so as to ensure that they remain state-of-the-art;

– supply and replacement of medical equipment;– provision of all services necessary to manage the hospital’s assetsprovision of all services necessary to manage the hospital s assets

in accordance with best industry practice;– maintenance and replacement of the departmental assets in the

hospital;– provision or procurement of utilities and consumables and surgicalprovision or procurement of utilities and consumables and surgical

instruments; and– provision of facilities management (FM) services

• The hospital was built under a separate contract. However, the Project Company was responsible for the remedial works

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Project Company was responsible for the remedial works

Concessionaire Obligations

• Service levels based on outputs specification• Outputs for medical equipment and IM&T had to be produced

using state of the art equipment and industry best practicesusing state of the art equipment and industry best practices– five-year replacement schedules for medical equipment– three-year replacement schedules for IM&T

• The FM services have to be provided according to detailed t t b d ifi tioutput-based specifications

• A complex and rigorously designed and essentially self-monitoring penalty system ensures that any deviation from full service provision by the concession company is reflected in a p y p yseries of payment deductions

• A help desk for effective end user contact, call logging, and service performance measurement tracking was required

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Extensive IM&T facilities

• An electronic patient record;• order-communications;• on-line results reporting;• electronic prescribing and recording of drug administration;• theatre and out-patient scheduling systems;• digital imaging;• incorporated as a principle near-patient computing to support

near patient testing. This required computer access at the b d idbedside;

• IM&T links with secondary care (Other government hospitals) to facilitate direct bookings; and

• Started actively exploring the potential of tele medicine

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• Started actively exploring the potential of tele-medicine

Risk Transfer

• Medical Equipment and IM&T– Technology refreshment– Obsolescence replacement– Obsolescence replacement– Purchase cost including exchange and taxation risks– Equipment performance/availability– Maintenance costs– Life of Equipment

• Hospital Buildings and Infra-structure– Condition and availability of the IALCH building fabric/services and its

required FM services performance upon commencement and during the gterm of the Project Agreement

– Whole life FM costs to include asset maintenance and replacement and FM service delivery in capital and revenue terms

– Condition of the IALCH buildings and infrastructure at the end Project

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Project Costs

• Capital Investment (NPV): R1,560.5 m – R947 m in the first yeary

• Operating Costs (NPV): R1,460 m

• Value for Money: R370 million over the Public Sector Comparator (PSC) constructed during the feasibility study stagestudy stage

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PPP Award

• Contract award in March 2001 to Impilo Consortium• Treasury approval in line with the PFMA regulationsTreasury approval in line with the PFMA regulations

was given in October 2001• Financial closure followed in early November 2001• Contract signed in December 2001• First patients on June 2002

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Ithala FinanceService PaymentR 304.9 M/year

African PPP/HealthcareDeal of 2002

CorporationR 304.9 M/year

Monthly (FM)

IMPILO

15-year PPPContract

R 360 M Int. free loan

Quarterly (CapitalCosts)

IMPILO Consortium

OShareholders

Cowslip InvROE

IMPILO ConsortiumSpecial Purpose

Company

Cowslip Inv.(SPV)

R60 M Equity

R326 M unsecured loan facility

DeferredShares

Lender:

Payments (i + p)

Provision of non-clinical Lender:

RAND MERCHANTBANK Inkosi Albert

Luthuli Hospital

services

Financial Structure

• Upfront Payment = Once-off amount of R360m(including VAT). – This amount was not adjusted for inflation; – Interest-free “loan” from the KZN DoH (made via Cowslip, a

special purpose vehicle created to channel the funds to the j t f th t’ Ith l Fi C ti )project from the government’s Ithala Finance Corporation)

– The agreement specifies that the KZN DoH should have first ranking security over the assetsCowslip took a special class of equity which allows it to take– Cowslip took a special class of equity, which allows it to take control of the Concessionaire in the event of default, thus ensuring immediate control over the assets for the continuance of clinical service provision.

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Financial Structure

• Service Payment= R304.9m per annum (including VAT and in March 2002 terms), to escalate by CPIX and payable in: – Monthly installments to cover FM costs– Quarterly installments to cover capital refurbishment and

replacement costs• The fact that the escalation in the quarterly fee for the

purchasing, replacement, and maintenance of IM&T and medical equipment is linked to CPIx means that, although there is a significant import component on equipment both initiallyis a significant import component on equipment, both initially and during replenishment, the government did not accept any foreign currency risk

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The Inkosi Albert Luthuli Hospital

• First PPP project to close in terms of the Public Finance Management Act PPP regulations;g g ;

• First of its scale and complexity to achieve financial close less than a year after announcement of the

f d bidd dpreferred bidder; and• First project where investors and banks have had to

take provincial government credit risk, without any a e p o c a go e e c ed s , ou a yreliance on national government, other than the approval procedures as set out in the regulations

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Thank You!

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PPP Closed TransactionsPPP Closed Transactions

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Chapman’s Peak Drive toll roadBenefit to government: R450 million in capex and operationsSigned: May 2003Signed: May 2003Term: 30 yearsBEE: equity 30%; construction subcontract 10%; ops and maintain subcontract 50%

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Free State social grantsValue to government: R260 millionSigned: April 2004Signed: April 2004Term: 3 yearsBEE: equity 40%; subcontracting first year 30%, second year 35%, third year 45%

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Department of Trade & Industry campusValue to government: R870 millionSigned: Aug 2003Signed: Aug 2003Term: 25 yearsBEE: equity 55%; construction subcontract 43%; facilities management 50%

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Toll roads: N3, N4 east, N4 westTerm: 30 years eachN3 signed: May 1999; value: R3.5bnN3 signed: May 1999; value: R3.5bnN4 east signed: Dec 1997; value: R3.0bnN4 west signed: Aug 2001; value: R 3.2bn

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Department of Labour ITValue to government: R1.5 billionSigned: Dec 2002Signed: Dec 2002Term: 10 yearsBEE: equity 30%; subcontracting 25%

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Universitas and Pelonomi HospitalsTerm: 16 5 yearsTerm: 16,5 yearsSigned: Nov 2002BEE: equity 40%; subcontracting 40%

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SANParks concessionsEleven concessions in four national parksSigned: 2001 to 2002Terms: 20 years eachTerms: 20 years eachValue: R270 million in fixed capital assets; NPV concession fees R253 millionBEE: equity 20% plus; subcontracting 30% plus; 620 new jobs

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Project inception• Register the PPP with the relevant

treasury;treasury;• Inform the relevant treasury of the

expertise within that institution to proceed with a PPP;A i t j t ffi f ithi• Appoint a project officer from within or outside the institution; and

• Appoint a transaction advisor if the relevant treasury so requestsy q

• PSC: R4.8 bill.• Risk Adjusted PSC: 5.4 bill.

Lessons from project inception • Learn from international

expertise, especially if none is available locally

• Ensure that the transaction advisor is multi-disciplinary and contains experts in all fields necessary to the

j tproject

• PSC: R4.8 bill.• Risk Adjusted PSC: 5.4 bill.

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Traditional payment mechanismExample: Government office accommodationExample: Government office accommodation

Government Payment

DelayOverruns Delay costs

Overruns

CAPEX

C t ti /

Budgeted OPEX

Construction/development

Overruns

330 3 10 15

Time (years)

PPP paymentExample: Government office accommodationExample: Government office accommodation

PPP unitary paymentGovernment

Paymenty

Operational periodPayment against service

ConstructionPeriod Payment against service

delivery, linked to CPI-XPeriodNo payment

340 3 10 15

Time (years)

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Treasury’s PPP feasibility approach

Affordabilitylimit

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Agenda

• The South Africa PPP Unit• South Africa’s Regulatory framework for PPPsSouth Africa s Regulatory framework for PPPs• Generic PPP Project Life Cycle• The Inkosi Albert Luthuli Hospital Transactionp

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Inkosi Albert Luthuli HospitalValue to government: R4.5 billionSigned: Dec 2001Signed: Dec 2001Term: 15 yearsBEE: equity 40%; subcontracting 40%

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PPP Objectives for KZN Department of Health

• Improved value for money by choosing Services on the basis of whole life costs

• Make service payments based on service availability• Ensure that payments fall within the parameters of

the KwaZulu-Natal Government's budget The projectthe KwaZulu Natal Government s budget. The project had to be affordable

• Establish a replacement program for all equipmentT f i k h P j C• Transfer risk to the Project Company

• Ensure that DoH’s commitment to BEE and development were met

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