Public-Private Partnerships’ contribution to quality ...

PUBLIC-PRIVATE PARTNERSHIPS’ CONTRIBUTION TO QUALITY

HEALTHCARE: A CASE STUDY FOR SOUTH AFRICA AFTER 1994

by

MONGI JAMES JOKOZELA

submitted in partial fulfilment of the requirements of the degree

Magister Commercii

in

Economics

in the

Faculty of Economic and Financial Sciences

at the

University of Johannesburg

Supervisor: Professor Ronald Mears

May 2012

Johannesburg

ii

ACKNOWLEDGEMENTS

I am indebted to a number of people for the success of this study.

I would like to acknowledge the support, guidance and encouragement of my

Supervisor, Professor Ronald Mears of the Department of Economics and

Econometrics at the University of Johannesburg. I thank you for your thoughtful

advice and direction in my studies.

My sincere thanks and love to my wife, Lindiwe Jokozela for believing in me and

always supporting me in my studies. To my kids who missed the love and attention

of their father during my studies. A special thanks to my parents for bringing me up

to be the person I am today and the community of Hillside village in whose

environment I grew up.

Lastly, I thank my work and student colleagues, friends and family for their

encouragement and support throughout my studies.

Opinions expressed and conclusions derived, are those of the author and not

necessarily to be attributed to the University of Johannesburg.

iii

DECLARATION

I, declare that

Public-Private Partnerships’ contribution to quality healthcare: a case study of

South Africa after 1994

is my own work, that all the sources used or quoted have been indicated and

acknowledged by means of complete references, and that the research was not

previously submitted by me for a degree at another University.

Mongi James Jokozela

May 2012

iv

PUBLIC-PRIVATE PARTNERSHIPS’ CONTRIBUTION TO QUALITY

HEALTHCARE: A CASE STUDY FOR SOUTH AFRICA AFTER 1994

Student: Mongi James Jokozela

Degree: Magister Commercii in Economics

Department: Economics and Econometrics

Supervisor: Professor Ronald Mears

ABSTRACT

PPPs have developed out of a realisation by governments that in order to improve

health systems efficiency there is a need to involve the private sector. Governments

throughout the world have opted for PPPs to deliver public services, share risks and

attain common goals. While the idea of PPPs is not new, it nonetheless has grown in

application in recent years especially in developing countries such as South Africa.

The neo-liberal GEAR macro-economic policy, that seeked to reduce government

spending and to accelerate investment, catalysed the formation of PPPs in South

Africa after 1996.

The South African health system is a two-tier system consisting of the public sector

and private sector. The public health sector is under resourced in terms of health

personnel, health resources and funding compared to private healthcare. As a

consequence, public health outcomes in South Africa are poor relative to its funding

and have deteriorated since 1996, reportedly mainly due to the HIV/AIDS epidemic.

On the contrary, private healthcare outcomes are amongst the best in the world. As

a result, the demand for private healthcare is higher than that of public healthcare,

because it is better resourced and offers better quality care.

The research investigates the contribution of PPPs to access quality healthcare in

South Africa. The study follows the policy, financial and governance approach to

review health PPPs. It suggests that the 7 implemented health PPPs contributed

v

directly and indirectly to improved access to quality healthcare. It recommends the

implementation of health PPPs particularly at local government level, to improve

access to quality healthcare.

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LIST OF ACRONYMS AND ABBREVATIONS

AIDS Acquired Immunodeficiency Syndrome

ANC African National Congress

BBO Buy, build and operate

BEE Black Economic Empowerment

BOLB Buy, own and lease back

BOO Build, own and operate

BOOT Build, own, operate and transfer

DBFOT Design, build, finance, operate and transfer

DFBOT Design, finance, build, operate and transfer

DFO Design, finance and operate

DBO Design, build and operate

DFBO Design, finance, build and operate

DHS District Health System

DoH Department of Health

ECDoH Eastern Cape Department of Health

FSDoH Free State Department of Health

GEAR Growth, Employment and Redistribution policy

GDP Gross Domestic Product

GNP Gross National Product

HIV Human Immunodeficiency Virus

IALCH Inkosi Albert Luthuli Hospital

KZNDoH KwaZulu-Natal Department of Health

LAC Long-term average costs

LBO Lease, build and operate

LDoH Limpopo Department of Health

NDoH National Department of Health

NHI National Health Insurance

NHP National Health Plan

NHS National Health System

NPV Net Present Value

O&M Operate and maintenance

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OPD Out-patients department

PFI Private Finance Initiatives

PHC Primary Health Care

PPI Public-private initiative

PPP Public-Private Partnership

PSC Public Sector Comparator

SAC Short-term average cost

SMC Short-term marginal cost

SPV Special Purpose Vehicle

STC Short-term total cost

SVI State Vaccine Institute

TB Tuberculosis

UK United Kingdom

USA United States of America

WCDoH Western Cape Department of Health

WHO World Health Organisation

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TABLE OF CONTENTS

CONTENTS PAGE

Acknowledgements................................................................................................ii

Declaration ........................................................................................................... iii

Abstract ................................................................................................................ iv

Table of contents ................................................................................................ viii

List of figures and tables ...................................................................................... xi

List of acronyms and abbreviations ...................................................................... iv

Table of contents...................................................................................................viii

List of figures and tables........................................................................................xi

CHAPTER 1

THE PROBLEM AND ITS SETTING

1.1 Problem statement 1

1.2 Clarification of concepts 3

1.3 Literature review 5

1.4 Aim and objectives of the study 7

1.5 Hypothesis and research question 8

1.6 Importance of the study 8

1.7 Research design and methodology 8

1.8 Deployment of study 9

CHAPTER 2

THE ECONOMICS OF HEALTHCARE DELIVERY AND MODELS OF PUBLIC-

PRIVATE PARTNERSHIPS

2.1 Introduction 11

2.2 Health economics 11

2.3 The demand for healthcare 11

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2.4 The production and cost of healthcare services 16

2.5 Healthcare markets 19

2.6 Healthcare systems 22

2.7 The economics of Public-Private Partnerships 25

2.7.1 Public-private mix 25

2.7.2 What are PPPs? 26

2.7.3 Participants in PPPs 28

2.7.3.1 Public sector parties 28

2.7.3.2 Private sector parties 29

2.7.4 Models of PPPs 31

2.7.5 Healthcare PPPs 33

2.7.6 The economic and social rationale of PPPs 34

2.8 Summary of the main findings and conclusions 39

CHAPTER 3

HISTORICAL OVERVIEW AND POLICY DEVELOPMENTS IN HEALTHCARE

AND PPPs

3.1 Introduction 42

3.2 History of healthcare 42

3.2.1 The development of the hospital industry as a social institution 42

3.2.2 The characteristics of the modern hospital 45

3.3 History of healthcare in South Africa 49

3.3.1 A brief evolution of medicine as a science 49

3.3.2 The settlement period to unification in 1910 50

3.3.3 Development of hospitals in South Africa 52

3.3.4 Health policy reforms from the 19th century to 1994 53

3.4 Health policy and reforms after 1994 55

3.4.1 Development policy in South Africa since 1994 55

3.4.2 The Reconstruction and Development Programme (RDP) 55

3.4.3 Growth, Employment and Redistribution (GEAR) 56

3.4.4 The Primary Health Care (PHC) approach 56

3.4.5 The District Health System 56

3.5 Health resources 57

x

3.6 History of PPPs 61

3.6.1 History of PPPs in developed countries 61

3.6.2 PPPs in emerging markets 63

3.6.3 The history of PPPs in South Africa 64

3.6.4 Health sector PPPs in South Africa 67


CHAPTER 4

AN ANALYSIS OF PPPs AND THEIR CONTRIBUTION TO QUALITY

HEALTHCARE IN SOUTH AFRICA

4.1 Introduction 73

4.2 Quality healthcare issues in South Africa 73

4.3 Approaches to analysing PPPs 76

4.4 Review of healthcare PPPs in South Africa 78

4.4.1 Introduction 78

4.4.2 Inkosi Albert Luthuli Hospital 78

4.4.3 Universitas and Pelonomi hospitals co-location 82

4.4.4 State Vaccine Institute 85

4.4.5 Humansdorp District Hospital 87

4.4.6 Western Cape Rehabilitation Centre and Lentegeur Hospital 90

4.4.7 Polokwane Hospital Renal Dialysis 93

4.4.8 Port Alfred and Settlers Hospitals 95

4.5 Issues and concerns 97


CHAPTER 5

CONCLUSIONS AND RECOMMENDATIONS, AREAS FOR FURTHER

RESEARCH AND LIMITATIONS OF THE STUDY


5.2 Recommendations 113

5.3 Areas for further research and limitations of the study 114

xi

REFERENCE LIST

Reference List 116

LIST OF FIGURES AND TABLES

FIGURES

PAGE

Chapter 2

Figure 2.1 Individual demand curve for physician service 12

Figure 2.2 Shifts in the demand curve for physician services 14

Figure 2.3 The elasticity of demand and the slope of the demand curve 15

Figure 2.4 The production function of medical services 17

Figure 2.5 Short-run cost function 18

Figure 2.6 Public-Private mix in healthcare financing and provision 25

Figure 2.7 Typical private sector consortium for PPP 30

Chapter 4

Figure 4.1 Percentage distribution of personnel between the public and private

sectors in 1998 75

Figure 4.2 Tertiary hospitals budgets in KZN for the financial year 2007/08 80

Figure 4.3 Number of inpatients and outpatients admitted to IALCH since

2002 81

Figure 4.4 Comparison of PSC and PPP costs for the SVI project 86

Figure 4.5 Option analysis of the Polowane Renal Dialysis Unit 94

TABLES

Chapter 2

Table 2.1 Market structure and market power 21

Table 2.2 Types of national health systems 23

Table 2.3 Models of healthcare systems 24

Table 2.4 Elements of PPPs 28

Table 2.5 (a) A PPP typology based on financial and organizational

relationships 32

Table 2.5 (b) A typology of PPPs based on origin, content, form

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and depth 32

Table 2.6 Types of PPPs 33

Table 2.7 Models of PPPs in hospital provision 34

Table 2.8 Risk categories 36

Chapter 3

Table 3.1 Sources and uses of hospital funds 47

Table 3.2 Health legislation passed, 1830 to 1990 51

Table 3.3 Medical personnel in developed and developing countries 58

Table 3.4 Consolidated flow of funds in the South African health sector 59

Table 3.5 Comparison of healthcare and health status indicator of selected

countries 60

Table 3.6 British PFI projects by government departments, 1987 to 2005 62

Table 3.7 National PPP projects signed as at May 2010 65

Table 3.8 Provincial PPP projects signed as at May 2010 65

Chapter 4

Table 4.1 A framework for analysing healthcare PPPs 77

Table 4.2 Selected cost of the IALCH 79

Table 4.3 Objectives of Universitas and Pelonomi hospitals co-location

project 82

Table 4.4 Revenues from turnover and rental in Rand 84

Table 4.5 Total capital investment 88

Table 4.6 Facilities provided by Mpilisweni for each institution 91

Table 4.7 Cost per in patient day with and without PPP cost 92

Table 4.8 Proposed six health flagship projects 98

CHAPTER 1

THE PROBLEM AND ITS SETTING

1.1 Problem statement

The quality of healthcare in the public sector in South Africa has deteriorated over

the years for several reasons. These include the lack of management skills, budget

cuts and a change in the disease burden structure (DoH 2009:5). The disease

burden structure has changed with an emergence and re-emergence of infectious

diseases. The burden of Human Immunodeficiency Virus or Acquired

Immunodeficiency Syndrome (HIV/AIDS) and Tuberculosis (TB) are well

documented in South Africa. According to the DoH (2007:21+30), 29.4 percent of

antenatal clinic attendees tested positive for HIV in and over 35 thousand cases of

TB were reported in 2007.

The South African healthcare system is ranked 164 out of 191 countries by the

World Health Organisation (WHO 2000:indexes). The health outcomes are not

optimal because of the quadruple burden of diseases, namely HIV/AIDS, high

maternal and child mortality, non-communicable diseases, and violence and injuries

(DoH 2009:3). South Africa may not be able to meet the Millennium Development

Goals of reducing maternal and infant mortality rates by half from the 2005 figures of

58 under five mortality rate per 1000 and 124 maternal mortality per 100 000 births

(DoH 2007:1). In the 2009/10 Annual Report, the Minister of Health concedes that

HIV and AIDS are the common denominator influencing the mortality rates of

mothers and children and also fueling the TB epidemic.

The current policy framework of the Department of Health is based on the 10-point

plan of the health sector proposed in 2009/10 by the Minister of Health. In this plan,

the Department of Health identifies ten priorities including improving the quality of

health services, implementing the National Health Insurance (NHI), overhauling the

healthcare system and its management, and revitalisation of infrastructure (DoH

2010:2). The Primary Health Care (PHC) approach still forms the basis of healthcare

delivery in South Africa. PHC is defined in the Declaration of Alma Ata as essential

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healthcare made universally accessible to individuals and families in the community

through scientifically sound and socially acceptable technology (ANC 1994:24). The

introduction of PHC increased access to basic healthcare to all South Africans, but

inevitably led to the deterioration of quality healthcare, especially in the public sector.

Cooper quoted in the South African Health Review (2003:290) states that attention

should shift from increasing access to more citizens to increasing good quality care.

He further states that public healthcare needs to deliver standardised care of high

quality, which is centered on the needs of patients and has been scientifically

proven.

Healthcare funding in South Africa compares well with other developing countries at

8.6 percent of the expenditure on health as a percentage of the Gross Domestic

Product (GDP). Government expenditure makes up 3.5 percent of this total spent on

health (National Treasury 2007:33). In comparison with other middle income

countries in 2004, South Africa has the highest expenditure on health as a

percentage of GDP and is in the middle with regards to government expenditure as

percentage of GDP. The private sector contribution to the latter figure amounts to 5.1

percent, and this probably explains the strong private health sector in South Africa.

Despite government committing billions to public health, it has not translated into

improved quality (Bernstein 2010:5).

The management of public sector healthcare facilities has been seen as a

contributor to poor quality of care. In 1994, the African National Congress

government adopted the National Health Plan (NHP). The NHP was proposed to

address equity, access and sustainability of healthcare and committed the

government to the PHC approach (ANC 1994: 20). Subsequently, the government

adopted the Growth, Employment and Redistribution (Gear) policy. The aim of Gear

amongst other things was to reduce government expenditure and thus to avail funds

to stimulate economic growth (Department of Finance 1996:39). In both the NHP and

Gear policies, the government accepted the role of the private sector in assisting to

improve quality healthcare to all citizens. The private sector in delivering public

services is believed to bring in more efficiency, share the risk, and increase expertise

and management capacity.

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In order to bring in the private sector for financing and provision of public goods and

services, the government developed guidelines for public-private partnerships

(PPPs) in June 2000. The National Treasury’s PPP unit is charged with the task of

implementing PPPs in South Africa (National Treasury 2001:5).The PPP unit’s

manual defines a PPP as a contract in which the private party performs part of

government service delivery or administrative functions and assumes or shares the

risks thereof. In return, the private party receives a fee, tariff, user charges or an

allocation from the budget. The government in return benefits through risk sharing,

output efficiency focus and value for money (National Treasury 2001:5). The

Department of Health followed the National Treasury by establishing its Public-

Private Initiatives (PPI) in 2002 (Wadee, Gilson, Blaauw and Mills 2004:19).

Carroll (2008:1) reports that the most extensive experiments with PPPs have

occurred in developed countries that have adopted the New Public Management

approach. The first starters in PPPs were the United Kingdom, Australia, New

Zealand and to a lesser extent Canada. In the United State of America, Europe, Asia

and other developing countries PPPs have developed at the slower rate (Domberger

and Rimmer 1994:443). In South Africa much has been achieved since the inception

of the National Treasury’s PPP unit in 1997. The PPP Quarterly Bulletin (2010:5)

reported 20 signed PPP contracts in May 2010, and 61 active projects. Of the signed

projects seven are for health and in the active group health makes up 12 projects.

The projected capital value of all sectors PPP projects was R7.393 billion for the

2009/10 financial year (National Treasury 2007:59).

1.2 Clarification of concepts

For the purpose of this research, definitions are used to ensure that the meanings of

the concepts used are fully and clearly understood. The following concepts form the

basis of the study and are used frequently in this study. These concepts are used

consistently in this dissertation according to the definitions given below.

Health is defined by the World Health Organisation (WHO 1978:1) as a state of

complete physical, mental and social wellbeing and not merely the absence of

disease or infirmity. A healthy person is able to function optimally based on his or her

4

natural abilities and training. Health is influenced by various factors such as religion,

socio-economic status, physical environment and personal attributes (Björkman

2004:3). This implies that the relationship between poverty and development is such

that poverty causes ill health and not the other way round.

Quality healthcare is defined by Donabedian (1980:95) as consisting of technical,

interpersonal and social elements. Technical aspects are the provider’s behavior and

skills in making interventions. Interpersonal elements relate to compliance of care

with social norms, ethical standards and the client’s expectations. Social elements

are non-clinical in nature and include accessibility of services and efficiency of their

delivery (Newbrander and Rosenthal 1997:178). Quality healthcare is standardised,

patient centered and scientifically proven.

Public-Private Partnerships are a mechanism by which governments partner with the

private sector to deliver certain public goods, services or infrastructure with an

explicit understanding that risk is transferred or shared by the private party for an

agreed fee over the concession period (National Treasury 2007: 58). In a PPP

contract the public and private sectors share a commitment to pursue common goals

that have been jointly determined (Fourie and Burger 2001:149). Another important

future of a PPP is that risk must be transferred to or shared with the private party.

Privatisation refers to a privatised business that was formally owned by the public

sector, but is now owned by the private sector. Usually it operates in highly

competitive markets such as airlines and may hold a monopoly position that needs

regulation (Grimsey and Lewis 2005:122).

Primary Health Care (PHC) is defined in the Declaration of Alma Ata (WHO 1978:1)

as essential healthcare based on practical, scientifically sound and socially

acceptable methods, which have been made universally accessible to individuals

and families. This care is delivered to promote self-reliance and self determination.

The PHC approach seeks to promote access, equity and sustainability of healthcare.

The District Health System (DHS) is based on PHC and comprises of a well defined

population and geographic area, as well as individuals and institutions that provide

5

health to the district (ANC 1994: 64). In terms of the DHS each province is

subdivided into a number of functional districts and each district acting as a provider

and purchaser of health services. Currently there are 52 health districts in South

Africa (Day 2010:126).

The WHO (2010:1-2) defines a Health System as all activities that aim to promote,

restore or maintain health. It consists of public and private health departments,

hospitals and clinics, including doctor rooms and paramedics. Outside the formal

health care system there are traditional healers and faith healers (Torado and Smith

2009:413).

The National Health Insurance (NHI) is a health system aimed at achieving universal

coverage for all citizens in South Africa. The proposed NHI would be funded through

general tax revenue and other taxes to ensure equitable and sustainable health

financing. All NHI services will be free based on risk pooling and cross-subsidisation.

This implies that the rich will subsidise the poor, and the young subsidising the

elderly (McIntyre 2010:13). The Minister of Health has proposed that the NHI will be

implemented in phases over 14 years starting from 2010 (ANC 2010:47).

1.3 Literature review

A review of prior relevant literature is important for any academic project and it forms

the basis of advancing knowledge (Webster and Watson 2002:13). A brief literature

review informs the research questions and hypothesis, the research design and

methodology. Watson and Webster (2002:15) further point out that a good literature

review needs to be complete and focused on the concept, as opposed to one that is

focused on authors. This study follows the concept-centric approach and attempts to

identify gaps in the current literature that have motivated this research.

Literature specific to PPPs and how they relate to quality healthcare is thin and

sparsely available, especially for South Africa. However, the concepts of PPP and

quality healthcare have been well defined in the existing literature. Fourie and Burger

(2000:305), Field and Peck (2003:496), Widdus (2001:716) and Gerrard (2003:496)

define PPPs from different perspectives and platforms. Fourie and Burger

6

(2000:315) define a PPP as a true partnership where several parties combine with a

common objective and where risk is transferred or shared with the private operator.

Field and Peck (2003:496) define PPPs from the field of economics and field of

organisational studies. The former has elements of risk sharing and common

objectives. The latter definition has descriptions of degree of integration,

membership numbers, roles and responsibilities. Widdus (2001:716) identifies pull

and push interventions to promote PPPs in developing countries. Pull mechanisms

include attractive markets in developing countries, such as tax credits and good

infrastructure. Push incentives include basic research and tax credits for investment

in research. Gerrard (2001:46) distinguishes a PPP from a privatised business. He

states that PPP’s potential for profit making is constrained by the contract rather than

market forces. In light of the above definitions, it can be concluded that the available

literature adequately defines PPPs and no inconsistencies or disagreements are to

be addressed by this study.

Quality healthcare has been extensively defined by Donabedian (1980:95) as

consisting of technical, social and interpersonal elements. Milton, Dionne, Peacock

and Sheps (2006:201) define the quality treatment process as one with every step

valuable, capable, adequate, available and linked to the flow of events or

information. They suggested that higher quality treatment does not necessarily cost

more and may actually cost less. This relates to inefficiencies within the health

sector. Lim (2005:464), writing on Singaporean healthcare quality, concedes that

there is a gap between what is known and should be in terms of quality healthcare.

The gap or inequality regarding quality healthcare measurement is worse in the

South African health.arena This study attempts to examine quality standards in both

the private and public sectors, and compares those to PPPs.

The concept of PPP is not new, although the literature is relatively new dating back

to 1988. The French privately financed their public infrastructure as early as the 17th

century. The first contract was awarded to finance the construction of Canal de

Briare in 1638 and later Canal du Midi in 1688 (Grimsey and Lewis 2005:xiii). The

French were the pioneers in PPP contracting and financing, but the evolution of

PPPs was accelerated in the United Kingdom during the privatisation era of Prime

Minister Margaret Thatcher in the 1980’s (Starr 1988:6). Advocates of privatisation

7

urged that it will reduce government overload and increase the number of

entrepreneurs. The Thatcher government referred to privatisation as ‘Peoples

capitalism’ (Starr 1988:31). Carroll (2008:1) notes that in the past twenty years

PPPs, which are short of privatization, have occurred in most developed countries in

particular those that embraced New Public Management, namely New Zealand,

Australia, the United Kingdom and to a lesser extent Canada. Domberger and

Rimmer (1994:445) show that PPPs had spread to the whole of Western Europe,

America, Asia and Oceanic by the mid-1990’s.

In the developing world PPPs have evolved as a result of the globalisation process

(Widdus 2001:714). The disparities between the rich and the poor, as well as the

strengths and limitations of the public and commercial sectors in addressing world

problems have defined the necessity for PPPs. Lim (2005:462), writes on PPPs in

Singaporean health system and Pal and Pal (2009:46) discusses India’s PHC PPPs.

The South African history of PPPs is discussed by Burger (2006:6). He states that

PPPs were started in 1997 with the piloting of six projects. The six pilot projects were

the N3 and N4 toll roads, two maximum prisons, two municipalities’ water services

and an SA National Parks tourism concession.

The implementation of PPPs especially in the health sector is the subject of this

study. The WHO and other development agencies have commissioned many studies

to examine PPPs in healthcare (Ratzan 2007:315). These studies have ranged from

PPPs in the healthcare industry, PPPs for hospitals, PPPs in PHC and PPPs and

health systems. Vrangæk (2008:144) provides a comprehensive evaluation of PPPs

in the Danish health sector. Wadee et al. (2008) discusses the history and analyses

PPPs in the South African healthcare industry. This study has identified

shortcomings in the current literature on the contribution of PPPs to quality

healthcare in South Africa.

1.4 Aim and objectives of the study

The aim of this study is to get a better understanding of the relationship between

public-private partnerships and access to quality healthcare in South Africa. This is

8

studied for the period 1994 to 2011. In other words, this study seeks to answer the

question whether PPPs in healthcare services improve access to quality care.

The first objective is to explain the theories of healthcare and models of PPPs. This

involves a discussion of health economics and the economics of PPPs. This is

followed by an examination of the historical developments in healthcare and PPPs.

The third objective is an analysis of the contribution of PPPs to accessing quality

healthcare in South Africa. Finally, the study summarises the main findings and

makes proposals or tentative recommendations for consideration by policy officials.

1.5 Hypothesis and research question

This study tests the hypothesis that PPPs in South Africa lead to an increased

access to quality healthcare. The approach of this research is to analyse five

research questions to test the hypotheses. Firstly, what are the theories of

healthcare delivery and PPPs? Secondly, what is the history of the health industry in

South Africa that may have necessitated PPPs in healthcare? Thirdly, what types of

PPPs have been created in the South African health industry? Fifthly, what has been

their economic effects and impact on access to quality healthcare?

1.6 Importance of the research

This study is important because it leads to a better understanding of PPPs especially

in healthcare. Moreover, the research investigates how public funds are utilised in

PPPs and determines whether the results improve access to quality healthcare. The

government is entrusted with fiscal policy to ensure the wellbeing of citizens and

value for money. This study gives both government and the private sector an

opportunity to review the manner in which PPPs are managed.

1.7 Research design and methodology

Research involves a systematic and rigorous exploration and description of selected

phenomena in order to solve some problem or to answer some question. A research

design describes the overall plan for the research, the methodology that will be used

9

and the research strategy that will be followed to answer research questions (Kumar

2005:20).

This is mainly a literature research based on qualitative and quantitative data. The

quantitative approach is used to measure elements of quality healthcare such as

waiting times, number of patients admitted to PPPs, length of stay in PPP hospitals

and patient fees (Newbrander & Rosenthal 1997:179). The qualitative approach is

followed to explore the relationship between access to quality healthcare and PPPs.

This is compared with both the pure public health sector and private health by

reviewing patient satisfaction data as an example.

The study also follows an evaluative and descriptive approach (van den Bergh

2009:9). It is descriptive because it is aimed at describing the strengths and

shortcomings of the public health system. It analyses the public health and identifies

the elements that contribute to less access to quality healthcare. It is evaluative

because it measures the access levels to quality healthcare for all citizens.

Available literature is used to answer the research question of how PPPs can

contribute to quality healthcare. This question is based on the hypothesis that PPPs

result to increased access to quality healthcare in South Africa. Data from primary

and secondary sources is analysed. The National Treasury’s PPP Unit is the primary

source of information. Informal interviews are conducted with senior government

officials in the PPP Unit. Literature sources used include but are not limited to,

government documents, academic journals, published and unpublished books,

newspaper articles, journals and the internet.

1.8 Deployment of study

This section explains how the study is organised. Chapter 2 discusses the

economics of health care delivery and PPPs, healthcare production, health systems

and quality healthcare. The economics of PPPs are also discussed in order to

explain the rationale of PPPs. Different types of PPPs with an emphasis on those in

the health sector in particular are discussed.

10

In Chapter 3, the historical overview and developments in healthcare and PPPs are

examined. The chapter gives a concise history of the healthcare industry in South

Africa from the colonial, republican to post-apartheid era. It further analyses the

recent history of the private healthcare industry in South Africa with a view to

compare it to public health. The chapter then provides a comprehensive history of

PPPs in the developed and developing countries. It concludes with an analysis of the

history of PPPs in South Africa, with a particular emphasis on healthcare.

Chapter 4 analyses the contribution of PPPs to quality healthcare access. It

discusses the approaches to analysing PPPs in the health sector. The financial and

developmental approaches are followed to collect data for accessibility analysis.

Reference is made to private healthcare provision and financing. The economic

effects of PPPs are examined with a view to evaluating their impact on access to

quality care. Empirical findings on existing health PPPs accessibility data is

interpreted and analysed. Tables and graphs are used in the analysis. The chapter

concludes with key findings for policy consideration

Chapter 5 outlines the summary of the main findings and conclusions based on the

research objectives and questions outlined, areas for further research and the

limitations of the study. It analyses whether the research objectives were met and

makes tentative recommendations for future research.

11

CHAPTER 2

THE ECONOMICS OF HEALTHCARE DELIVERY AND MODELS OF PUBLIC-

PRIVATE PARTNESHIPS

2.1 Introduction

This chapter discusses the economics of healthcare delivery and theories, models

and concepts of Public-Private Partnerships (PPPs). It begins with a discussion of

the basics of health economics, healthcare markets and healthcare systems. The

second part defines PPPs and its related concepts of privatisation and outsourcing. It

proceeds with a discussion of the economics of PPPs, PPP models and a particular

emphasis on PPPs in the health sector. The summary of the main findings and

conclusions section analyses the lessons learnt about PPPs.

2.2 Health economics

Health economics studies the supply and demand of healthcare resources and the

impact of these on the population (Santere and Neun 2007:4). It is a branch of

economics that analyses the various costs and benefits of healthcare interventions.

Healthcare resources are further classified as consisting of medical supplies such as

pharmaceutical goods, rubber gloves and bed linen, personnel such as physicians,

laboratory assistants and nurses, and capital inputs including hospital wards,

diagnostic and therapeutic equipments. It is generally accepted in Economics that

any recourses, including healthcare recourses are scarce and limited at any given

point in time. A major complexity in health is that choices are made regarding quality,

rather than price and quality. Moreover, there is uncertainty regarding the medical

effects of treatments on health outcomes (Getzen 2004:18). People are willing to pay

for medical interventions despite no guarantees for improvements in their health.

2.3 The demand for healthcare

The demand for healthcare services or medical services is a derived demand, since

it depends on the usefulness of the treatment in providing good health (Getzen

12

2004:25). For example, a visit to the dentist to fill a cavity generates an improvement

in dental health, but no utility at having the cavity filled. No one buys dialysis or

chemotherapy because these are fun things to have, but because they need medical

care to improve their health.

The demand for healthcare services is influenced by their price. For example, less

will be bought when the price of osteopathy treatment increases, ceteris paribus.

There are other economic and non-economic determinants of the demand for

healthcare (Office of Health Economics, OHE 2001:19). In microeconomic terms the

quantity demanded is inversely related to price, as shown in Figure 2.1.

Figure 2.1 Individual demand curve for physician service

Source: Adapted from OHE (2001:19).

Figure 1 is based on the assumption that the prices of all other goods and income

remain constant and that the consumer is purchasing the optimal mix of physician

services and all other goods. Figure 1 shows that if the price of physician services

decreases, the quantity demanded increases. The demand curve represents

graphically the relationship between quantity demanded by a consumer of a good

and the price of that good as the price varies (Schotter 2001:70). This inverse

relationship between the price that the consumer pays for physician services and the

quantity demanded is referred to as the law of demand.

What happens if the assumption that both the price of other goods and income held

constant is relaxed? Income and price are the other determinants of the demand for

Pric

e of

phy

sici

an s

ervi

ces

(P)

p0

p1

d

0 q1

Quantity of physician services (q)

q0

13

healthcare services. If the income of consumers rises they buy more physician

services at each price and if it falls they will buy less, because medical services are

assumed to be normal goods. The income effect results in a shift of the demand

curve to the right for an increase in income, or to the left for a decrease in the

consumer’s income (Schotter 2001:76).

The demand for physician services is also influenced by the price of other goods and

services. Suppose the price of physician services increases, while that of other

medical services, for example Out-patients department (OPD) services decreases.

The consumer will substitute physician services for less expensive OPD services to

meet their needs. The impact of this substitute-induced change in the demand curve

is called the substitution effect. It applies to complementary goods and substitute

goods. Complementary goods and services tend to be bought together, for instance

eye tests and demand for spectacles, while substitute goods or services satisfy the

same wants for example physician services and OPD services. As a result of the

substitution effect the demand curve will either shift to the left or right as in the

income effect above (Schotter 2001:76).

The non-economic determinants of the demand for healthcare are tastes and

preferences, physical and mental profile, state of health, and quality of care

(Santerre and Neun 2007:104). Tastes and preferences include personal

characteristics such as marital status, education level and lifestyle. This might affect

how people value healthy living and the demand for certain types of medical care.

Blaug (2005:20) urges that the rich and educated receive more healthcare than

those of lower income levels, social class and occupation. Educated and rich people

also tend to have different preferences, for example they may prefer alternative

medicine in the form of osteopathy in the place of physiotherapy or surgery. Married

people may tend to demand less medical care, particularly hospitalisation because of

the availability of the spouse and family to care for them at home. The profile

variable considers such factors as age, gender and race on the demand for medical

services. Jones (2006:17) points out that older people consume more medical care

and devote more time and money to investment in health than young people.

14

A study done in the USA revealed that non-Europeans have a tendency to consume

higher than expected physician services, but lower than expected in-hospital care

(Jones 2006:203). Females are generally assumed to consume more medical care

than males, primarily because of childbearing. The state of health controls the

demand for healthcare because sicker people need more medical attention. A

person born with a medical problem such as hemophilia is likely to seek more

medical care to augment his stock of health (Santerre and Neun 2007:107). Quality

of care also impacts on the demand for medical care. People tend to prefer hospitals

with specialists rather than small hospitals with general medical care (Long and

Harrison 1985:170).All the factors listed above either result to a right or left

movement in the demand curve, whereas a price change results to movements

along the demand curve.

Figure 2.2 Shifts in the demand curve for physician services

Source: Adapted from OHE (2001:20).

Figure 2.2 shows a shift in the individual demand curve for physician services from

d0 to d1. It shows an increase in demand due to an increase in the income of the

consumer. Since medical service is assumed to be a normal good, consumers spend

a portion of the extra income on this, causing the consumer to purchase additional

physician services at a given price. This shifts the demand curve from do to d1. A

normal good or service’s demand increases as the income of the consumer

increases. In the case of an inferior good, the demand decreases as the income of

the consumer increases and the relative prices are constant (Schotter 2001:65). A

decrease in income results in a decrease or a shift to the left of the demand curve.

d0

d1

Quantity of physician services (q)

Pric

e of

phy

sici

an s

ervi

ces

(P)

0

15

What happens to the demand curve if the price of a good or service changes? This is

explained by the elasticity of demand, which measures the percentage change in the

demand of a good that results from a given percentage change in its price (Schotter

2001:93). Price elasticity of demand measures the responsiveness of the quantity

demanded to changes in price. The elasticity of demand for a straight-line demand

curve varies along its length despite the fact that the slope is constant.

Mathematically price elasticity of demand is given by:Q

P

P

QED ×

∆∆= , where DE is the

price elasticity of demand, P

Q

∆∆

represents the percentage changes in quantity

demanded, and Q

P is the original change in price. Elasticity could be inelastic, that is

a percentage change in price is greater than the percentage change in quantity

demanded, unit elastic where the percentage DQP ∆=∆ , and perfectly elastic where

any price change leads to an infinite change in quantity demanded (Schotter

2001:94). Figure 2.3 shows demand curves D1 and D2 with price changes from p0

and p1. At price p1, q1 quantity of visits is demanded on D2, while at the same price

on curve D1 less visits are demanded at q2. A decrease in price to say p0 has a

larger effect on D2 than in D1, q2 – q0 is greater than q1 – q0. The demand curve D1 is

relatively more elastic than q2. Essential healthcare services such as OPD services

are more sensitive to price changes than for example cosmetic surgery.

Figure 2.3 The elasticity of demand and the slope of the demand curve

Source: Adapted from Santerre and Neun (2007:109).

Pric

e of

phy

sici

an

serv

ices

(p)

p1

D1 Relatively elasticity

p0

D2 Relatively inelasticity

q2 0 q1 q0

Number of visits (n)

16

Empirical evidence indicates that the demand for medical services is inelastic with

respect to price. This means that it is a necessity and demand will increase by a

relatively small amount when the price decreases (Getzen 2004:31).

Another demand side factor that affects elasticity is income. Income elasticity of

demand refers to the percentage change in the demand for a good as a result of a

change in income (Schotter 2001:100). Income elasticity of a normal good is greater

than 1 and the income elasticity of inferior goods is less than 1. The income elasticity

of demand of individual consumers of medical care is relatively inelastic. However,

studies have shown that rich nations spend more on health than poor nations

(Getzen 2004:304). This means that the type of healthcare service an individual

gets is determined not entirely by their income level, but by clinical need and the

level of healthcare in that country. Hence, governments provide insurance cover and

subsidies for healthcare when the poor cannot afford to pay.

2.4 The production and cost of healthcare services

The production of medical services occurs over the short-run and long-run. All

medical firms including doctor rooms, hospitals, old-age homes and pharmaceutical

companies earn revenue from selling some type of medical output. In the short-run,

production of medical services occurs under conditions of fixed capital, but this is not

the case in the long-run as new entrants may enter the market (Donaldson and

Gerard 2005:21). In the short-run, production involves both fixed and variable costs.

To derive the short-run and later long-run production of medical services, it is

assumed that capital, k is at some fixed amount and labour, l is variable. In this case

output then becomes a function only of labour (Santerre & Neun 2007:164).

If the input of labour is nurse-hours, n and output is quantity of medical services, q

the short-run production function for medical services can be depicted as in Figure

2.4.

17

Figure 2.4 The production function of medical services

Source: Adapted from Schotter (2001:213).

Figure 2.4 shows combinations of output supplied that are possible given the existing

technology. The total output is first increasing at an increasing rate point 0 to B, but

later increasing at a decreasing rate from point B to C. The total output curve depicts

the total output produced by different levels of the variable input, labour, holding

capital constant. The law of diminishing productivity states that in the short-run an

increase in the number of nurses in a facility with a given technology will result to

increased productivity until the physical constraint of a fixed facility causes

diminishing productivity to set in at some point (Santerre and Neun 2007:166).

Hence, beyond point B, the productivity of nurses begins to increase at a decreasing

rate.

Average and marginal cost curves could be derived from the total production curve

above. The short-term total cost (STC) function is the sum of the fixed and variable

cost. Figures 2.5(a) and (b) show the relationship between the STC curve and the

short-term marginal cost (SMC) and short-term average cost (SAC) curves.

Qua

ntity

of m

edic

al

serv

ices

(q)

Nurse-hours (n)

• B

• C

0

Total output curve

18

Figure 2.5 Short-run cost function and Short-run marginal and average cost functions

Source: Adapted from Schotter (2001:214)

Figure 2.5 (a) shows that total costs are made up of fixed costs and variable cost.

The distance from the origin to point A equals fixed costs. The relationship with the

previous TP curve and the costs functions is that marginal and average costs curves

could be derived as shown in figure 2.5 (a) and (b). Marginal cost is derived from the

slope of the TC function, while average cost is derived from the slope of the ray from

the origin to a point on the TC curve (Schotter 2001:214). Alternatively, the short-run

e

B

SAC

SMC Cost of medical

services

Quantity of medical services (q)

(b)

Total cost of medical

services

B

Quantity of medical services (q)

A

(a)

C

19

marginal costs of production are the total costs associate with the change by one

unit of output. The SAC of production are total variable costs divided by total output.

At what level of output will a medical firm produce, namely at point e or B in Figure

2.5(b)? The answer to this question depends on the objectives of the firm, whether it

is to maximise or break-even profits. At point e, the SAC and SMC curves are equal

and it is at this level that the average costs are minimised. At point B, the SAC curve

lies above the SMC and its average costs are only at a minimum at point e. Beyond

point e, the firm is not only minimising its average costs, but maximising its profits.

Hence, a medical firm will produce at any point beyond e (Santerre & Neun

2007:177).

In the long-term medical firms have sufficiently time or long enough time for them to

alter any fixed commitments and make cost saving adjustments (Folland, Goodman

and Stano 2004:107). The long-term average costs (LAC) curve is U-shaped like its

short-run counterpart and is derived from a series of SAC functions. The LAC curve

can exhibit both economies of scale and scope. A firm is experiencing economies of

scale when its LAC is declining as output increases and economies of scope if it is

possible to produce two or more outputs of different goods jointly more cheaply than

they can be produced separately. An example of economies of scope is the provision

of pediatric hospital care and geriatric hospital care in one hospital (Folland et al.

2004:104). It might be cheaper to combine the two services if the inputs needed to

produce them interact with one another. To achieve economies of scale and scope

governments have to regulate the healthcare market for example by controlling the

number of hospital beds and high technology equipments such as computerised

tomography (CT) scanners. This is done because healthcare firms do not operate in

perfectly competitive markets (Baker 2001:223).

2.5 Healthcare markets

A market can be formally defined as any set of arrangements which allow buyers

and sellers to communicate and exchange goods and services. In a free market such

exchange occurs without the interference of government (OHE 2001:18). Both

buyers and sellers need to have sufficient information to allow them to make rational

20

decisions. Neoclassical economic theory suggests that market participants are homo

economicus, that is they are rational with self-interest that is primarily wealth or

income motivated (Donaldson and Gerard 2005:28). Buyers or consumers of

healthcare would be anyone who wants good health, such sick people and those

who want preventative healthcare. The sellers or producers of health are those who

provide healthcare services, such as doctors, nurses, physiotherapists, dentists and

pharmacists.

Market competition implies that firms are only willing to produce goods and services

that consumers are willing to purchase at the least cost. Trading stops when

equilibrium is reached, that is when the goods and services produced are equal to

those people demanded and they are produced without economic waste of

resources (Rice 1997:386). In this instance, consumers have revealed their tastes

based on alternative goods and their incomes in order to maximise their utility. Rice

(1997:386) concludes that when both the consumption and production markets are in

equilibrium, the economy is said to be Pareto optimal (Rice 1997:386). In a Pareto

optimal state, it is not possible to make someone better off or increase their welfare

without making someone else worse off. In this state, the economy has attained

allocative efficiency. A competitive economy that has achieved Pareto optimality

does not necessarily ensure equity.

Market structure characteristics such as the number and size of incumbents, barriers

to entry and information asymmetry influence the performance of individual firms and

the aggregate industry (Robinson 2001:178). The healthcare organisations can be

classified as consisting of horizontal and vertical markets. Horizontal markets offer

similar or substitute products and compatible or complement products. Vertical

markets consist of upstream suppliers of intermediate products, for example,

materials and components, labour services such as managerial and professional and

capital in the form of debt and equity. Downstream distributors include wholesalers

and retailers and purchasers such as government, businesses or consumers.

Microeconomic theory argues that profit seeking firms are usually driven by

competitive market forces to allocate scare recourses effectively for the benefit of

society as a whole through the invisible hand of Adam Smith (Donaldson and Gerard

2005:19). When competitive market forces are weak or absent, firms acquire market

21

power and misallocation of society’s recourses may occur. Table 2.1 below shows

the classification of the market according to the degree of market power.

Table 2.1 Market structure and market power

Degree of market p ower

0% ... 100%

Characteristic Perfect

competition

Monopolistic

competition

Oligopoly Pure m onopoly

Number of sellers Many Many Few, dominant One

Individual firm

market share

Tiny Small Large 100%

Type of product Homogeneous Differentiated Homogeneous or

differentiated

Homogeneous by

definition Barriers to entry None None Substantial Complete

Consumer

information

Perfect Slightly perfect Perfect or imperfect Perfect or imperfect

Source: Adapted from Santerre and Neun (2007:196).

Folland et al. (2004:46) state that firms in other market structures unlike in perfect

competition have market power and thus the ability to affect market prices. As shown

in Table 2.1, these market structures range from pure monopoly, monopolistic

competition, and several forms of oligopoly. In the health sector, pharmaceutical

firms that control patents for certain drugs may be pure monopolists, while hospitals

will be considered as oligopolies. With the other market structures besides perfect

competition, there is bound to be welfare losses. For example, monopolies selling at

a higher price than the marginal cost, resulting in consumer losses (Folland et al.

2004:46).

Because healthcare is a merit good and the market fails as described above to

allocate recourses efficiently, government intervenes in both the provision and

financing of healthcare (Donaldson and Gerard 2005:30). Folland et al. (2004:402)

lists the reasons for government intervention in healthcare as the existence of

externalities in the healthcare market, government’s promotion of merit goods and

incomplete markets. Donaldson and Gerard (2005:35) add moral hazard and

adverse selection to these problems. Incomplete markets pertain to situations where

the private sector fails to meet an existing demand, for instance insurance for cancer

or AIDS patients at any premium. In such situations, the government intervenes by

22

meeting the needs of such consumers in the society. Moral hazard is a change in

attitudes of consumers and providers of healthcare, which results in the excess

provision of healthcare which is higher than the benefits forgone or opportunity cost.

Consumer moral hazard arises because insured patients tend to seek physician

services frequently, because being insured reduces the financial cost of seeking

treatment. Producer moral hazard or supplier-induced demand is associated with a

financial incentive for doctors to provide excess care, because consumers are not

fully informed (Getzen 2004:416). Adverse selection exists when people with

different health related characteristics to that of the average person increase the

average insurance purchased. This is an argument against differentiated insurance

plans, because of risk aversion by low risk groups (Dewar 2010:33).

The extent of government intervention in the healthcare market depends on the

country’s healthcare system.

2.6 Healthcare systems

Roemer (1991:31) presented a comprehensive study of health systems. He defines

a healthcare system as a combination of recourses, organisation, financing and

management that culminates in the delivery of health services to the population. He

lists the components of a health system as, production of resources, organisation of

programs, economic and support mechanisms, management methods, and delivery

of services. The health needs of the population go through these interrelated

components to generate the health status of the population.

Wendt, Frisina and Rothgang (2009:71) distinguish between three major dimensions

of a healthcare system as financing, health service provision and regulation by

government. In their view, to describe a healthcare system it is important to know

who is financing, providing or regulating healthcare services. The health systems in

any country have developed over the years and have been influenced by socio-

economic and political factors (Roemer 1991:32). Roemer (1991:97) classifies health

systems according to the economic level and health systems policies. Table 2.2

presents this classification under 16 categories for selected countries.

23

Table 2.2 Types of national health systems

Economic l evel

(GNP per capita)

Health systems policies and market intervention

Entrepreneurial

and permissive

Welfare o rientated Universal and

comprehensive

Socialists and

centrally planned

Affluent and

industrialised

United States Germany

Canada

Japan

United Kingdom

New Zealand

Norway

Soviet Union

Czechoslovakia

Developing and

transitional

Thailand

Philippines

South Africa

Brazil

Egypt

Malaysia

Israel

Nicaragua

Cuba

North Korea

Very p oor Ghana

Bangladesh

Nepal

India

Burma

Sri Lanka

Tanzania

China

Vietnam

Resource -rich Libya

Gabon

Kuwait

Saudi Arabia

Source: Adapted from Roemer (1991:97).

Table 2.2 shows that the USA has an entrepreneurial and permissive health care

system to the extreme and China has a socialist and centrally planned healthcare

system to the opposite end. South Africa, Philippines and Thailand are developing

countries with entrepreneurial and permissive healthcare systems.

Wendt et al. (2009:81) identifies three types of ideal healthcare systems comprising

of the state healthcare systems, societal healthcare systems and private healthcare

systems. In state healthcare systems financing, provisioning and regulation are

carried out by the state. In societal healthcare systems financing, provision and

regulation is done by societal actors, for example non-governmental organisations.

Finally, in private healthcare systems all three dimensions are done by the market.

Alongside each ideal-type there are mixed types of healthcare systems making a

total of 27 healthcare systems.

The OECD (1987) classification categorised systems according to their coverage,

main source of funding, ownership of healthcare facilities and services and the status

of healthcare (Wall 1996:182). This classification has both elements from Roemer

and Wendt et al. Table 2.3 summarises the models of healthcare systems.

24

Table 2.3 Models of healthcare systems

Model and

categories

Coverage Funding Control Status

Beverigde Universal Taxation Public Social service

Bismarck Universal Social insurance Mixed Social right

Modified market Partial Private

insurance

Private Insurable risk

Source: Adapted from Wall (1996:183).

Wall (1996:184) explains the health systems model briefly as follows. The Beveridge

model involves the universal coverage, tax funding, national ownership and control

of services and facilities. The United Kingdom’s National Health System, Sweden

and Italy fit into this model. The Bismarck model unlike the Beveridge model has

social insurance funding and mixed control of resources and facilities. Examples of

this model are the UK and Netherlands. The modified market model bases

healthcare financing on insurance and private ownership of resources such as in the

USA and Australia. South Africa has elements of the Beverigde and modified market

systems.

Dunlop and Martins (2005:75) compared the health systems of various countries

including Japan and Canada. The Japanese health system is based on social

insurance funding with co-payments for in-hospital and out-patient care, the rate

depending on age. For the over 75 years it is 10 percent and younger Japanese co-

payment is 30 percent (Dunlop and Martins 2005:45). Canada has a single-tier

health system financed through poll taxes collected by provinces. The actual delivery

of healthcare services by all physicians, hospitals and patients happens within the

public payment system (Dunlop and Martin 2005:90).

The healthcare systems of developing countries in Asia such as South Korea,

Taiwan and Singapore have been studied by Eastaugh (2009), Lim (2005) and Lu

and Chang (2010). The Korean health system is based on the Japanese model, but

is dominated by physicians who increased bed utilisation and resource allocation

especially in urban areas (Eastaugh 2009:5). The South African healthcare system is

made up of a large public sector financed by 3.4 percent of GDP and a strong private

25

sector catering for less than 20 percent of the population with 3.8 percent of GDP

funding (Van den Heever 2010:163). Dunlop and Martins (2005:108) conclude that a

centralised and public funded health system produces public satisfaction, equity and

effective care whether it is provided by the private or public sectors.

2.7 The economics of Public-Private Partnerships

2.7.1 Public-private mix in healthcare

Health systems around the world are facing challenges of how to raise funds for

healthcare, how to pool risks and resources and how to deliver healthcare in the

most efficient and cost-effective manner (Lim 2005:461). There is a growing

realisation in developed and developing nations that involving the private sector may

lead to health system efficiency. The public-private mix in healthcare provision and

financing is used to explain the involvement of the private sector in healthcare

system. Figure 2.6 illustrates the public-private mix in healthcare financing and

provisioning.

Figure 2.6 Public-private mix in healthcare financing and provision.

Source: Adapted from Donaldson and Gerrard (2005:57).

Public provision could be financed by private finance for example, insurances and

direct payments. Private provision could be publicly financed for instance through

government payments to private hospitals. Figure 2.6 quadrant 2, shows financing is

by government and private provision for example physicians, as it is the case in most

developed countries. It is possible to have mixes of both financing and provision in

Provision

Fin

ance

Public Private

Public Publicly financed

Publicly provided

Publicly financed

Privately provided

Private

Privately financed

Publicly financed

Privately financed

Privately provided

1 2

3 4

26

the four quadrants in Figure 2.6. The financing intermediaries range from a public

agency as government, insurance companies and out-of- pocket by private

individuals (Donaldson and Gerrard 2005:58).

2.7.2 What are PPPs?

Scholars are divided on how to define PPPs. To attain a better understanding of the

contribution of PPPs in improving access to quality healthcare it is important to revisit

the theoretical debate on the definition and how to think about PPPs. Chapter 1

accepts that there are no inconsistencies or inadequacies in the literature on defining

PPPs, but just different perspectives. Hodge and Greve (2005:4) define a PPP as a

co-operation of some sort between the public and private sector to develop products

and services and share risks, resources and costs over a defined period of time.

They further mention two dimensions of PPPs, namely organisational and finance.

Mörth (2008:37) and Gerrard (2001:48) add a legal view to the definition of PPPs.

Mörth refers to PPPs as arrangements where the private sector finances, builds, or

operates infrastructure assets that are traditionally provided by the public sector.

Gerrard (2001:48) adds that the profits of the PPP business are constrained by the

contract rather than market forces.

In clarifying the definition of PPPs Mörth (2008:38), Greve (2008:118) and Grimsey

and Lewis (2004:55) contrast PPPs with privatisation, out-sourcing and vouchers. A

privatised business is one where a formerly government entity is now owned by a

private firm. It also assumes full responsibility for service delivery. It may operate in

highly competitive markets, for example airlines, or in a monopoly as the postal

services or electricity supply. As a result government may impose some form of

regulation over the price, the rate of return or profit and/or constrain profit by contract

(Gerrard 2001:48).

Out-sourcing refers to a situation of opening up certain activities to competition. A

formal contract binds the parties to a predetermined quality and quantity of services

in exchange for agreed financial payments. Greve (2008:58) states that the

distinctive feature of contracting-out is that the private and public sectors are

purchasers and providers respectively. In PPPs, the two sectors are partners

27

whereas out-sourcing is an ad hoc and less stable arrangement than PPPs (Mörth

(2008:38). Vouchers are issued by government to individual providers in exchange

for services for a specified period of time. Vouchers are therefore of a more short-

term nature than out-sourcing. Typically services that are out-sourced are the so-

called non-core services such as cleaning services and refuse collection, but can

also include traffic control, busses and business services (Grimsey and Lewis

2004:57).

Osborne (2010:257) notes that the public sector organisations have in the recent

past moved away from government service delivery to private service delivery. The

government has moved from conventional procurement, to private finance initiatives,

then to outsourcing and finally to privatisation of service delivery. Through these PPP

stages the private sector uses innovation, technology and expertise to deliver

services efficiently.

Hodge and Greve (2005:7) suggest that the term PPP has been used to cloud out

the intentions of privatisation and out-sourcing, because of the opposition these

terms generate in public debate. They argue that a number of governments are

avoiding using the terms privatisation and out-sourcing in favour of more acceptable

expressions such as alternative delivery systems and PPPs. This is done to distance

themselves from past failures of privatisation. Trade unions and other public

stakeholders in Britain and elsewhere have been skeptical of the intentions and

advantages of PPPs. They see PPPs as a language game camouflaging the

intentions of transaction merchants, legal advisors and merchant bankers seeking

large commissions (Grimsey and Lewis 2005:8). However, the evaluation of PPPs

from the economics, organisational and engineering perspectives suggests merit in

the concept of PPPs.

Table 2.4.describes the elements of PPPs.

28

Table 2.4 Elements of PPPs

Elements of PPPs Description of element

Participants A PPP involves two or more participants, one of which must be a public body.

Each party must have organisational and legal capacity to commit to the

partnership.

Cooperation The relationship between the parties is that of cooperation and trust. It looks

beyond the principal-agent relationship, and it sees both the government and the

private partner as principals in pursuit of shared objectives. There is an emphasis

on cooperation rather than competition.

Resourcing Each participant is expected to bring value to the partnership in the form of skills,

knowledge, innovation and resources. The ultimate goal is to bring value for

money to the partnership. Depending on the type of the PPP financing and

provision could either e by the private sector or public sector. However, in all

cases the public body arranges and initiates the partnership (Greve 2008:116).

Durability The partnership takes place over a period of time to provide the partners with

some form of certainty and continuity. The duration of the partnership is specified

in the contract signed by the parties. The contract governs their relations and

enables parties to make decisions without having to re-write the rules every time.

PPP contracts usually un for 15 to 20 years up to 50 to 60 years (Greve

2008:116).

Sharing PPPs involve sharing the responsibility and risk for outcomes in a collaborative

manner (Grimsey and Lewis 2004:13). Risk that is shared may be anything from

financial, construction and governance risks. Ultimately the risk has to be borne

by the appropriate party and could be shared or transferred to the private partner.

Source: Adapted from Grimsey and Lewis (2004:12), and Greve (2008:115).

2.7.3 Participants in PPPs

Participants in a PPP can be divided into two, namely the public sector parties and

private sector parties (Hodge and Greve 2005:68). A description of each participant

and their roles are analysed in the next sub-section.

2.7.3.1 Public sector parties

The important starting point in PPPs is to identify the correct public sector entity to

enter into contract with the private sector for the provision of services. The public

sector procurer could be the government, local authority, government agencies or

state-owned entities (Grimsey and Lewis 2004:108). The government entity or

minister contracting on behalf of the government has delegated power under

29

legislation to enter into such transactions. , An Act of Parliament may be required to

rectify a PPP contract, should there be limitations or shortcoming in the law.

Government is responsible for determining the objectives, seeing to it that the

outcomes are according to standards and to ensure value for public money (Grimsey

and Lewis 2004:112). Government is also responsible for creating an enabling

environment, monitoring performance and managing community expectations.

2.7.3.2 Private sector parties

The private sector parties to a PPP project include a special purpose vehicle (SPV),

financers, subcontractors, and other parties involved such as advisers and insurers

(Hodge and Greve 2005:69). The SPV is a separate legal entity which is established

to carry out the project and is funded through private equity and private sector debt

financing. PPPs are generally financed through project finance, also called limited

recourse financing. The project financing technique is used to raise large amounts of

money for specific purposes from financial institutions, while limiting the risk of

sponsors (Grimsey and Lewis 2004:113). There is limited or no financial recourse

from project sponsors. This allows them to insulate their balance sheets from riskier

projects.

The benefits of project financing accrue to both the government and the private

sector. Project financing enhances performance under PPPs by ensuring that the

private sector is highly incentivised to ensure services are supplied on time and

quality. The private operator only receives revenues once the infrastructure is

complete, operational and delivering specified service levels. Government benefits

through having to deal with a single finance entity for the whole life cycle of the

project (Hodge and Greve 2005:69).

Other private sector parties are financiers, subcontractors, advisers, rating agencies

and insurers (Grimsey and Lewis 2004:113). Figure 2.6 shows a typical structure of

a private sector consortium for a PPP project.

30

Figure 2.7 Typical private sector consortium for PPP

Source: Adapted from Grimsey and Lewis (2004:112).

In figure 2.7, the SPV is the driving force behind the operations of the PPP. It may be

involved in the construction of buildings or other infrastructure, its maintenance, or

operations of the PPP. The other option is that some of these services may be

outsourced to subcontractors. The government and the private partner may utilize

financial, legal or other forms of advisors before the conclusion of a PPP contract.

This may occur even after the conclusion of a contract.

Financiers depend on the financing approach for an SPV. This could be one or more

banks, a contractor, or operator. The traditional financing approach involves

contractors or service providers sponsoring an SPV and buying equity to show their

commitment to the project and its delivery. Under the financier led approach

investment banks buy equity in the SPV and manage all activities including

subcontractors (Grimsey and Lewis 2004:113). The project delivery is through

subcontractors who may be minority shareholders. Subcontractors may be involved

in construction, equipment supply, operation and maintenance. Advisers provide

financial, legal, technical and other advice to the public and private sectors. Insurers

Equipment provider

Building contractor

Funding advisers Public sector

Government advisers

Debt funding

Operating company (SPV)

SPV advisers Equity funding

Operation “Soft”

Design/ specifications

Construction/ manufacture “Hard”

Services installer

Facilities management

Service support

Catering

31

and rating agencies are used to provide credit ratings when projects are financed

through the issue of public bonds. Insurers limit the risk of projects to an achievable

price level (Grimsey & Lewis 2004:114).

2.7.4 Models of PPPs

PPPs come in many shapes and forms. However, there seems to be two major types

of partnerships in literature and practice, namely economic partnerships and social

partnerships (Hodge and Greve 2005:62). Economic partnerships have tended to

dominate the literature on PPPs. These are partnerships where the private sector

participates in the design, financing, building and operating of a service or

infrastructure together with public sector partners (Greve 2008:119).

In the United Kingdom economic partnerships have come to be called private finance

initiatives (PFI). The British Treasury defines a PFI as an arrangement where the

public sector contracts to purchase quality services from the private sector on a long-

term basis, taking advantage of private sector management skills and financing

(Greve 2008:119). In return the private sector receives revenue from operating the

service and hence making a profit. The reasons of the PFI are that it provides a

service or facility at a minimal cost to the public sector and that it takes advantage of

the private sector’s ability to manage and design efficiently (Owen and Merna

1997:164). There are three types of PFIs. Financially free-standing projects are

financed and managed by the private sector. The finance is recouped through user

charges such as the London Sky Bridge. Secondly, joint ventures occur where the

public and private sectors contract to provide merit goods or services such as the

reduction of traffic congestion, for example the Gautrain linking Johannesburg and

Pretoria. Finally, services sold to the public sector are services provided by the

private sector to the government for example the hospital information systems to the

NHS (Hall 1998:123).

Hodge and Greve (2005:64) state that PPPs are a function of a range of factors

starting from the sector in which the project takes place, the associated risks, ability

of infrastructure to generate revenue, existence of market competition and the legal

and pricing framework. The typology of PPPs is thus influenced by the environment

32

in which they operate. Smith and Wohlestetter (2006:254) found that partnerships

could be differentiated based on their origin, content and form. In their findings

partnerships could be separated based on their origin. For instance, some were

initiated by independent organisations while some were started by pre-existing

organisations. The content or resources used differed from one organisation to

another, while the form ranged from formal and informal arrangements. Finally,

depth of employee interaction differed, with some involving leaders only and others

involving several levels of employees. Meanwhile.Hodge and Greve (2005:6)

identified two dimensions in the organisational aspect of PPPs. These are the

financial dimension and the organisational dimension. As a result they presented a

typology of PPPs based on the financial and organisational relationships of PPPs.

Tables 2.5 (a) and (b) illustrate the two typologies of PPPs.

Table 2.5(a) A PPP typology based on financial and organisational relationships

Finance/Organisational Tight organis ational relationship Loose organis ational

relationship

Tight financial relationship Joint venture

Joint stock

Joint development

Build, Own, Operate and Transfer

Build. Operate and Transfer

Sale-and lease-back

Loose financial relationship Policy communities Issue networks

Source: Adapted from Hodge & Greve (2005:6)

Table 2.5(b) A typology of PPPs based on origin, content, form and depth

Origin Content Form Depth

Independent

organisations

Spin-offs

Financial resources

Human resources

Physical resources

Organisational resource

Informal arrangements

Formal arrangements

One-level involvement

Multi-level involvement

Source: Adapted from Smith and Wohlstetter (2006:263)

Savas (2000:246) identified seven forms of partnerships some of which are part of

the PFI. These types of PPPs are listed below with their short explanations of each.

33

Table 2.6 Types of PPPs

1. DBO or Design, build and

operate

Here the private sector designs, builds and operates a PPP project

which is financed by the public sector

2. DFBO or Design, finance, build,

and operate

Under DFBO the private sector finances, designs, constructs and

operates a revenue generating assets for a predetermined period of

time, usually 25-30 years. It is the most successful form of PPP, the

most common being the PFI in the United Kingdom. Ownership of the

infrastructure is retained by the private sector and may revert to the

public sector at the conclusion of the concession period. 3. BOOT or Build, own, operate

and transfer

It is a variation of the BOO model with the ownership and operation in

private hands in perpetuity. 4. BOO or Build, own and operate It is the most common form of PPP. Under BOOT the private entity

designs, constructs, finance and operates the asset for duration of 25

to 30 years. The private operator bears all the risk and maintenance

costs, but derives revenue in the form of user fees. At the conclusion of

the contract the asset reverts to the public sector, usually at no extra

costs. 5. O&M or Operate and

maintenance

In these arrangements the private sector provides only operation and

maintenance services for an asset owned by the public sector. 6. LBO or Lease, build and

operate

These are lease contracts that do not cover project finance. These are

also known as affermage, referring to lease in French, and are

common in France and French speaking African countries.

7. BBO or Buy, build and operate In this case the private entity buys, builds and operates a concession

from the public sector.

Source: Adapted from Savas (2000:246).

These examples constitute some of the common types of partnerships, but various

other contractual models exist. There is no common classification of PPPs and many

variations are possible (Mörth 2008:40).

2.7.5 Healthcare PPPs

PPPs in the healthcare sector are not different from those in industry at large. The

discussion on types of health PPPs begins with the classification of health PPPs

based on the purposes they serve. Nishtar (2004:3) lists six categories of health

PPPs based on the purposes they serve. PPPs could be for product development,

improving access to healthcare products, as a global coordination mechanism, for

strengthening health services, public advocacy and education, and regulation and

quality assurance. In the South African health arena, partnerships with national and

34

global organisations for any of the reasons above exist, for example the purchase of

dialysis services from Fresenius and HIV/AIDS research by the Presidents

Emergency Plan for AIDS Relief (PEPFAR) (Bernstein 2010:28).A useful

classification of hospital PPPs is provided by McKee, Edwards and Atun (2006:3).

They classified PPPs in hospital provision as shown in table 2.7.

Table 2.7 Models of PPPs in hospital provision

Model Description

Franchising The public sector contracts a private company to manage existing hospital.

DBFO (design, build, finance

, operate)

The private company designs, builds, finances and operates the hospital as per

contract with government.

BOO (build, own, operate) The public authority purchases services for a fixed period for example 30 years,

after which ownership reverts to the private provider.

BOOT (build, own, operate,

transfer)

The public authority purchases services for a fixed period for example 30 years,

after which ownership is transferred to the public sector

BOLB (buy, own, lease back) The private contractor builds the facility, after which it is leased back and

managed by the public sector.

Alzira model The private contractor builds and operates the hospital with contract to provide

medical care for a defined population.

Source: Adapted from McKee, Edwards and Atun (2006:3).

Table 2.7 shows variations of PPPs in the hospital provision sector. Other variations

are possible to the list supplied in Table 2.7.

The next section discusses the economic rationale of PPPs.

2.7.6 The economic and social rationale of PPPs

This section discusses the economic and social objectives of PPPs. It seeks to

explore some of the issues surrounding PPPs. The economic benefits and

challenges of PPPs are discussed from different perspectives. This study analyses

the economic rationale of PPPs from the efficiency and fiscal themes.

The central justification of adopting PPPs is that their delivery increases efficiency

over the state provision of public goods or services (Flinders 2005:225). It assumes

that provision in the market by the profit maximising private sector under competitive

35

pressures is more likely to be efficient than government production of goods and

services. Burger (2006:2) distinguished between three kinds of efficiency, namely

allocative, technical and X-efficiency. Allocative efficiency refers to the use of

resources to maximise profits and utility. Technical efficiency uses minimum inputs to

get maximum outputs and X-efficiency means preventing the wasteful use of

production inputs. The efficiency of the private sector stems from its technical

efficiency and X-efficiency. Better skilled managers, innovation, more flexibility, less

misallocation of resources and full-capacity use of assets can improve efficiency

especially of the private sector (Fourie and Burger 2000:701).

The efficiency gains of PPPs derive from the profit incentive of managers and

owners, the competitive market environment in which they operate and the risk that

private entrepreneurs are willing to take (Fourie and Burger 2000:698). Delivery

through PPPs depends on the nature of the goods or services to be provided. In the

case of public goods or a good characterised by an externality, the choice of PPP or

government delivery depends on the ability of government to transfer supply-side

risks to the private operator and the extent of competition. In the absence of these

two factors, private sector delivery may not necessarily be more efficient. Moreover,

it may even cost more than government provision (Grimsey and Lewis 2005:351).

Even in these circumstances, PPPs still provide the opportunity of buying now and

paying later (Flinders 2005:225). These long-term contracts reduce flexibility of

future governments by binding them to contracts concluded by previous

governments.

The transfer of risk to the private operator is one of the main microeconomic

arguments that justify the efficiency savings by PPPs (Flinders 2005:226). Value for

money is improved if appropriate risk is transferred to the supplier who is able to

either reduce the probability that the risk will occur, or handle its financial

consequences if it does occur or both (Grimsey and Lewis 2004:172). PPP contracts

enable the government to transfer risks associated with the design, construction,

implementation, ownership and operation of projects to the private sector.

Several types of risks can be distinguished in an assessment of risk in a particular

case. Demand risk comes from consumer preferences and tastes, substitute

36

products and import competition. Supply risk derives from input and labour

availability, input and labour costs, technical production costs and risks. Financial

market risk relates to capital cost, interest rates, exchange rates, inflation rates and

so forth. Finally, legal and political risk relate to the legal environment, government

policy, fiscal policy and regulatory institutions (Fourie and Burger 2000:706). Hodge

and Grave (2005:67) and Grimsey and Lewis (2004:172) classified risk that may face

PPP projects. Table 2.8 shows a summary of risk categories with a short explanation

of each.

Table 2.8 Risk categories

Risk category Description

Site risk Risks related to accessibility, suitability and ownership of site. Landscaping

and title deed of site are included here.

Construction risk Risk that arises because of faulty construction techniques, cost increases and

delays in construction. Most of this risk is allocated to the private sector in the

form of output specifications and penalties.

Operating and maintenance

risk

Risk that is as a result of higher operation and maintenance costs.

Financial risk Risk of increases in interest rates, inflation and taxes. This risk is mainly borne

by the private sector for example through arbitrage.

Force majeure risks Risks of significant adverse effects, usually acts of God for example adverse

weather and wars. These risks are shared as they are beyond the control of

either party.

Regulatory or political risk These risks result from government planning changes and legal changes that

may increase costs or prevent performance of PPP projects. The private

sector bears this risk.

Uptake or patronage risk This risk relates to the market, competition and usage of infrastructure.

Depending on the project the risk is taken private sector, sometimes assisted

by the public sector for instance government subsidy for public transport.

Source: Adapted from Hodge and Grave (2005:67) and Grimsey & Lewis (2004:172).

The interaction between risk and efficiency derives from the drive for efficiency by

the private operator given the fear and risk that actual and expected profits will not

coincide. The management of risk involves due diligence, technical performance

requirements and risk transfer to a third party by way of insurance or subcontracting

(Hodge and Greve 2005:66). If the private sector, using any of the techniques above

is better able to manage risk and price it at a lower level than the public sector then

value for money is improved.

37

An exception of where PPPs are used irrespective of efficiency is when government

policy is effective delivery of services. Effectiveness refers to how goals of

production are achieved. It relates to how social goals of public expenditure are

attained, for example improved health or literacy irrespective of efficiency or not in

the process. Effectiveness arises because of policy issues such as equitable access

to goods or services, for example expensive medical care. An example is the

provision of renal dialysis services in the Western Cape province by Fresenius, a

private company (Khan 2011:4). Another exception is where government consider

services to be so important to the public interest that it does not want the private

sector to deliver them, for example air traffic control and forensic pathology services

(Flinders 2005:232).

The main method of assessing the efficiency of the PPP projects is through the

Public Sector Comparator (PSC), which is an estimate of what the project would

have cost using traditional procurement methods (Flinders 2005:225). Hall

(1998:121) contests that the cost-effectiveness of PFI schemes depends on the

efficiency gains rather than the PSC because it is difficult to calculate an accurate

and uncontroversial PSC. It then follows that a higher PSC does not necessarily

mean value for money in a PPP scheme, because it may have been overestimated

by officials in order to gain project approval and generate impressive efficiency

gains.

Hodge and Greve (2004:38) cite studies that indicate that in the UK government

departments that implemented PPPs registered cost savings of 10 to 20 percent. In

the NHS the UK government’s attempt to reduce waiting times for elective surgery

has prompted PPP arrangements with the private sector. However, the limited

supply of specialists for advanced surgery has enabled this group to increase its

earnings and thus unit cost (Field and Peck 2003:498). Another difficulty of

monitoring decisions regarding patient care in the private sector may lead to over-

servicing and thus increasing costs. Therefore, it is not a foregone conclusion that

private sector provision is always more efficient than government provision (Fourie

and Burger 2000:700; Flinders 2005:225).

38

The fiscal theme of the economic rationale of PPPs is based on the argument that

government spending is reduced by using PPPs (Fourie and Burger 2001:147). Hall

(1998:364) cites an increase of British public sector capital expenditure as a result of

PPPs, following cuts in public sector expenditure in 1994 to 1998. PPPs have been

used as a substitute rather than in addition to public sector investment in the light of

worldwide fiscal constraints.

The use of PPPs affects both the expenditure and revenue sides of the budget. The

impact is on the level and timing of government, as well as the type of expenditure

(Fourie and Burger 2001:146). The immediate effect of PPPs is to reduce total

government expenditure and the budget deficit. This happens because of the

delayed payment streams by government to the private operator is a buy now pay

later scheme (Flinders 2005:225). Capital expenditure is for start-up capital and

current expenditure is used for operations and maintenance, plus interest on the

loan. The private sector is expected to pay a higher interest rate on the loan than

government. This is because the government is seen as risk-free because of its

ability to transfer risk to the taxpayers (Grimsey and Lewis 2005:133). Despite its

risk-free status government may face a danger of credit ratings downgrades if it

defaults on future loan payments.

In contrast, taxes and fees or user charges are used to cover expenses by the public

sector. Taxes and subsidies present distributional and equity effects to taxpayers. If

the taxation formally available to finance a public service is decreased and user

charges are levied on a service rendered through a PPP, the tax burden of non-

users is reduced (Fourie and Burger 2001:165). However, the composite tax burden

on service users is likely to increase. The equity effect arises if the total burden on

service users is unaffordable and government is forced to revert to tax increases to

raise subsidies. The extent of user charges depends on the type of product or

service the private operator is delivering. This includes the level at which user

charges are set. In the case of public goods, its demand will suffer from the free-rider

problem (Fourie and Burger 2001:166). This research explores the overall effect of

government subsidies to hospital PPPs regarding the access levels and

improvements or not in quality healthcare.

39

2.8 Summary of the main findings and conclusions

The aim of this chapter was to discuss the economics of healthcare and models

developed for PPPs. The key concepts of health economics and PPPs were

defined. The demand, production and cost of healthcare were discussed, followed by

healthcare markets and healthcare systems. This set up a platform for an exploration

of PPPs.

Health economics is a branch of economics that is still evolving that analyses the

costs and benefits of healthcare interventions. It is based on the assumption that

healthcare interventions result to better health. An important element of health

economics is the choices made about quality rather than quality and price.

The demand for healthcare is a derived demand, because people buy medical care

because they need to improve their health. The price of medical services is inversely

related the quantity demanded. The price of complementary and substitute goods

and services, as well as the income of consumers also affect the demand for

healthcare. The demand for medical services is relatively price inelastic meaning that

the quantity demanded will increase by relatively small amount when the price

decreases. The quantity and quality of healthcare and individual receives is not

entirely determined by their level of income, but by the clinical need and level of

healthcare in that country.

The production of medical services occurs in the short-term under fixed capital and

variable capital. In order to produce efficiently and to save costs medical firms use

economies of scale and scope. These concepts relate to combining inputs that

interact with one another to produce services cheaper. Having general hospitals

rather than specialist hospitals might save costs of medical services. Government

assists to achieve economies of scale and scope by regulating the healthcare market

for example controlling the number of hospital beds.

Healthcare markets are characterised essentially by asymmetry of information. The

consumers of healthcare do not have enough information to make rational decisions

and choices as producers, such as physicians and hospitals. Market structure in

40

healthcare may range from perfect competition, monopolistic competition, oligopoly

to pure monopoly. Besides perfect competition, the other market structures result in

welfare losses and higher prices or lesser supply of medical services. This market

failure in healthcare necessitates government intervention in the form of healthcare

provision and financing.

The extent of government intervention in healthcare delivery depends on the

healthcare system. Healthcare systems all over the world have developed over years

influenced by economic and political factors. Generally, healthcare systems may be

classified according to coverage, funding, control and status. South African

healthcare system is currently a mixture of a government or publicly funded and

market modified system with no universal coverage. It is suggested that a centralised

and publicly funded system is better able to achieve public satisfaction, equity and

effective care whether provided and financed by the public or private sector.

The study found that PPPs in the current literature are adequately defined. The

argument that the PPP concept came in to cloud the actual meaning of privatisation

is challenged by the distinct elements of PPPs. Participants, cooperation,

resourcing, durability and sharing have been identified as the key elements of PPPs.

The driving force of PPPs is the SPV working with public and private parties to

initiate and finally deliver on the PPP contract. For PPPs to succeed there needs to

be cooperation and commitment, not a principal-agent relationship by the parties.

Partnerships come in many forms and shapes. This study focused only on economic

partnerships. It noted the pioneering role of the PFI as a model for PPPs in the UK.

Seven common types of PPPs were identified as DBO, DFBO, BOOT, BOO, O&M,

LBO and BBO. Health sector models are not different to these. There is no common

classification of PPPs in the current literature.

The economic rationale of PPPs is efficiency and fiscal savings. Efficiency of PPPs

derives from the assumption that the private sector is driven by the profit motive, has

better management skills and is willing to take the risks. If the private sector is able

to manage the risk and price at a lower level than government efficiency is achieved.

However, the study showed that the private sector is not always more efficient than

41

the public sector. The PSC was identified as the main method to evaluate PPP

project efficiency. But the study warned against possible manipulation in calculating

to disguise project viability. In certain instances, effective service delivery by

government may overrule the efficiency need, for example to promote equity.

On the fiscal theme, the use of PPPs affects both the expenditure and revenue ideas

of the budget. The study concluded that the immediate effect of PPP delivery is to

reduce current government expenditure and the budget deficits, because of the buy

now pay later arrangement. On the revenue side user charges, taxes and subsidies

used to cover expenses may result to distributional and equity effects to taxpayers.

PPPs service users may end up paying more in the form of user charges and/or

taxes depending on the taxation policy of the government. This may tie up the future

generations to inflexible contracts concluded by past governments. This research

explores the effect of government subsidies to hospital PPPs regarding access

levels and improvements or not in quality healthcare.

Chapter 3 deals with the historical developments of healthcare delivery in South

Africa and the evolution of PPPs with an emphasis on healthcare.

42

CHAPTER 3

HISTORICAL OVERVIEW AND POLICY DEVELOPMENTS IN HEALTHCARE

AND PPPs

3.1 Introduction

This chapter reviews the history of healthcare and PPPs in the world and in South

Africa. The chapter begins with the history of the development of the hospital

industry, first in the world and then in South Africa. This is followed by a discussion

of the history of healthcare in South Africa, from the pre-colonial era to the post-1994

health policy reforms. The second part, discusses the evolution of PPPs globally and

in South Africa. An analysis of PPPs in the South African health arena is done and a

review of the existing PPPs in the health sector. The chapter concludes with a

summary of the main findings and conclusions.

3.2 History of healthcare

3.2.1 The development of the hospital industry as a social institution

Hospitals have developed as major social institutions for the delivery of healthcare

and to offer medical treatment and personal care. This extends beyond the service

normally available at home. Hospitals protect the family from the disruptive effects of

caring for the sick at home and put patients into medically supervised institutions

where their problems are less disruptive to society as a whole (Crockerham

1994:225). Moreover, hospitals offer the sick and injured access to medical

knowledge and technology. The development of hospitals as institutions providing

medical services was influenced by the needs, beliefs, values and attitudes of

societies they served (Jones 1994:1). According to Crockerham (1994:226) hospitals

developed through four distinct phases, namely, as centres of religious practice, as

poor houses, as death houses and as centres of medical technology.

The Romans were the first to establish separate medical facilities for the care of the

sick and insane, due to economic and military reasons. These hospitals were run by

43

the Roman Catholic Church who encouraged their clergy to establish hospitals and

locate them next to churches. Hence, the development of hospitals is associated

with the rise of Christianity. Christian theology emphasises that human beings are

duty bound to care for the sickly and needy so that they may derive spiritual

salvation (Cockerham 1994:226). Other secular benefactors, such as kings and

queens, members of the noble classes, wealthy merchants, guilds and municipalities

also founded hospitals between 1096 and 1291 in Western Europe. The primary

function of these hospitals was to extend religious practices and social tasks to the

poor in the form of food, lodging, sanctuary, prayer and nursing (Getzen 2004:155).

In these hospitals medical care was provided for the lower classes in society mainly

by the clergy and the nuns. During the Renaissance and Reformation periods, the

Christian character of the hospitals diminished as more hospitals fell under secular

authorities. However, the modern hospital derived features of caring and accessibility

to all from these early Christian hospitals (Crockerham 1994:226).

The second phase saw hospitals developing to be poorhouses. By the end of the

16th century, the economic and social conditions of the poor had worsened in

Europe. Unemployment, higher prices and landlessness created vagrancy

throughout Western Europe. Moreover, hospitals under secular authority had no

uniform administration resulting to the abuse of funds, neglect of facilities and a

decline in the standards of care. In the mid-1500s in England, most hospitals were

closed with the suppression of the monastery and only sick patients were admitted.

However, the socio-economic conditions of the 16th century saw many vagrants

claiming to be sick or crippled in order to be admitted in hospitals. Many hospitals

were reopened to provide food and shelter to the poor regardless of whether they

were sick or healthy (Crockerham 1994:227). In this sense, hospitals became

warehouses where invalids, the aged, orphans and the mentally handicapped were

kept away from the mainstream society. That trend of using hospitals as poorhouses

is still prevalent in many countries including South Africa. Life group long-term

hospitals serve that purpose (Wadee et al. 2004:26).

By the 14th century, physicians started to associate themselves with hospitals to

study the sick and injured in order to improve medical treatment. Their influence was

limited to advising on medical treatment. However, by the 17th century physicians

44

had acquired virtual monopoly over the existing body of medical knowledge and thus

could advise and direct all patient care activities in the hospitals. The modern day

hospital does not do anything without the directions from a physician, only physicians

are allowed to admit patients, perform surgery, or prescribe drugs (Getzen

2004:169). Hospitals started concentrating more on medical treatment. This gave

rise to their present day primary functions as institutions of medical care, research

and teaching (Crokerham 1994:228). Few patients survived treatment because of

the primitive level of medical treatment, dirt, overcrowding and poor ventilation. As a

result hospitals acquired the image of death houses for the poor. According to Jones

(1994:20) in the early 20th century there were two types of hospitals in Britain,

namely, voluntary hospitals and workhouses. The latter was for the medically insured

and the former were for the poor without insurance. Working men paid contributions

to access care in voluntary hospitals, for medical care in workhouses or poor-law

infirmaries had a stigma attached to them. In order to receive free medical care in

the workhouse, patients had to undergo the indignity of a means test.

The final phase is marked by the development of hospitals as centres of medical

technology. Since the end of the 19th century, hospitals evolved as institutions of

medical excellence where patients of all social classes could expect to be cured.

Three factors were responsible for this change (Crokerham 1994:228). Firstly,

medicine had by then developed as a science. Physicians and other medical staff

had increased their knowledge on physiology, bacteriology and anesthesia for

surgery. The second factor is the use of aseptic techniques to prevent infections.

Patients with infectious diseases were isolated, hospital staff were required to wash

their hands in between patients and to wear rubber gloves, masks and use sterilised

instruments. Thirdly, the quality of hospital personnel improved especially with the

entry of the trained nurses and laboratory technicians. No single change has ever

transformed the day-to-day work of hospitals as the trained nurse (Getzen

2004:155).

45

3.2.2 The characteristics of the modern hospital

This section discusses the types, control as well as competition and cost to analyse

the characteristics of the modern hospital.

Hospitals are categorised based on ownership, types of services, length of stay and

size (Folland et al. 2010:380). Hospital ownership can be private or public. The latter

are owned by the province, municipalities, or national government. Private hospitals

consist of either for profit and non-profit hospitals. Non-governmental organisations

and not for profit organisations such as churches own non-profit hospitals. In the

USA federal hospitals are based at military institutions or are run by military veterans

(Santerre and Neun 2007:381). Non-federal hospitals are made up of community

hospitals, to which the general American public is familiar.

Although, some hospitals offer specialised care such as psychiatric, obstetric and

ophthalmic services, the majority of hospitals offer a multitude of diagnostic and

therapeutic services. Hospitals provide different levels of care according to the

degree of complexity or seriousness of illness and the level of technology used

(Santerre and Neun 2007:381). Thus, hospitals can be classified according to the

level of care they provide, that is primary, secondary, tertiary and quaternary care.

Primary care services involve the prevention, detection and early treatment of

diseases at a point of first contact in the healthcare system. Services that can be

accessed include obstetrics, gyneacology, internal medicine and general surgery.

Basic X-ray facilities and laboratory analysis are available in most primary healthcare

facilities (Food and Health Bureau 2008:117). Secondary care involves more

sophisticated treatment, such as cardiology, respiratory care and physical therapy. It

is provided by a limited number of medical specialists, for example cardiologists,

urologists, trauma surgeons and dermatologists. Equipment and laboratory

capabilities are more sophisticated in secondary hospitals.

Tertiary care is specialised health care for inpatients and outpatients referred by

primary and secondary health professionals. Examples of tertiary care services are

cancer treatment such as chemotherapy, heart surgery, neurosurgery, plastic

surgery and treatment of severe burns, advanced neonatology and other complex

46

medical and surgical interventions. Quaternary care is an extension of tertiary care

for medicine of advanced level and highly specialised services. It is provided by

research or central hospitals associated with university medical schools (Food and

Health Bureau 2008:123). These delineations are arbitrary as certain hospitals have

elements of most levels of care incorporated within them. In the context of global

population ageing resulting in an increasing number of older patients with chronic,

non-communicable diseases the demand for PHC services is expected to increase in

both the developed and developing world. Hence, the WHO promotes the PHC

approach to improve and ensure sustainability of healthcare services in the world

(ANC 1994:19).

A typical hospital is governed by a board of trustees that selects a president and

approves major decisions. To achieve its task of providing medical care to patients,

the hospital relies on prescribed authority which is put in place through rules,

regulations and administrative procedure (Crockerham 1994:232). Efficiency and

effectiveness in hospital administration is achieved through coordination of

departments and individuals in the hospital as a firm. However, the hospital’s

decision-making power rests with the physicians, because they advise the board on

hospital governance and patient care matters. Only physicians are allowed to admit

patients, perform surgery and prescribe medicines. Hence, the claim that medical

staff organises the hospital as its workshop (Getzen 2004:169). Nurses and other

occupational groups in the hospital are subjected to authority from the administrators

and physicians to render patient care. Jones (1994:135) mentions that in 1967 under

the NHS, even midwifes who had more discretion than other nurses, lost their

authority and are now legally subordinate to doctors. In health systems dominated by

physicians such as in South Korea, demand-pull and cost-push inflation manifests

itself in terms of increased admissions, increased length of stay and increased

spending by hospitals (Eastaugh 2009:4) In the USA, unlike other developed

countries, physicians have been able to escape the corporate and bureaucratic

control of hospital boards by opposing national health insurance and maintaining a

private and voluntary financing system. As a result, they have channeled the

development of hospitals, health insurance and other medical institutions into forms

that enhance their authority and interests. American physicians exercise authority

over patients, fellow workers and the general public far beyond their clinical

47

knowledge (Greβ, Gildermeister and Wasem 2004:679). This raises the need for a

balance between the interests of consumers of medical care, physicians and other

medical staff, administrators and managers of hospitals.

Since the evolution of modern medicine, doctors have expected to be compensated

for their services, just as patients have been expected to pay for the care of a doctor.

Various types of medical payments have existed. For example, payments from

patients to doctors for a consultation, diagnosis and treatment, payments to

corporate bodies such as hospitals and lump-sum payments for instance capitation

payments (Valone 2004:219). Since the medieval hospitals in England, hospitals

have been funded from patient fees and philanthropy. Hospitals were largely

dependent on charity, but some raised money by organising annual fairs and from

rents collected from land or houses they owned. Taxes were also collected as a form

of revenue for the 15th century hospitals. The funds were used to buy food for patient

meals, hospital beds and other equipment and to pay physicians for the treatment of

patients (Dainton 1976:535).

The uses and sources of funds for the modern hospital have developed over time

and are influenced by the healthcare system. Getzen (2004:157) lists the main

sources of funds for the American health system as third parties in the form of

private insurance, Medicaid and other sources from government. Hospital funds are

used to purchase labour, medical supplies and maintenance of the hospitals. Table

4.1 presents the sources and uses of funds in American hospitals in 2002.

Table 3.1 Sources and uses of hospital funds

Sources of funds Uses of funds

Out-of pocket 3% Labour 53%

Private insurance 32% Professional fee 5%

Philanthropy 5% Supplies, mainly medical 34%

Medicare 31% Depreciation and interest 8%

Medicaid 17% 100%

Other government sources 12%

100%

Source: Adapted from Getzen (2004:157).

48

Table 3.1 shows that spending on health by the government amounts to 60 percent

compared to private financing of 40 percent. Government finances consist of

Medicare, Medicaid and other government sources. Medicare is a uniform, national

health insurance program for the aged and disabled Americans. It is administered by

the federal government, financed through taxes and covers both in-patient and out-

patient service (Santerre and Neun 2007:86). Medicaid is also a public health

insurance program for the economically disadvantaged groups. It is financed by the

federal government and states through conditional matching grants. Its coverage

extends beyond acute care to long-term nursing homes. Cost shifting occurs in the

hospital industry as one group is charged higher prices to cover for the loss due to

undercharging the indigent or Medicaid patients (Morris, Devlin and Parkin

2007:171). In these instances, the rich and healthier are subsidising the poor and

the elderly who are prone to ill health. Risk pooling in healthcare insurance is an

actuarial and epidemiological concept. It states that individuals contribute regularly to

a pooled fund to cover unexpected and high medical costs when they occur. Moral

hazard and adverse selection in healthcare insurance may threaten sustainability of

its funding (McIntyre 2010:15).

The hospital as a labour intensive industry spends over 53 percent of its funds on

labour, followed by 34 percents on medical and other supplies. This suggests that

one way to reduce hospital costs and thus increase profits is to reduce wages or

employment. The profits of hospitals whether it is a profit or non-profit hospital

accrue to managers who want their hospitals to be the biggest and the best (Getzen

2004:169). Economic theory points to the stickiness of wages, making the option of

cutting hospital labour difficult. Competition amongst hospitals has tended to be

driven by expensive capital equipment and extensive advertising to attract patients.

Unlike in other industries where sellers compete on the basis of prices, hospital fees

are largely fixed by medical insurance schemes and regulated by the government.

According to the medical arms race hypothesis, hospitals in more competitive areas

provide physicians with advanced medical technologies, excess bed capacity and

consulting rooms. In return physicians are expected to admit their patients in these

hospitals (Santerre and Neun 2007:40).

49

The market structure for hospital services, general practitioner services and private

health insurance is oligopolistic. In an oligopoly there are few firms in the market,

entry is restricted, product type is undifferentiated or differentiated and providers

have some control over the price of the product (Morris et al. 2007:110). The hospital

as an oligopoly may collude with other firms to limit competition or compete with one

another to gain market share of the industry. Hence, government intervenes to

prevent collusion, which can result in welfare losses through increasing prices.

Kosimbei, Hanson and English (2011:7) found that hospital costs are reduced and

financial savings achieved by using clinical guidelines to change clinical dependent

costs. These are costs under the discretion of the healthcare provider, for example

drugs, tests and investigations, inpatient and outpatient stays. In this way

competition in the hospital industry and efficiency may be enhanced.

The next subsection discusses the history of healthcare in South Africa

3.3 History of healthcare in South Africa

3.3.1 A brief description of the evolution of medicine as a science

The roots of modern medicine can be traced back to the 5th century when

Hippocratic rational medicine originated in Greece. In those times, physicians were

trained through apprenticeship and did not write qualification examinations. As a

result the standard of practice differed enormously (Cilliers and Retief 2006:34). In

those times knowledge of anatomy was based on that of animals. Physiology was

explained in terms of a balance of four humours, namely white bile, black bile

phlegm and blood. For good health the four humours needed to be in equilibrium

with one another and the four elements namely, the earth, fire, air and water. This

signified a move away from superstition and religious beliefs to explain the cause of

diseases. The Hippocratic code of conduct was also published around the third

century (Cilliers and Retief 2006:35). Avicenna, a Muslim scientist of the tenth and

eleventh centuries contributed to the development of medicine through diagnosis

and treatment of some diseases such as asthma, jaundice and biliary obstruction.

Although his work was based on Hippocrates and Galenus, his book Canon is said

to be superior to all previous scientific works of that time (Moosavi 2009:4).

50

In the 17th century, the Galenic concept that humours cause diseases was

challenged by new medical and scientific discoveries. Harvey (1578-1657)

discovered that blood circulated in the body as a result of heart beats. Leeuwenhoek

(1632-1723) discovered the principle of the microscope. In 1574, Prince William

started a university in Leyden in England as a reward for his soldiers who defended it

against Spanish invasion (Burrows 1958:18). However, the standard of the 17th

century medicine in Europe was far from scientific. Ancient beliefs of superstition and

witchcraft still existed.

Training of surgeons was associated with the barbers and was held in the same

social status in England. A partnership between the English surgeons and barbers

guilds was only broken in 1745 due to the advances in surgical technology (Barrow

1958:19). In France, there were three classes of surgeons namely, upper class

surgeons, lower class barber surgeons and working class barbers with outcast

surgeons. In Holland, the present day division of physicians and surgeons existed.

The Dutch physicians were trained in reputable institutions such as Leyden

University and had to receive practical postgraduate work at home. On the contrary,

surgeons were trained through apprenticeship in established surgeon’s guilds.

Despite their inferior academic training, surgeons were respected for their hard work

more than the undisciplined physicians. The Dutch East India Company (DEIC)

appointed its medical staff from the surgeon’s guilds (Barrows 1958:20).

3.3.2 The settlement period to unification in 1910

Van Rensburg (2004:52) distinguishes two periods of early healthcare history in

South Africa. Firstly, the settlement period, 1652 to1695 mirrored the medical and

scientific developments in Europe. The second period, 1795 to 1910 is characterised

by expansion, consolidation and control of healthcare. The arrival of Jan van

Riebeeck to set up a refreshment station in the Cape for the DEIC presents the first

recorded history of healthcare in South Africa.

The first hospital, the Van Riebeeck hospital was completed in 1656. It was staffed

by the master surgeon, an assistant surgeon, an apprentice surgeon and a sick-

51

comforter (Barrows 1958:32). The hospital was managed by three directors, the

master surgeon, the sick-comforter and the army sergeant. Van Riebeeck himself

drew up the regulations for the administration of this hospital. The diseases at the

Cape were initially the same as those of the sailors at sea. These mainly were

dysentery, fever and vitamin deficiency especially scurvy. All medical personnel

including physicians were full-time employees of the company. The settlement of the

first free burghers in 1657 meant that the Cape became a colony rather than a

refreshment station as it was before. The free burghers were freed from company

service to become semi-independent farmers. On the healthcare front, this resulted

in private practice and a civilian surgeon, Jan Vetteman practicing amongst them

(Van Rensburg 2004:54). At that time, the Van Riebeeck hospital was not coping

with the increased patient load and a new hospital, the Cape Town hospital was

completed in 1699. The diseases that resulted in high mortality in the Cape were

typically epidemics. The smallpox epidemics of 1713, 1755 and 1767 significantly

reduced the population of the colony as the health system proved inadequate.

The second period begins in 1795 with the British occupation of the Cape colony.

This period marked an intense contact and confrontation between the black and

white communities and the eventual occupation of the whole of South Africa by the

British. The chaotic administration of the healthcare services and unprofessional

conduct of physicians prompted the British to promulgate legislation to control

healthcare and healthcare professionals (Barrows 1958:72). Table 3.2 lists the

health legislations passed and its purpose.

Table 3.2 Healthcare legislations passed during the period 1830 to 1900

Legi slation passed Purpose

Public Health Act 4 of 1833 This law made notification of communicable diseases and inoculation against

smallpox compulsory. It also authorised the governor to grant extraordinary

emergency powers to local authorities during an epidemic.

Medical and Pharmacy Act 34

of 1891

Established the Colonial Medical Council and the Pharmacy Board to regulate

doctors, surgeons, accouchers, chemists and druggists, midwifes and

registered nurses. All these categories could only practice if licensed by the

Colonial Secretary.

Public Health Amendment Act

23 of 1897

Created the Colonial Public Health Department with the post of medical officer

for the colony and local authorities medical officers.

Source: Adapted from Van Rensburg (2004:57).

52

The legislative developments such as these above took place in the Cape Colony

and were applied later in Natal. In the Boer republics of Transvaal and the Orange

Free State consolidation of legislation to be in line with the Cape occurred after the

peace of Vereeniging in 1902 (Van Rensburg 2004:56). However, true consolidation

of healthcare legislation in the four provinces came into effect only in 1919.

3.3.3 Development of hospitals in South Africa

This subsection discusses the development of hospitals and other institutions of care

from the settlement period to the early twentieth century. The first hospital, the Van

Reibeek was opened in 1656, followed by the Cape Town hospital in 1699. It is

important to note that the first civilian hospital, the Somerset hospital was erected in

1818 (Van Rensburg 2004:61). This hospital was opened to all citizens of the Cape

Colony, namely sailors, the aged, the mentally ill and the slave population. Unlike the

colonial hospitals, which cared for the seaman and soldiers, Somerset hospital cared

for the civilian population. Hospitals spread throughout the country in the 19th century

to cater for the expansion inland. Torkington (2000:6) comments that South African

health services had no rational development, for example, hospitals were

established for sailors who worked for trading companies. They were also built to

separate people who were suffering from infectious diseases such as leprosy,

smallpox and plagues.

The discovery of diamonds and gold in the Transvaal and Orange Free State in the

1870s resulted in the erection of mine hospitals. Cartwright (1971:6) states that there

was a shortage of the unskilled labour force for the mining companies which

threatened their production capacity. The Chamber of Mines had observed the poor

health of its African miners and the high mortality caused by pneumonia and other

respiratory diseases. The conditions in the Kimberly mine hospital in 1876 were

described by Sister Stockdale as overcrowding, poor ventilation and poor medical

care (Van Rensburg 2004:62). Mine management, in an attempt to have a healthy

and productive labour force, instituted different measures such as, soup kitchens at

each mine shaft, issuing two blankets for each man in cold weather, improvements in

the sanitary system and compound hospitals to serve the sick. The consolidation and

53

central control of curative and preventive services was proposed, but only came into

effect in 1952 when the Ernest Oppenheimer hospital was established in Welkom

(Cartwright 1971:36).

The first hospital for blacks was built in King William’s Town in 1856 and a second

one was opened in Pietermaritzburg in 1857. The motivation to build these hospitals

was less to provide the needed healthcare, than to ensure allegiance of black people

to the colonial government (Torkington 2000:6). At the same time, missionary

hospitals were started throughout the country, especially in rural black communities.

Missionaries were inspired by the belief that medical treatment was enhanced and

more effective if given with prayer (Gelfand 1984:19). In almost all cases, missions

depended for their existence on funds from overseas donors. For many years, they

recruited most of their medical and nursing staff from abroad. It is important to notice

that this evolution of Western medicine co-existed with the traditional medicine of the

indigenous people. This split structure of two types of medicine is still characteristic

of South African medicine even today (Van Rensburg 2004:68).

3.3.4 Health policy reforms during the 19 th century up to 1994

Van Rensburg and Harrison (1995:1) discuss the evolution of the history of health

policy in South Africa in six distinct phases. The first phase is the period prior to

1919. During the 1800s the healthcare in the four colonies in South Africa was

uncoordinated and unsystematic. Military and civilian hospitals were constructed

mainly to contain the spread of epidemics (Van Rensburg and Harrison, 1995:1). At

the time of unification in 1910, the responsibility for health care was transferred from

the four colonies to the four provincial administrations. While the provinces continued

to provide public curative services, environmental and preventative health services

were still provided by municipalities under the jurisdiction of the Department of

Internal Affairs (Naidoo, 1997:53).

The second phase is from 1919 to 1948. The disastrous influenza epidemic in 1918,

which claimed 14 200 lives directly led to the passing of the Public Health Act

Number 36 of 1919. This act replaced the previous colonial legislation and sought to

establish uniform control of preventative health services (Naidoo, 1997:53). The first

54

separate ministry and Department of Public Health was established at national level.

The rest of the period to 1940 saw intensive debate on health policy, while

developments favoured the exclusion and segregation of the emerging private health

sector (Van Rensburg and Harrison, 1995:1).

The third phase began in 1940 to 1950. During this phase a vision of a united,

comprehensive and state-funded national service based on PHC was realised. The

National Health Services or Gluckman Commission of 1944 recommended the

establishment of a national health service for a single national health authority to be

responsible for all personal health services. The recommendations of the Gluckman

commission were never implemented, because the government believed that health

was a provincial prerogative (Van Rensburg and Harrison, 1995:4).

The fourth period started in 1948 to 1990. It started with the victory of the National

Party in the elections of 1948. This was the era of Grand Apartheid characterised by

legislated racial discrimination and segregation, affecting the organisation of health

services and the health of the people in South Africa (Van Rensburg and Harrison,

1995:2). For over five decades the 1919 Public Health Act determined the

organisational framework of South Africa’s health care, until it was repealed and

replaced by the Health Act No.63 of 1977 (Naidoo, 1997:54). This Act reinforced

fragmentation by delegating responsibility for preventative care to local government

and curative care to the provinces. The government’s intention to create a Native

Health and Medical Service were opposed by the African majority. To maintain white

privilege and supremacy its response was more privatisation of healthcare services

and the Tri-cameral Constitution of 1983 (Van Rensburg and Harrison 1995:2).

The fifth period was from 1990 to 1994.This period showed a first serious attempt to

do away with Apartheid and fragmentation of healthcare. There were efforts to swing

the emphasis towards PHC, a guarded approach to privatisation, nationalisation of

mission hospitals in the homelands and seeking positions in the future health

services by authorities (Van Rensburg and Harrison, 1995:2). Medical facilities of the

University of Cape Town (UCT) and the University of the Witwatersrand (Wits) had

long pressed for desegregation at their teaching hospitals (Kelly, 1990:16). In the

55

end, the reforms during this phase were cosmetic, because the government that

made them was undemocratic.

The final phase was after 1994.This phase commenced with the country’s first

democratic elections on 27 April 1994. A first democratic government came into

power led by the African National Congress (ANC). The first African Minister of

Health, Dr. Nkosazana Dlamini-Zuma was appointed. She had the task of

establishing a unitary and equitable health service for all South Africans (Van

Rensburg and Harrison, 1995:2). The ANC had committed itself to the PHC

approach. Keeton (2010:803) reports that access to healthcare services improved

especially for the poor South Africans. However, the standard of healthcare

deteriorated over this period because of the burden of the HIV/AIDS epidemic, poor

maintenance of hospital infrastructure and poor management.

3.4 Health policy and reforms after 1994

3.4.1 Development policy in South Africa since 1994

As previously explained health and socio-economic development are closely related

phenomena. When the democratic government took over in 1994, this signaled the

start of a period of community-driven development. This meant an approach of

delivery based on organising, providing and distributing the outcomes of

development in a defragmented, equitable, accessible and acceptable manner (Van

Rensburg, Kruger and Barron 1997:23).

3.4.2 The Reconstruction and Development Programme (RDP)

The RDP was promoted as the developmental initiative of the post-apartheid

government. Its aim was to combat poverty through five programmes. These were

meeting of basic needs of society, upgrading human resources, strengthening the

economy, democratising the state and society and making the state and the public

sector more efficient (Van Rensburg et al. 1997:24). Health development also

formed a central part of the RDP, for example its Presidential Lead Projects, primary

school feeding schemes, free healthcare for pregnant women and children under six

56

years and the building of new clinics for PHC. However, the government abandoned

the RDP in mid-1996, because of the inability to deliver on its election promises.

3.4.3 Growth, Employment and Redistribution (GEAR)

The GEAR strategy was presented in mid-1996 to replace the RDP. The GEAR

strategy emphasises economic growth and employment creation. It however,

maintained most of the principles of the RDP. The new macroeconomic strategy

shifted social development to a secondary position, with reducing the budget deficit

and state expenditure taking priority. There was also less consultation in the

development and generation of GEAR (Van Rensburg et al. 1997:25). During its

period of operation the GEAR strategy created less jobs than was envisaged, but

succeeded in achieving better economic growth and a decline in the budget deficit.

The GEAR policy improved the private investment climate and produced better

resources and institutions for government to play an active role in development

(Streak 2004:271).

3.4.4 The Primary Health Care (PHC) approach

The new government in 1996 followed the PHC approach to the delivery of health

care services. This approach is based on full participation of the community in the

planning, provision and monitoring of services. It focuses on health promotion

through prevention and education. The PHC approach sees patients or the

community as active recipients of health services. It forms a central part of the

National Health System (NHS) and will aim to reduce inequalities in access to health

services, especially in rural areas and townships (ANC 1994:19).

3.4.5 The District Health System

The NHS distinguishes between two functions of the state with regard to health,

namely, to create, amend and monitor the NHS and to be a major provider of health

care services. The government’s function as a health care provider is to ensure

quality and equitable access to everyone (ANC 1994:59). The RDP had suggested a

single NHS based on the District Health System (DHS). The DHS is based on PHC,

57

comprises a well-defined population and geographic area, and individuals and

institutions that provide healthcare to a district. In terms of the DHS, each province is

subdivided into a number of functional districts and each district acting as a provider

and purchaser of health services. It includes all institutions and individuals who

provide healthcare in a district, whether governmental, social security, non-

government, private or traditional (ANC 1994:62). Currently there are 252

municipalities equivalent to health districts in South Africa. The proposed National

Health Insurance (NHI) policy suggest a re-engineering of the PHC services to focus

on health promotion and preventative care, while rendering quality curative and

rehabilitative services using the DHS as a delivery model. It further proposes three

streams for the delivery of PHC, namely, district specialist support team, school

health services and municipal ward-based PHC agents (Department of Health

2011:23)

3.5 Health resources

The public health sector in South Africa was highly fragmented during the Apartheid

era. After the 1993 rationalisation process a single National Department of Health

was formed. Alongside it existed ten homeland departments of health (ANC

1994:30). Healthcare delivery was the responsibility of the four provinces through

hospital services, ambulance services and OPD services. The third level of

government, namely local authorities were responsible for environmental health,

public health as well as preventative and promotive health services. The private

health sector is strong, but fragmented, consisting of private practices, private

hospitals, pharmaceutical manufacturers and distributors, medical aid schemes and

other providers such as healthcare workers (ANC 1994:31).

In 2008 there were 117850 hospital beds in South Africa. Of these 87870 were

public sector beds and 29 980 were private sector beds (Day and Gray 2008:355).

There were 396 public hospitals and 211 private hospitals in 2008. Makube

(2011:256) states that in 2007 there were 28 hospital beds per 10000 of the

population in South Africa. The public sector is under pressure to cope with the rising

demand from non-insured patients and insurance holders whose benefits have been

exhausted prematurely in the private sector. He concludes that 67 percent of the

58

population is served by public hospitals and 33 percent by private hospitals. The

mean bed to population ratio is 2.1 per 1000 people in public hospitals and 4 per

1000 people in private hospitals. Hospitals are classified according to the level of

healthcare they deliver and this determines their occupancy rates and length of stay.

In 2006 the District Health Information System (DHIS) calculated the length of stay to

be 5.7 days and bed occupancy at 71 percent in public sector hospitals (Day and

Gray 2008:355).

The WHO states that challenges with health personnel, especially in low and middle

income countries, present a serious obstacle to achieving key health priorities and

improving the performance of the healthcare system. The ANC (1994:32) cites that

health personnel are over-concentrated in the metropolitan curative settings and in

the private sector. These health professionals are inadequately trained to deliver

healthcare according to the PHC approach. There is no reliable data that splits

health personnel between the public and private sector, but best estimates

suggested that 32 percent of the population use private general practitioners and 15

percent use private hospitals (Harrison 2009:27).Table 3.3 shows a comparison of

medical personnel in developed and developing countries.

Table 3.3 Medical personnel in selected developed and developing countries in

2008

Physicians Nursing and midwifery personnel

Dentistry personnel Pharmaceutical personnel

Countries Number Density per 10000 population

Number Density per 10000 population



South Africa

34,829

8

184,459

41

5,995

1

12,521

3

Australia 19,612 10 222,133 109 29,624 15 15,339 8

United Kingdom

126,126

21

37,200

6

25,914

4 - -

Brazil 320,013 17 549,423 29 217,217 12 104,098 6

India 643,520 6 1,372,059 13 55,344 1 592,577 6

Egypt 179,900 24 248,010 34 25,170 3 92,540 12

Malaysia 17,020 7 43,380 18 2,160 1 2,880 1

Source: Adapted from WHO (2010b:113).

59

Table 3.3 shows statistics of medical personnel collected by the WHO for country

National Health Accounts in 2010. South Africa does not perform badly compared to

other middle income countries and developed countries. There are more physicians

in South Africa than Australia and Malaysia, more nurses than in the United Kingdom

and Malaysia, but less dentistry and pharmaceutical personnel than most countries

listed in Table 3.3. However, this is distributed very skew to favour the private sector

and urban areas in South Africa. In the absence of a uniform national health system,

it is difficult to accurately allocate health personnel between the public and private

sectors. In South Africa, the supply of health professionals by universities does not

meet the rising demand caused amongst other things by the HIV/AIDS epidemic

(Harrison 2009:27).

Healthcare financing constitutes the third element of health resources. Funds flow

from three main sources to the South African health sector, namely public sector,

private sector and donors and non-governmental organisations. The private sector

funds from households and employers originate either through medical schemes, out

of pocket payments, medical insurance or private employers’ direct payments

(Doherty, Thomas, Muirhead and McIntyre 2002:16). Table 3.4 shows the flow of

funds in the South African healthcare industry during the period 2005/06 to 2010/11

and estimates the 2011/12 position.

Table 3.4 Consolidated flow of funds in the South African health sector (R million)

2005/6

2006/7

2007/8

2008/9

2009/10

2010/11

2011/12

Public sector 54,417 61,822 71,131 84,588 92,568 102,934 110,793

Private sector 81,226 87,983 100,685 113,181 121,637 130,383 139,114 Donors or NGO’s 1,944 2,503 3,835 5,212 6,910 6,319 5,787

Total 137,627 152,308 175,651 202,981 221,115 239,636 255,694

Source: Adapted from Makube (2011:253).

Table 3.4 demonstrates that on average between 2005/06 to 2010/11 the private

sector received 56 percent of funds, while 41 percent of fund went to the public

sector, while donors contributed only 2 percent. This is despite of the fact that the

private sector serves only 15 percent of the population as opposed to the public

sector that serves 85 percent. However, healthcare expenditure over this period

60

grew with a nominal rate at 10.9 percent. It is important to underline that real per

capita public health expenditure declined after 1995 and only regained the 1996

levels in 2005 resulting to a decrease in public health resources and personnel

(Harrison 2009:25). This is mainly as a result of the additional burden on healthcare

financing caused by the HIV/AIDS epidemic.

The major areas of growth of the public health budget are HIV/AIDS, hospitals,

healthcare facilities revitalisation and compensation of employees. In 2007 the South

African healthcare expenditure was 8.6 percent of GDP, but health outputs,

outcomes or quality are poor (Makube 2011:254). The level of healthcare

expenditure is similar to that of Brazil and the United Kingdom who have far better

health outcomes. Table 3.5 compares healthcare expenditure and health status

indicators in developed and developing countries.

Table 3.5 Comparison of healthcare expenditure and health status indicators of

selected countries

Country Healthcare expenditure as percentage of GDP, 2007

Per capita expenditure on health (PPP international $),2007

Life expectancy at birth, 2008

Infant mortality rate per 1000 live births, 2008

South Africa 8.6 340 53 48

United Kingdom 8.4 2,446 72 5

United States of America 15.7 3,317 70 7

Brazil 8.4 348 64 18

China 4.3 104 66 18

Chile 6.2 507 70 7

Egypt 6.3 118 60 20

Source: Adapted from WHO (2010:45 and130).

South Africa’s healthcare expenditure level of 8.6 percent of GDP is similar to the

United Kingdom’s and Brazil’s 8.4 percent. It is more than China’s 4.3 percent,

Egypt’s 6.3 percent and Chile’s 6.2 percent. Table 3.5 also shows that all these

countries have higher life expectancy and lower infant mortality rates than South

Africa. The South African life expectancy was 53 years at birth and infant mortality

rate was 48 per 1000 births of in 2008. The declining life expectancy and high

mortality rates in South Africa are reported to be adversely affected by the HIV/AIDS

epidemic (Makube 2011:255).

61

Many governments in the world are confronted by fiscal restraints caused by the

downturn of the global economy after the oil crisis of the 1970s and the world

depression of 2008. This has forced them to carefully prioritise and restrict public

expenditures. Many have adopted the PPPs policy to deliver services that might

have been unaffordable to governments (Nikoloc and Maikish 2006:1) The private

sector is able to help deliver improvements in efficiency and service quality .

The next section discusses the history of PPPs in general and South Africa in

particular.

3.6 History of Public Private Partnerships

3.6.1 History of PPP developments in developed countries

The literature on PPPs is relatively new, but the concept is old. The French were first

to use PPPs to privately finance public infrastructure through the French concession

model. Canal de Briare and Canal du Midi were financed and constructed in France

in 1663 and 1666 respectively in this way. During the 19th and 20th century France

used PPPs to finance its infrastructure, water, electricity, railways and tramways

(Grimsey and Lewis 2005:xiii). While the French can claim of be the founders of

PPPs, the evolution of PPP has been accelerated in Britain. The origins of PPP can

also be traced in the turnpikes in Britain and in the USA. A turnpike is a road wholly

or partly paid for by fees collected from tollgates. The first British turnpike was

established in 1663 and in the USA the first turnpike road was authorised in 1785

(Grimsey and Lewis 2005:45). The development of Britain as a naval super power in

the 16th and 17th century is also as a result of financing by private merchants.

In the recent history, the United Kingdom has been in the forefront of the

development of innovative approaches to engage the private sector in delivering

public services. Canada, Australia and New Zealand are also considered as front

runners in the development of PPPs (Carroll 2008:1). In the UK, private financing of

public infrastructure was prohibited by the Ryrie Rules, which stated that private

finance could only be used in place of public finance, not in addition to it. This limited

important investment in public infrastructure, until they were repealed in 1987 and

62

the PFI was launched in 1992 (Yescombe 2007:33). The initial purpose of the

Private Finance Initiates (PFIs) was to use private sector financing for public

infrastructure especially concession projects that were self-financing. The UK

Treasury took over direct control of PFI projects by initiating standardised contracts

to speed up the procurement time in 1997. The PFI programme has grown over the

years to account for more than 10 percent of total investment in the UK public sector

(Yescombe 2007:39).

Table 3.6 summarises PFI projects since 1987 according to the number of projects

and capital value in million British pounds.

Table 3.6 British PFI projects by government department for the period 1987 to

2005 (£ million)

Government department No. of projects Capital value

Transport 51 21,956

Health 149 6,572

Defence 55 4,570

Education 144 4,112

Scotland regional government 91 2,745

Work and pensions 11 1,341

Other below £1 million per department

243 6,355

Total 747 47,561

Source: Adapted from Yescombe 2007:37

Table 3.6 shows that in the UK, health followed by education had the largest number

of PPP projects, but transport had the largest capital value.

In France, PPPs are through concession and affermage contracts. Concession

contracts cover designing, building and financing the project. The contractor also

bears the cost of maintaining the project until it is transferred back to the public body

at the end of the contract. Affermage involves operation and maintenance being

carried out by the private sector party under contract with the public sector (Ribault

2001:50). In these contracts, the investment is financed and owned by the

government. Concession contracts have been used to construct highways, water

provision networks, railways and tunnels, local gas and electricity networks.

63

Affermage contracts have been used for sewage disposal, refuse collection, urban

transport, school canteens, sport facilities and other municipal services (Ribault

2001:51). They can also be used at the end of the concession contracts if not

renewed or while looking for a new contract to replace the existing contract. The

French PPP experience also shows a high degree of market concentration with two

firms controlling over 50 percent of services in local authorities.

Besides the influential role of Britain and France in the development of PPPs, other

parts of the developed world have adopted the PPP delivery model. In the USA and

Canada, which have federal governments PPPs have been used for water,

transportation, energy and power infrastructure. In these two countries, PPPs have

been extended to include non-profit organisations (Hodge and Greve 2005:185). In

Western Europe and Australasia PPPs performance has been a mixture of both

success and failure, caused mainly by imperfect contracts. Nevertheless, there is a

potential for value for money and improvement in service delivery using PPPs

(Hodge and Greve 2005:343).

3.6.2 PPPs in emerging markets

Infrastructure investment in developing countries and transitional economies in

Eastern Europe takes place in a different environment to that of developed countries.

The political systems of these countries may be unstable and the legal framework

not fully developed. The financial systems of these countries in some instances are

not fully developed. This increases the risk of investment in public infrastructure

(Grimsey and Lewis 2004:220). The Sofia water concession project in Bulgaria was

concluded in 2000. It took 30 months to conclude the contract with a concession

period of 25 years. The project supplies water to 1.2 million people and is an

example of a successful PPP in developing countries. Domberger and Rimmer

(1994:439) cite a wide use of PPPs for refuse removal and transportation in Asian

countries such as Malaysia and Thailand. In the Peoples Republic of China, the use

of PPPs increased after the introduction of market reforms in 1988. South Africa, a

developing country with a sophisticated financial and investment sector also

presents an example of successful PPP programmes. PPPs in South Africa provided

64

a means to accelerate economic investment and investment in social infrastructure

(Yescombe 2007:47).

The next subsection discusses the history of PPPs in South Africa.

3.6.3 The history of PPPs in South Africa

The history of PPPs in South Africa dates back to 1997 when government appointed

an interdepartmental task team to develop policy, legislation and institutions for

PPPs. Between 1997 and 2000 government operated six pilot projects. These are

the South African National Roads Agency’s N3 and N4 toll roads, correctional

services two maximum prisons, water services in two municipalities and the South

African National Parks’ tourism concession (Burger 2006:6). The PPP unit was

established in the National Treasury in June 2000. Its role is to provide technical

assistance through all phases of the PPP life cycle. The life cycle comprises of six

phases, namely inception, feasibility study, procurement, development, delivery and

exit.

PPPs on national and provincial level are regulated in terms of Treasury regulation

16 issued in 2004 under the Public Finance Management Act of 1999. Municipal

PPPs operate under the Municipal Public-Private Partnership regulations issued in

2005 in terms of the Municipal Management Act of 2003. There are 20 PPPs being

implemented in terms of Treasury Regulation Number 16 by national and provincial

governments in South Africa (National Treasury PPP Quarterly Unit 2010:5).

Moreover, there are 26 PPP municipal projects registered by the PPP Unit as of July

2011.These range from solid waste management, water supply and reticulation to

provision of office accommodation.

Tables 3.7 and Table 3.8 show national and provincial PPP project agreements

concluded by May 2010.

65

Table 3.7 National PPP projects signed as at May 2010.

Project Government

institution

PPP

type

Contract duration

and date of

agreement

Net Present Value to

government

State Vaccine Institute Department of

Health

Equity

partners

hip

4 years, January

2004 extended to

December 2009

R15 million systems

investment

Head office

accommodation

Department of

Trade and Industry

DFBOT 25 years,

August 2003

Value to government R870

million

Information systems Department of

Labour

DBFTO 10 years,

December 2002

Value to government R1.5

billion

National fleet

management

Department of

Transport

DFO 5 years,

September 2006

R919 million

Head office work

environment

Department of

Education

DBFOT 27 years

May 2007

Capital value R512,264

million

Serviced head office Department of

International

Relations and

Cooperation

DBFOT 25 years

Date not stated

Capital value R1.4 billion

Source: Adapted from National Treasury PPP Unit (2010:5).

Table 3.8 Provincial PPP projects signed as at May 2010.

Project Government

institution

PPP type Contract duration

and date of

agreement

Net Present Value to

government

Humansdorp district

hospital

Eastern Cape

Department of

Health

DFBOT 20 years

June 2003


billion

Fleet management Eastern Cape

Department of

Transport

DFO 5 years

August 2003

Value to government R553

million

Inkosi Albert Luthuli

hospital

KwaZulu-Natal

Department of

Health

DFBOT 15 years

December 2001


billion

Eco-tourism Limpopo

Department of

Finance

DFBOT 30 years

December 2001

R25 million cash

Universitas and Pelenomi

hospitals co-location

Free State

Department of

Health

DFBOT 21 years

November 2001

R43 million cash and R38

million capital investment

Chapman’s Peak drive

toll road

Western Cape

Department of

Transport

DFBTO 30 years

May 2003

R450 capital investment

66

Cradle of Mankind

Interpretation Centre

complex

Gauteng

Department of

Agriculture,

Conservation,

Environmental

and Land Affairs

DBOT 10 years

October 2003

R39 million cash

Gauteng Rapid Rail Link Gauteng

Department of

Public Transport,

Roads and Works

DBFTO 20 years

September 2006

R23.09 billion capital value

Western Cape

Rehabilitation Centre

Lentegeur hospital

Western Cape

Department of

Health

Facilities

managem

-ent

Duration not stated

November 2006

R334 million capital value

Polokwane hospital renal

dialysis

Limpopo

Department of

Health

DBOT 10 years

December 2006


million

Port Alfred and Settlers

hospital

Eastern Cape

Department of

Health

DBFOT 17 years

May 2007

Capital value R168 million

De Hoop nature reserve Western Cape

Nature

Conversation

Board

DBFOT 30 years

Date not stated


Fleet management Northern Cape

Department of

Transport, Roads

and Public Works

DFO 5 years

Date not stated


Whale Trail nature

reserve

Western Cape

Nature

Conversation

Board

DBFOT 20 years

July 2006


Source: Adapted from National Treasury PPP Unit (2010:5).

Tables 3.7 and Table 3.8 show that 12 of the 20 projects are provincial projects,

while only 6 are at the national level. It also shows that there are seven health

projects. The majority of PPPs are of build, design, finance, operate and transfer

(BDFOT) type. Burger (2006:7) reports that national and provincial PPPs occur at a

rate of roughly two per annum, mainly because of lack of skilled staff in the

departments and provinces. This is far less than in the UK where 208 projects were

signed or concluded in 2004, with a total public service investment of 11 percent of

67

total expenditure (Yescombe 2007:37). The National Treasury (2007:59) estimated

the PPP project capital investment in 2009/10 to be R7,393 million.

3.6.4 Health sector PPPs in South Africa

The relationship between the public and private sectors in healthcare can be traced

back to the 1940s when there was an expansion of mission hospitals and later in the

1970s when mission hospitals were nationalised in the homelands. These

interactions between the public and private sectors were accelerated after the

democratic dispensation of 1994. The Public-Private Interaction (PPI) policy was

developed by the National Department of Health parallel to the PPP policy of the

National Treasury. In 2001, PPI policy guidelines were presented to all major

stakeholders (Wadee et al. 2004:20). PPI extends beyond PPP as defined by the

National Treasury to include a range of activities that support service delivery directly

or indirectly. Wadee et al. (2004:23) analysis of PPIs revealed two broad categories,

namely, PPIs that manage relationships and service delivery PPPs. PPIs that

manage relations are formal dialogue, informal dialogue, policy and patient transfer

protocols. Formal dialogue involves forums set-up to facilitate informal

communication between the sectors. Policy management of relations is through

government policies such as pharmaceutical pricing and the reference price list.

Patient transfer protocols are used to facilitate patient transfers from the private

sector hospitals when their benefits run-out.

Service delivery PPPs include purchased services, out-sourced non-clinical

services, joint-ventures and PFIs. Purchased services refer to the public sector’s

purchase of private clinical services. It can take the form of outsourcing clinical

services to both for-profit and non-profit organisations (Leon and Mabope 2005:38).

Life care hospitals for psychiatric services and tuberculosis as well as doctors and

nurses working in government hospitals on sessional basis fall into this category.

Khan (2011:4) cites the kidney dialysis service by Fresenius medical care and the

radiation therapy to state patients by GVI Oncology Incorporate as other examples of

purchased services. There is no uniform policy of outsourcing non-clinical services

by the different provinces, but mainly non-core services such as catering, portering,

cleaning, security and ground maintenance have been outsourced. Joint ventures

68

refer to arrangements in which the public and private sectors share resources on a

lease or service basis. The use of public sector radiology facilities by a private

radiology group in return offering radiographer services to public patients is an

example of a joint venture. Another example, is to allow public sector providers such

as medical specialists to earn additional income by working in the private sector.

This may also help to retain them in public service. The PFI is the most prominent

form of PPP in both national and provincial government in South Africa. It involves

using privately raised capital to fund public infrastructure and thus support public

sector service delivery (Leon and Mabope 2005:38). It was discussed extensively in

the previous sub-section.


The history of healthcare is linked to the development of the hospital as a social

institution to provide care for the sick outside their homes so as to limit the disruptive

influence of ill health on family life. The Christians were the first who founded

hospitals in 1094 to 1291. The Roman Catholic Church and its nuns and clergy were

the pioneers who provided medical care for religious purposes to the lower classes

in society. The element of caring for the sick to derive spiritual salvation originates in

this era. The next phase in the development saw hospitals falling under secular

ownership. This period was associated with deteriorating socio-economic conditions

of unemployment, landlessness and higher prices. Vagrancy increased and many

poor people seeked admissions to escape these conditions. Hence, hospitals were

referred as poor houses. Physicians entered the hospitals to study the sick in the

14th century and by the 17th century they had gained virtual medical knowledge to

control them. Only physicians can admit patients, prescribe drugs and perform

surgery. However, very few patients survived treatment, because their medical

treatment was still primitive and in dirty and overcrowded hospitals. As a result of this

hospitals became death houses for the poor. The final phase of development saw

hospitals becoming centres of excellence where all social classes could expect to be

cured. One key element in this development was the arrival of the trained nurse to

care for patients in the wards and the laboratory technician. Even today, these two

members of the medical team play an important role in quality healthcare.

69

The modern hospital is characterised according to ownership, level of care rendered,

control, financing and market structure. Ownership could be private or public. Public

hospitals are owned and/or managed by the provincial or national governments.

Private hospitals are owned by for profit or non-profit organisation. Most hospitals

deliver multidisciplinary care rather than specialist care, because of economies of

scale and scope. They render primary, secondary, tertiary and quaternary levels of

care in a defined referral system. Governance of hospitals is vested with the board of

directors or trustees. Their role is to coordinate all hospital activities to ensure

effective and efficient service delivery. However, the influence of physicians limits

their role especially in healthcare systems that are privately financed such as in the

USA.

As early as the 15th century, patients paid for care rendered by physicians and for

hospital services. Hospitals were mainly financed then through charity. The trend has

now changed with most finance coming from the government and the use of third

party payments through insurances and government agencies. Hospital funds are

used predominantly for labour and medical supplies. The hospital market structure is

mainly oligopolistic. There are only a few similar firms, restricted market entry

through high sunk costs and registration requirements. This often results in welfare

losses caused by uncompetitive prices. Competition may be possible through

differences in clinical dependent cost, but this may affect the quality of healthcare.

The history of healthcare in South Africa is linked to the evolution of medicine as a

science in Western Europe. The ships that came to the Cape from the Netherlands

were manned by surgeons who had received apprenticeship training. Physicians

who had undergone university training were not used by trading companies, because

they were expensive and not well behaved. The disease of the sea, namely

dysentery, fever and vitamin deficiency, especially scurvy affected the Cape

inhabitants as well. The first hospital was opened by Jan van Reibeek in the Cape in

1656. It was owned by the DEIC and served sailors and their employees only. A

second hospital of the company was opened in 1699 to meet the increased demand

for medical care.

70

The first civilian hospital was opened in Somerset in 1808. The inland expansion of

the free burgers and the subsequent discovery of diamonds and gold in the

Transvaal and Orange Free State led to the opening of mining and mission hospitals.

Conditions in the mining hospitals were bad with overcrowding, poor sanitation and a

lack of medical supplies. Mission hospitals which catered for Blacks had a secondary

motive or intention of converting Africans to Christianity.

Reforms that took place between 1910 and 1994 laid the foundation for the present

day healthcare system in South Africa. Consolidation of the previous four colonies

happened up to 1919. A single Department of Public Health was legislated in 1919.

The Gluckman Commission in 1944 marked a major milestone in the history of PHC

in South Africa. It recommended the establishment of a comprehensive state funded

National Health Service based on the PHC approach. Its recommendations were not

implemented as the 1948 Apartheid policies took effect until 1990. During this period

segregation and fragmentation increased, privatisation gained momentum and

mission hospitals were nationalised in the homelands. The result was more

inequality in healthcare services. After 1990 the PHC approach regained support and

after 1994 the ANC produced the National Health Plan for South Africa.

Health policy and reforms after 1994 were aimed at ending fragmentation, promoting

equity and accessibility of health services to all South Africans. During the RDP era

more clinics were built and free healthcare for pregnant women and children under 5

years were granted in state hospitals. Healthcare was also made free at all

government PHC clinics. The RDP was abandoned in 1996 to be followed by the

GEAR strategy. The aim of the GEAR strategy was to create macroeconomic

stability by reducing the budget deficit and government expenditure. Under the

GEAR strategy social spending received second priority, but it helped to create an

enabling environment for private sector investment. PPPs took off during the GEAR

period. The PHC approach took centre stage under the ANC government using the

DHS as a delivery model of healthcare after 1994.

However, health resources in terms of hospital beds, health personnel and

healthcare financing are not achieving optimal results with a life expectancy at birth

of 53 and infant mortality rate of 48 per 1000 live births in 2008. This is despite

71

comparable 8.6 percent healthcare expenditure as percentage of GDP (WHO

2010:45 and 130). It was calculated that 56 percent of the funds went to the private

sector and the public sector only received 41 percent. However, the private sector

caters for only 15 percent of the population. South Africa has a strong private sector

health industry and its resources and skills need to be tapped to the advantage of all

South Africans. Public sector hospital beds serve 67 percent of the population with a

bed occupancy rate of 71 percent and average length of stay of 5.7 days. The South

African health system funding is concentrated on metropoles and tertiary hospitals,

while manned by professionals who are inadequately trained to provide PHC.

PPPs originated in France in the 17th century, but were accelerated in the UK and

other New Public Management countries. The British influence on the development

of PPP happened because of a desire by government to engage the private sector in

the delivery of public services. In the UK the PFI is the dominant form of such

partnerships and makes up 11 percent of public investment. Transport dominates

PFI projects in terms of capital investment, but health has most projects. A high

degree of market concentration with a few companies controlling most PPP projects

may occur, for example in France. PPPs have also been established in emerging

markets with some degree of success.

In South Africa the concept of PPPs is relatively new. The government operated 6

pilot projects between 1997 and 2000. The regulatory and institutional framework for

PPPs in South Africa was formalised through the PPP unit in 2000. The regulations

for PPPs in South Africa are based on the UK’s PFI model. National and provincial

PPPs are regulated in terms of Treasury Regulation Number 16 issued in 2004

under the Public Finance Management Act of 1999. Municipal PPPs operate under

the Municipal Public-Private Partnership regulations issued in 2005 in terms of the

Municipal Management Act of 2003. In May 2010 there were 20 projects operated at

national and provincial levels and this means a rate of 2 projects per year. The

performance of PPPs in South Africa is still low compared to the UK due to the lack

of capacity in the departments and provinces.

PPPs in the health sector extend beyond the definition provided by the National

Treasury. These are PPI as developed by the National Department of Health in

72

response to the health needs of the country. There are PPIs that manage

relationships through dialogue, legislation and transfer protocols. Service delivery

PPIs such as purchased services and joint ventures have a potential to improve

access to quality healthcare and efficient service delivery. An investigation of these

initiatives and PPPs forms the basis of this study.

Chapter 4 analyses the contribution of PPPs to quality healthcare access for the

period 1994 to the present.

73

CHAPTER 4

AN ANALYSIS OF PPPs AND THEIR CONTRIBUTION TO QUALITY

HEALTHCARE IN SOUTH AFRICA

4.1 Introduction

Chapters 2 and 3 discussed the economics of healthcare delivery and PPPs as well

as the historical developments in healthcare and PPPs. This theoretical and

historical discussion created a platform for the analysis of PPPs in South Africa.

This chapter begins with an analysis of quality healthcare in South Africa. A

comparative analysis of both the private and public sectors is done. An examination

of the accessibility of quality healthcare to the general populace is made. This is

followed by a discussion of the approaches to analyse the success of PPPs. A

framework for the analysis of healthcare PPPs is presented as an evaluation tool. A

review of the 7 healthcare PPPs is conducted using document reviews, interviews

and case studies from the National Treasury’s PPP unit. Secondary financial and

non-financial data is used to evaluate the accessibility of quality care in all the

implemented PPPs. Issues and concerns raised from the preceding analysis and

policy recommendations are drawn for future consideration. The chapter ends with a

summary of main findings and conclusions.

4.2 Quality healthcare issues in South Africa

Donabedian (2005:692) asserts that it is difficult to define what the quality of medical

care is. He states that quality medical care can mean different things to different

people, but is essentially a reflection of values and goals in the current healthcare

system and society as a whole. Different people have different opinions of what

quality entails. He defines quality healthcare as consisting of technical, interpersonal

and social elements (Donabedian 1980:95). These elements are linked to the current

healthcare quality policy to evaluate the state of healthcare in South Africa.

74

The outcome, structure and process approach may be used to assess the quality of

healthcare. Outcomes of medical interventions are relatively easy to measure and

their validity is seldom questionable, for example death (Donabedian 2005:693).

Other outcomes used to measure medical quality include, studies on pre-natal

mortality, surgical fatality rates and social restoration of patients discharged from

psychiatric hospitals. The Centre for Development and Enterprise (CED 2011:4)

notes that in South Africa the under-five mortality rate increased from 59 per 1000

live births in 1998 to 104 per 1000 live births in 2007. The Hospital Association of

South Africa (HASA 2008:6) cites a report by the Monitor Group in 2003 which

ranked the South African private healthcare amongst the top five in the world in

attaining quality healthcare at 90 percent patient satisfaction rate. The public health

was third from the bottom at 50.7 percent in attaining quality healthcare just below

the overall South African rating of 58.2 percent.

The outcomes of medical care suffer from limitations caused by other factors, such

as the effectiveness of medical technologies and the time it takes for these to take

effect. Another approach to assess quality is to examine the process of medical care

itself (Donabedian 2005:694). The process of care involves completeness,

appropriateness and accuracy of information obtained through history taking,

physical examination, diagnosis and therapy. This approach relates to the

dimensions, values and standards of assessment used. It is related to outcomes as

a means to an end.

Technical aspects of care and patient satisfaction are part of the process of care. For

example, the accuracy of the diagnosis, time spent with the provider and attitudes of

provider and treatment staff (Newbrander and Rosenthal 1997:179). HASA

(2008:47) reports that patient experience in their hospitals is consistently above 80

percent. Patient experience is defined as the general patient satisfaction of services

provided and these include both clinical and non-clinical services. Meanwhile,

suggestions for priorities in public health service made in a national survey in 1998

included making the service better by 37 percent, getting the staff to treat patients

better by 26 percent and improving staff skills by 13 percent of the respondents

(Morris 1999:178). The poor health outcomes in South Africa are associated with

these inadequate processes of healthcare delivery.

75

A third approach to assess quality is to study the settings in which it takes place and

the instruments used to deliver it. This constitutes the assessment of the structure.

As a result there emerges a relationship between structure and process or structure

and outcome. Structure assessment is concerned with the adequacy of facilities and

equipments, qualifications and skills of medical staff, the administrative structure and

operations of programs and systems (Donabedian 2005:695).

One of the draw backs to quality healthcare in the public sector in South Africa is the

shortage of medical doctors and nurses. The WHO’s health statistics report indicates

that globally there are 13 physicians per 10,000 of the population and 28 nurses and

midwives per 10,000 of the population with large variations between countries and

regions (WHO 2009:102). In South Africa the nurse to patient ratio is 12 professional

nurses to 10,000 patients and the physician to patient ratio is 2.49 doctors for 10,000

patients. Moreover, there are 1.04 medical specialists for 10,000 patients in the

public health sector (Ntene and Mears 2010:7). Havemann and van der Berg

(2002:26) calculate the distribution of personnel between the private and public

healthcare sectors. Figure 4.1 shows that the private sector is better resourced in

terms of personnel than the public sector.

Figure 4.1 Percentage distribution of personnel between the public and private

sectors in South Africa in 1998

Source: Adapted from Havemann and van der Berg (2002:26)

74

60

14

26

40

86

0 20 40 60 80 100

Pharmacists

Doctors

Nurses

Public

Private

76

Figure 4.1 compares the main health personnel in the public and private sectors.

Only nurses are in the majority is in the public sector, at 86 percent against 14

percent in the private sector. However, it is possible that the majority of highly skilled

registered nurses are in the private sector. To compound the situation, some public

sector nurses and doctors do sessional work at private institutions. Havemann and

van der Berg (2002:28) concluded that the demand for private healthcare is higher

than public healthcare’s, because it is better resourced and offers better quality care.

The Department of Health has published National Core Standards as a guide to

improve quality healthcare in South Africa. These have 6 priorities namely, improving

staff values and attitudes, reducing waiting times, general cleanliness, patient safety

and security, infection prevention and control and the availability of medicines and

supplies (Department of Health 2011:3). The operational management domain of the

core standards covers the day to day running of health facilities. This includes

ensuring a safe and effective delivery of healthcare services, the management of

human resources, finances, assets, consumables, information and records. The

facilities and infrastructure domain covers the requirements for a safe physical

infrastructure which consists of buildings, plant and machinery, equipment and safe

disposal of waste.

In recognition of budgetary constraints and the need to improve healthcare quality

and outcomes, government considered the use of PPPs to deliver quality healthcare.

4.3 Approaches to analysing PPPs

Vrangæk (2008:142) identified 5 approaches to analyse PPPs. The policy

perspective is driven by political scientist and policy analysts who see PPPs as

policy learning opportunities in the search for optimal government service delivery.

Their view is that PPPs are different public-private arrangements at national policy

level (Flinders 2005:232). The developmental approach and local regeneration

perspective promote PPPs with civil society organisations, private sector partners

and the public sector at various levels of government. These partnerships are similar

to those between Non Governmental Organisations (NGOs) or Community Based

Organisations (CBOs), international organisations and government. The financial

77

perspective focuses on the various financial instruments needed to finance large

infrastructure projects. Savas, Hodge and Grimsey (2005:67) are examples of writers

who follow the approach. The governance perspective follows an inclusive

understanding of PPPs as collaborative arrangements, alliances or cooperation

between the public and private sectors. PPPs in this case are seen as joint working

arrangements with common goals, agreed on roles and principles (Field and Peck

2003:496). The analysis of this study follows a combination of the policy, financial

and governance perspectives. The review of the 7 implemented PPPs is based on

the analytic approach described above. Table 4.1 depicts the framework for analysis

which will be followed.

Table 4.1 A framework for analysing for the seven healthcare PPPs in 2011

Dimension for analysis Description of dimension

Description of project

Name of project.

Sector and sub-sector e.g. secondary, primary, rehabilitation, prevention

or dentistry ,

Where is the project i.e. location, its brief history and why was it started.

Objectives of the project

As stated in the project document

Type of PPP

Described in terms of DBFOT. What is the specific purpose of the PPP?

Is it to build infrastructure, maintenance, delivery of goods and services

or research. What are the roles of the private sector and public sector in

the delivery system?

Legal contract

The duration of the contract and renewal options.

Parties involved.

Roles of consultants, bankers or large companies.

Financing and risk sharing

Capital value or net present value of capital invested.

Recurrent investments or annual payments to third party.

Revenue generated and are there any user charges.

Risk elements such as construction, design, operations or financial.

bankruptcy, cream skimming, legal and political, natural disaster risk. Service coverage and affordability

Utilisation levels e.g. bed occupancy.

Services offered and population served.

Payment for services according to the UPFS or the Reference Price List.

Referral system as per DHS and PHC approach. Distance and transport

cost to the PPP.

Quality issues

Appearance of the hospital or centre.

Staff and their skill levels.

Supplies e.g. medicines and equipment.

Outcomes or outputs of health interventions e.g. infection rates and

mortality rates.

Source: Adapted from Vrangæk (2008:142).

78

4.4 Review of healthcare PPPs in South Africa in 2011

4.4.1 Introduction

To analyse the health PPPs the research methodology discussed in Chapter 1 is

followed. Data from case studies of implemented PPPs, Treasury Approval III

documents, PPP Unit Quarterly Bulletins, newspaper articles and interviews with

senior government officials are used to compile this analysis. The framework for

analysis provided above is then applied for each PPP to extract the important

information needed by this study and to better understand PPPs role in healthcare.

The order of the review is based on the date of financial closure or agreement, which

means the discussion, begins with the first implemented project. Finally, a summary

of the analysis of health PPPs is presented as a basis for policy recommendations.

4.4.2 Inkosi Albert Luthuli Hospital

The full name of the project is Inkosi Albert Luthuli Central Hospital (IALCH). It is a

central and tertiary referral hospital located in Mayville, Durban in the KwaZulu-Natal

(KZN) Province. The hospital is intended to provide highly specialised services for

the entire province of KwaZulu-Natal and half of the Eastern Cape Province

(National Treasury PPP Unit 2007a:7). The history of the hospital dates back to the

1980s, but it gained momentum in 1996 when Dr Zweli Mkhize was the provincial

Minister of Health and his Head of Department was Professor Green-Thompson.

They believed that KwaZulu-Natal needed a central and tertiary hospital that will be a

centre of excellence in the province. In 2000, Ezempilo Consortium was appointed

as a transaction advisor for the Department of Health (DoH). A feasibility study was

performed and it pointed to a public sector comparator with a net present value of

R5389 million after taking into account all risks involved (National Treasury PPP Unit

2007:7). After taking into consideration other options Ezempilo advised the KZNDoH

to choose the PPP route to deliver non-clinical services for the IALCH.

The objectives of the project from the perspective of the KZNDoH are, to improve

value for money by choosing services on the basis of whole life costs, to make

service payment based on availability, to ensure that payments are within the

79

province’s budget, to establish a replacement programme for all equipment and to

transfer appropriate risk to the private party (National Treasury PPP Unit 2007a:3).

These are within the described scope of the project, which are the supply of

equipment, management and technology systems and facilities management by the

private party to IALCH over the project period.

This was the first PPP of its kind in South Africa typed DFBOT. The private sector

party, namely Impilo Consortium is responsible for all medical, information

technology (IT) and facilities management of the hospital. Impilo Consortium, is the

Special Purpose Vehicle (SPV) and has subcontracted medical equipment to

Siemens and Vulindlela, IT equipment and software to AME and Vulindlela and

facilities management is subcontracted to Drake and Scull (National Treasury PPP

Unit 2007a:6). The contract between the KZNDoH and Impilo Consortium is effective

from March 2002 until 2017 with an option to extend for a minimum of six months

and a maximum of 12 months. The contract term is therefore 15 years.

The financing of the IALCH project is made up of R60 million shares raised by Impilo

Consortium and R360 million from KZNDoH. The KZNDoH used Ithala Development

Corporation to effect this startup investment, since the contract did not allow them to

make a direct investment (National Treasury PPP Unit 2007a:14). Ithala

Development Corporation is wholly owned by the KZN government. The Net Present

Value of capital investment is R1,156 billion of which R947 million was paid at the

beginning of the project. The cost of the transaction advise to Ezempilo Consortium

was R12 million. Mtshali (2011) comments, that these costs are about 10 percent of

the project’s total costs. Table 4.2 summarises the costs of the IALCH project.

Table 4.2 Selected cost of the IALCH PPP

Cost item Projected costs

NPV of capital investment R1,156 billion, of which R947 million at the beginning.

Annual contract management fee

R304 million per year linked to the consumer price

index (CPI).

NPV of unitary payments

Operation costs have an estimated NPV of R1,46

billion over the contract period.

Source: Adapted from National Treasury PPP Unit (2007a: 4).

The costs for the IALCH project were based on an 80 percent occupancy rate. This

was calculated taking into consideration Wentworth hospital’s 65 percent occupancy

and King Edward hospital’s occupancy rate of 95 percent. It was then decided to

settle at an average occupancy rate of 80 percent for the IALCH (National Treasury

PPP Unit 2007a:30). However, bed

because of a poor referral system

This has made the service delivery platform of IALCH less affordable from the

perspective of the KZNDoH. In comparison with other tertiary hospitals in the

province, IALCH costs the KZNDoH far more than King

Addington hospitals, all with higher bed occupancy rates. Figure 4.2 compares the

budgets of the four hospitals for the financial year 2007/08.

Figure 4.2 Tertiary hospitals budgets in KZN for the financial year 2007/08

Source: Adapted from National Treasury PPP Unit (2007

Figure 4.2 shows that the IALCH costs the province 47 percent compared to the 53

percent of the other tertiary hospital budgets combined. Of the R946 million about 40

percent is paid to Impilo Consortium

R360 million cost savings and delivery of a state of art ce

utilisation of the hospital is costly to th

not the problem with the PPP, but

the country. Possible risks to the project were identified as commissioning and start

up delays, client specification changes of equipment, IT systems design change,



hospital’s occupancy rate of 95 percent. It was then decided to


However, bed occupancy has never exceeded 65 percent

because of a poor referral system and late commissioning of services at the IALCH.



province, IALCH costs the KZNDoH far more than King Edwards, Greys and


budgets of the four hospitals for the financial year 2007/08.

Tertiary hospitals budgets in KZN for the financial year 2007/08

Adapted from National Treasury PPP Unit (2007a:30).



percent is paid to Impilo Consortium. Although the calculated value for money is a

R360 million cost savings and delivery of a state of art central hospital, the under

ation of the hospital is costly to the province. Mtshali (2011) argues

PPP, but the referral system within the healthcare system in

the country. Possible risks to the project were identified as commissioning and start


80



hospital’s occupancy rate of 95 percent. It was then decided to


occupancy has never exceeded 65 percent,

and late commissioning of services at the IALCH.



Edwards, Greys and


Tertiary hospitals budgets in KZN for the financial year 2007/08



. Although the calculated value for money is a

ntral hospital, the under

e province. Mtshali (2011) argues that this is

the referral system within the healthcare system in

the country. Possible risks to the project were identified as commissioning and start-


81

delays in the delivery of equipment and possible industrial action by the service

provider or hospital staff. Of these the major risks of financing, capital and operations

were transferred to the private partner. The KZNDoH bears the volume risk,

commissioning risk and other risks such as natural disasters.

The PPP project has increased access to tertiary services for the KZN population

and half of the Eastern Cape. The hospital is commissioned for 846 beds of these

685 are central hospital services and 179 beds for tertiary services. A range of

medical services are available at state patients’ rates for the population. Bed

occupancy has been a problem with 36 percent occupancy rate in 2002 (National

Treasury PPP Unit 2007a:29). However, the number of patients treated at the IALCH

has increased over the years making the hospital less costly to the KZNDoH. There

are more out patients treated than anticipated and this could be due to the

availability of equipments such as the magnetic resonance imaging (MRI) and

laboratory tests. Figure 4.2 shows the number of patients treated at IALCH from

2002 to May 2007.

Figure 4.3 Number of inpatients and outpatients admitted to IALCH since 2002

Source: Adapted from National Treasury PPP Unit (2007a: 57).

Figure 4.3 shows that the increase in both inpatients and outpatients admitted has

stabilised since 2006/7 after a directive from the province placed all central and

1.165 11

.575

18.2

08

18.5

13

18.5

48

8.21

7

6.04

6

95.7

9

147.

509

144.

814

151.

364

66.2

12

0

20

40

60

80

100

120

140

160

2002

2003

2004

2005

2006

2007

Tho

usan

ds

Number of inpatient Number of outpatients

82

tertiary services at the IALCH and Grey’s hospital.

As a result of the PPP arrangement, management at the IALCH reports that they are

freed to concentrate on core clinical services rather than non-core issues. The

Medicom IT system is working better than in other government hospitals. This results

in better availability of drugs and medical supplies. Moreover, the IT system avails

the patient record to doctors and other service providers instantly. The equipment is

well maintained and updated by the private company. Holding stock reduction has

gone down from R45 million to R23 million resulting in cost savings. The hospital is

much cleaner and the grounds are well maintained and this promotes a healing

environment. Staff morale is high because of the pleasant working environment. All

these factors point to an improvement in the quality of healthcare.

4.4.3 Universitas and Pelonomi hospitals co-location

The project is called Universitas and Pelonomi hospitals co-location PPP. It is the

tertiary and secondary healthcare subsectors for Universitas and Pelonomi hospitals

respectively. The two hospitals are situated in Bloemfontein in the Free State (FS)

Province (Shuping and Kabane 2007:153). The project was started by the Free State

Department of Health (FSDoH), because of facilities management backlog and the

need to create additional private beds in Bloemfontein. The objectives of the projects

are stated in Table 4.3 for the two hospitals separately.

Table 4.3 Objectives of Universitas and Pelonomi hospitals co-location project

Universitas hospital

Pelonomi hospital

To utilise excess ward space.

To utilise the under utilised space and equipment.

To optimise the use of theaters and other major equipments.

To provide private hospital beds to the Bloemfontein area.

To provide tertiary and academic services to the private partner.

To improve the appearance and grounds of Pelonomi hospital.

To promote retention of professional staff in the public health sector.

To enhance the reputation and capability of Univeritas hospital through the partnership as a leading academic centre.

Source: National Treasury PPP Unit (2007c:1.3 and 1.4).

83

In exchange for the offer to use the excess space and facilities the private party is

expected to complete upgrade work and make payment for the right to use the

facilities in both hospitals (National Treasury PPP Unit 2007c:1).The type of PPP in

this case is the DFBOT arrangement. The purpose of the partnership is to utilise

government resources efficiently through combining the strengths of the public and

private sectors, to add on existing resources through private sector investment and

to improve maintenance of existing resources through the creation of private sector

income generating activities (National Treasury PPP Unit 2007c:9.1.1).

The private partner, Community Hospital Management (CHM), which is a subsidiary

of Netcare was allocated empty wards at Universitas hospital to operate as

Universitas Private Hospital. At Pelonomi hospital, CHM was requested to upgrade

medical wards, theatre and the Intensive Care Unit (ICU) blocks and build Pelonomi

Private Hospital from the excess space (Shuping and Kabane 2007:154). The

FSDoH makes the concession areas in both hospitals available to CHM as they are,

that is with no improvements for the concession period. The legal contract is dated

25th November 2002 for 16 years and six months. The partnership contract is

between CHM comprising of Netcare and Malesela Group on the one side and the

FSDoH on the other side. The FSDoH used Ignis and Naude’s Attorneys for financial

and legal advice, respectively (National Treasury PPP Unit 2007c:3.1).

Capital investments to the project are calculated to be R70,9 million by the private

partner and R11,03 million by the public sector partner. The FSDoH in addition, is to

provide a capital injection to CHM of R8,342,500 to stimulate the commencement of

the project (National Treasury PPP Unit 2007b:9.1.14). There is a guaranteed fee of

R225 million for sharing radiology services payable to the FSDoH over the

concession period. The FSDoH is obliged to provide CHM with all pharmaceuticals

at the same cost price it receives them. In the event that this arrangement is

terminated, the variable concession fee reduces by 2 to 1 percent of turnover and

the fixed concession fee ceases to be payable. Table 4.4 shows total revenue flows

to the FSDoH from rental and a fixed 1.32 percentage of turnover.

84

Table 4.4 Revenues from turnover and rental in Rand

2004

2005

2006 2007

1.32 percent of turnover 2716000

2716000 2716000

8148000

Rental

480000

480000

480000

1440000

Total revenue

3196000

3196000

3196000

9588000

Source: Adapted from Shuping and Kabane (2007:156).

The total revenue payable to the FSDoH is estimated to amount to R43 million over

the concession period (National Treasury PPP Unit 2007c:5). However, there are

penalties to both parties in cases of non-compliance with the contact. In addition R38

million in the form of upgrades is estimated to accrue to the FSDoH as a result of this

project. Moreover, value for money will be realised because ownership of all

buildings will revert to the state at the end of the concession period (Shuping and

Kabane 2007:154).

The document review on the aspect of risk transfer and sharing is scanty. Insurance

risks are shared by the FSDoH and CHM, with the FSDoH insuring joint use areas

and facilities and the CHM doing so for its exclusive use areas. Both parties bear the

risk of failure to deliver according to specified service levels, but most shared

services are operated by the FSDoH (National Treasury PPP Unit 2007c:9.1.27 and

9.1.15).

In terms of service coverage and quality issues, the Universitas and Pelenomi co-

location project helped to solve the aging infrastructure problem of the FSDoH and

increased the private sector’s need for addition private beds in Bloemfontein.

Patients have a choice between the public and private hospitals on the same site.

Shuping and Kabane (2007:156) mention that the PPP contributed to improving

quality healthcare through attracting, recruiting and retention of scarce skills who

work in both the public and private hospitals. Another contribution to quality

healthcare is the improved efficiency of the public and private sectors.

85

4.4.4 State Vaccine Institute

The review of the State Vaccine Institute (SVI) PPP project is based on the Treasury

Authorisation III Report of March 2003. The project is in the subsector of health

prevention and it is located in Pretoria. Historically, the South African government

has been involved in the development and manufacture of different types of human

vaccine. This was done through the State Vaccine Institute (SVI), a subsidiary of the

National Department of Health (NDoH) and the South African Vaccine Producers

(Pty) Ltd (SAVP), a subsidiary of the National Health Laboratories Services (NHLS)

(Department of Health 2003:4).

Government has sourced its vaccine requirements through a competitive tender

process and has awarded such tenders for 2 year periods, without any quantity

guarantees and set at foreign currency terms. The NDoH and provincial

Departments of Health have acquired their extended programme for immunisation

(EPI) requirements through this tender process. Government identified vaccine

production as a strategic industry for disease prevention and the development of

biotechnology research and industry in South Africa. Consequently, government

decided in 2000 to transform the SVI and SAVP into a New Company that can

engage a private partner to meet its objectives (Department of Heath 2003:4).

The objectives of the State Vaccine Institute from the NDoH perspective are to

ensure a domestic capacity in vaccine production, to establish a viable vaccine

producer that meets international standards, to promote vaccine research and

development capacity and to create a competitive platform for the local vaccine

industry (Department of Health 2003:4). The intention of the government is to

promote the vaccine industry in South Africa and the Southern African Development

Community (SADC) region.

The type of PPP is described as an equity partnership. The specific purpose of the

partnership is to supply vaccines to the government and other public sector

customers. The supply agreement states that prices will be capped in dollar or Euro

prices for the concession period. The contract between the NDoH and the private

partner, Biovac Consortium is effective from the 1st January 2004 for four years only

(National Department of Health 2003:8).

to date. The NDoH used Pr

advisors.

With regards to financing the project, a R15 million systems investment

project will be realised as a result of the PPP. In a

value of R60 million is calculated over the concession period (

2007d:5). In calculating the

the SVI and SAVP operations are used as a benchmark to estimate the maximum

price government would be prepared to pay for the PPP. For example, in 2007 the

PSC was R140,838,811 as opposed to the PPP costs of R113,363,390 as bid by

Biovac Consortium. Figure 4.4 compares the PSC and the PPP costs the SVI project

over the concession period.

Figure 4.4 Comparison of PSC and PPP costs for the SVI project

Source: Adapted from Department of Health (2003:11)

Figure 4.4 shows that the PPP costs less than the traditional procurement as

evidenced by the PPP line which is below the PSC line.

inclusive of the R3,5 million equity injection by government in the first year of the

PPP (Department of Health 2003:8). The PPP route as proposed by Biovac was

seen to be more affordable a

spin-off of the project is an incentive to local and foreign vaccine manufacturing

(National Department of Health 2003:8). It has been extended and is still in operation

he NDoH used Pricewaterhouse Coopers and Deneys Reitz as transaction

With regards to financing the project, a R15 million systems investment

ed as a result of the PPP. In addition the net present value (NPV)

is calculated over the concession period (National Treasury

:5). In calculating the Public Sector Comparator (PSC) the costs of carrying


e prepared to pay for the PPP. For example, in 2007 the


Figure 4.4 compares the PSC and the PPP costs the SVI project

over the concession period.

arison of PSC and PPP costs for the SVI project

Department of Health (2003:11)

shows that the PPP costs less than the traditional procurement as

evidenced by the PPP line which is below the PSC line. The lower bid costs



seen to be more affordable and hence, accepted by the NDoH. Another positive

e project is an incentive to local and foreign vaccine manufacturing

86

It has been extended and is still in operation

icewaterhouse Coopers and Deneys Reitz as transaction

With regards to financing the project, a R15 million systems investment into the

ddition the net present value (NPV)

National Treasury

the costs of carrying


e prepared to pay for the PPP. For example, in 2007 the


Figure 4.4 compares the PSC and the PPP costs the SVI project

arison of PSC and PPP costs for the SVI project

shows that the PPP costs less than the traditional procurement as

The lower bid costs are



nd hence, accepted by the NDoH. Another positive

e project is an incentive to local and foreign vaccine manufacturing

87

companies to venture in the domestic vaccine industry, because of the guaranteed

government market. Furthermore, the project will ensure a transfer of skills, which

included training courses in Cuba and Cuban experts working in South Africa. Risks

identified are the exchange risk in calculating the PSC borne by government, price

fluctuation risks for both government and Biovac and the volume of purchases risk to

the private partner.

Service coverage and quality issues of the SVI project are reflected in the purpose

and objectives as contained in the Treasury Authorisation III report. The supply

agreement covers government and all public sector customers in the EPI

programme. Furthermore, the objective of ensuring a domestic capacity in vaccine

production to be able to respond to disease outbreak emergencies and applying

good manufacturing principles will contribute to quality healthcare (DoH 2003:4).

4.4.5 Humansdorp District Hospital

Kouga Partnership Hospital (KPH) is a co-location partnership in Humansdorp in the

Cacadu district of the Eastern Cape Province. It comprises of Humansdorp District

hospital with 80 beds and Isivivana Private Hospital with 30 beds. The KPH is a first

referral hospital, or level one that serves a population of approximately 100,000

people in Humansdorp and its surrounding areas (National Treasury PPP Unit

2007:3).The idea of a PPP started in 1995 when a private party expressed interest of

applying to the Eastern Cape Department of Health (ECDoH) for a license to build

and operate a private hospital in the Jeffery’s Bay and Humansdorp area. In 1998, a

study by the Centre for Scientific and Industrial Research (CSIR) commissioned by

the ECDoH found that Humansdorp hospital needed renovations and upgrades. As a

result of the deterioration of buildings and equipments, the 60 bed Humansdorp

hospital was no longer attracting private patients and thus loosing that revenue

source. The ECDoH faced with budget constraints began to investigate a PPP to

refurbish the hospital and to provide a service to private patients.

The objectives of the ECDoH were to utilise private sector resources in order to

increase access to quality healthcare in the public sector and to increase equity and

collaboration between the public and private healthcare systems in South Africa. The

88

specific purpose of the project is to build a private hospital, refurbish and upgrade

existing facilities and supply facilities management services to the public hospital.

Other project deliverables are shared use of medical facilities and services, revenue

sharing by the private partner with the ECDoH and socio-economic benefits

(National Treasury PPP Unit 2007b:4). The DFBOT is the type of PPP of this project.

The PPP is currently an agreement between the Life Healthcare Group and the

ECDoH. It was signed on the 27th June 2003 and the contract term is 20 years with

an option to renew for a minimum of 6 months and a maximum of 12 months

(National Treasury PPP Unit 2007:8). The initial contract was structured between the

ECDoH and Metropole Hospitals who comprised of Life Healthcare Group and an

equity partner, Metro Star Hospitals. However, Metro Star Hospitals could not raise

the funds and that contract dissolved. In this project, the ECDoH employed the

services of Ignis and Phatshoane Henny Incorporated for finance and legal services

respectively. The cost of this transaction advice amounted to R500,000.

Financing and risk management arrangements of the project showed value for

money in three ways, namely, the upgrade of the existing hospital, the return of

private partner’s facilities to the ECDoH after the concession period of 20 years and

revenue payments from the private partner for the use of shared facilities (National

Treasury PPP Unit 2007b:20). No PSC calculation was done to determine value for

money of the project. In the negotiations phase, it was stated that the funds spent on

the project should not exceed the funds received from the PPP. The funds required

to start the project are shown in Table 4.5.

Table 4.5 Total capital investment

Amount in Rand

Public facilities upgrade and refurbishment

7,759,246

Private facilities construction

6,750,809

Subtotal

14,510,055

Less: ECDoH contribution

1,500,000

Total private sector contribution

13,010,055

Source: National Treasury PPP Unit (2007b:20)

89

In Table 4.5 the R1,500,000 contribution by the ECDoH was paid as the initial costs

of the renovations and construction increased from R6 million to R9 million and

finally to R12 million. The ECDoH agreed to close the gap as Life Healthcare Group

resisted any further increases. All other funding was to be provided by the private

partner at a cost of capital rate of 15 percent. The total unitary charges for facilities

management amounted to R1,477,700 per annum escalated by CPIX. This amount

exceeds the current expenditure on facilities management by R184,956. In addition,

before handing over facilities to the private partner, the ECDoH was required to do

maintenance estimated at R365,000. However, the Eastern Cape provincial treasury

confirmed that funds were available to offset the additional R184,956 facilities

management fee. The revenue outflows from the private partner to the ECDoH for

the use of shared facilities amount to an estimated NPV of R3,397 million over the

concession period (National Treasury PPP Unit 2007b:20).

At the time of signing the contract the issue of catering had not yet been resolved,

because the amount quoted by Life Healthcare Group was significantly higher than

the current costs of catering to the ECDoH. The other two issues not yet resolved

were the use of provincial laundry services by the private partner and a pathology

laboratory to be provided by the private partner, but operated by National Health

Laboratory Services (NHLS). Risk allocation was done to ensure that the party best

suited to handle the risk does so. For example, operations and maintenance risk is

the responsibility of the private partner and the ECDoH pays the facilities

management fee. Construction risk is borne by the concessionaire and its appointed

subcontractors. Service levels risk is shared by both parties with penalties for non-

compliance by either party. Patient volume risk is borne by the concessionaire from

the levels of occupancy and usage of private facilities. The ECDoH bears some of

this risk as low occupancy levels may affect variable revenue streams to the

department.

Service coverage in the KHP increased the number of hospital beds from 60 to 80

for the Humanasdorp District hospital and an additional 30 new beds for the Isivivana

Private hospital. At the onset, it was intended that the services be undifferentiated

between the public and private hospital especially shared services. These include

90

the reception, casualty, labour ward and radiology services. All patients have to join

the queue in shared services. The private hospital pays UPFS rates for shared

services and charges private rates to patients. In essence they acquire public

services at cost price (National Treasury PPP Unit 2007b:37). Bed occupancy for

Isivivana has been low and it has been allowed to market itself separately to boost

occupancy rate from the 35 percent in 2004.

Quality healthcare is affected mostly by the high vacancy rate for theatre

professional nurses and other professional nurses. In Isivivana, it is easy to attract

staff and provide them with good working conditions compared to Humansdorp

hospital. However, the PPP contract forbids the parties from pouching staff from one

another. Nurses also complain that in the private hospital they work harder (National

Treasury PPP Unit 2007:32).The reluctance of private general practitioners to refer

patients to Isivivana contributes to the low bed occupancy rate. This is compounded

by the shortage of specialists in the area. Furthermore, shared services such as

causality and radiology have not met the standards of private patients and indirectly

contributed to low bed occupancy.

The peadiatric ward was intended to be shared after delivery in a shared labour

ward. Its standard of care was not acceptable to private patients and that

arrangement was terminated. Private patients are directly admitted to Isivivana and

treated by the doctor on call in the ward (National Treasury PPP Unit 2007:34).

Other shared services such as the operating theaters and the recovery room are

providing quality care to both private and public patients. Most importantly, patients

now have a choice between private and public healthcare in the same surroundings

in Humannsdorp. Through the joint liaison committee, it is hoped that all challenges

with the implementation of the PPP will be addressed in time (National Treasury PPP

Unit 2007b:27).

4.4.6 Western Cape Rehabilitation Centre and Lentegeur Hospital

The project’s name is Western Cape Rehabilitation Centre (WCRC) and Lentegeur

Hospital (LGH). It is located at Mitchell’s Plain in Cape Town in the Western Cape

Province. It is the only PPP registered with the National Treasury in the Western

91

Cape. The subsector for this project is physical rehabilitation at WCRC and

psychiatric at LGH. In 2002 the Western Cape Department of Health sold the

Conradie hospital and its acute services were taken to Groote Schuur and Eerste

River hospitals. It was also agreed to relocate the Spinal Cord Injury Unit and other

Neuro-Rehabilitation services to the LGH site (Western Cape Department of Health

or WCDoH 2010:4). These were later combined with the Neuro-Rehabilitation Unit of

the Stellenbosch University to form the existing WCRC situated within the greater

LGH site. LGH is the largest psychiatric hospital in the Western Cape. Its usable

beds have been reduced from 1500 to the current 788 beds in line with the

province’s deinstitutionalisation of chronic care. The site at LGH is large enough to

accommodate both hospitals.

The objectives of the PPP project are to provide soft facilities and hard facilities to

the two hospitals by the private partner, Mpilisweni Consortium. Table 4.6 lists the

facilities provided by Mpilisweni Consortium for each hospital.

Table 4.6 Facilities provided by Mpilisweni for each institution

Service

LGH

WCRC

Soft facilities

Catering Yes

Yes

Cleaning

Yes

Yes

Grounds and gardens

Yes

Yes

Linen and laundry

No

Yes

Pets control

Yes

Yes

Security

Yes

Yes

Utilities management

No Yes Yes

Waste management Yes Yes

Help desk services

Yes

Yes

Hard facilities

Procurement, maintenance and replacement of medical equipment

No

Yes

Procurement, maintenance and replacement of non-medical equipment

No

Yes

Western Cape Department of Health 2010:3.

92

Table 4.6 shows that the PPP is an operations and maintenance (O&M) type (PPP

Quarterly 2007:5). It is aimed at the maintenance of the existing infrastructure by

providing facilities management.

The legal contract was signed in September 2006 for a concession period of 12

years. Mpilisweni Consortium is the concessionaire with an equity shareholding of 45

percent. Transaction advisors for the project were KPMG, Africon and Deneys Reitz

Attorneys (PPP Quarterly 2007:5).

Financing the project is the responsibility of the concessioner. The WCDoH is

responsible for the monthly payments to Mpilisweni Consortium for facilities

management. The unitary fee payable to the concessioner is not mentioned in the

report, but a calculation of the value for money is done. The result is that a value for

money is shown by an additional cost of R82.59 for LGH and R281 for WCRC to

offer all the services listed in Table 4.7. Table 4.7 shows the cost per in-patient day

with and without PPP cost in 2008/09.

Table 4.7 Cost per in patient day with and without PPP cost

Element LGH

WCRC

2008/09 cost per in-patient day without PPP

R514.54

R926

2008/09 cost per in-patient day with PPP R597

R1207

2008/09 difference R82.59

R281

Source; Adapted from Western Cape Department of Health (2010:15).

Table 4.7 shows that at an additional cost of R363.59 the PPP is able to provide all

hard and soft facilities management as well as maintenance of all buildings. The

NPV or benefit to the government over the concession period is estimated at R344

million. Construction risk is borne by the WCDoH since these were existing buildings

before the PPP. All maintenance and operations risk are transferred to the

concessionaire, who receives unitary fees for their services.

Quality care is reported to have improved following the implementation of the PPP.

93

The staff and management at both hospitals have more time to concentrate on core

clinical services. There is a Helpdesk through which calls are logged according to

their urgency. The turnaround time is fast and services are not discontinued or

disrupted when services are required (WCDoH 2010:16). Other benefits of the PPP

are quicker procurement times and skills transfer. The later is done by using 2

percent of the private partner’s personnel expenses. There is no additional service

coverage as a result of the PPP since it deals only with facilities management in both

hospitals.

4.4.7 Polokwane Hospital Renal Dialysis

The name of the project is Polokwane Hospital Renal Dialysis Unit; it is situated in

the Polokwane/Mankweng Hospital complex in Polokwane in the Limpopo Province.

It caters for secondary and tertiary care patients who require dialysis in Limpopo.

Both acute and chronic renal patients are treated at the new renal unit. The renal unit

in the past comprised of 4 stations and could serve approximately 10 patients at a

time. Approximately 70 patients were referred to Gauteng, at a cost to the Limpopo

Department of Health and Social Development (LDHSD) and an inconvenience to

patients. Later, the LDHSD purchased an additional 8 dialysis machines but could

not obtain the critical staff to operate the service (LDoH 2006:3). It was against this

background that the LDHSD opted for a PPP route to provide dialysis services.

The objectives of the project emanate from the LDHSD’s vision of promoting access

to affordable and good quality services. Quality services have to be sustainable, cost

effective and focus on the development of human potential in partnership with

relevant stakeholders. In this case the partnership is with Clinix Renal Care. The

specific purpose of the project is to provide a world class renal dialysis service. The

private partners at a minimum, is required to provide 16 machines for chronic

patients, 2 machines for septic patients, 4 machines for acute dialysis and make

provision for peritoneal dialysis out-patient services (LDoH 2006:3). The

concessioner is also expected to take over all 12 existing dialysis machines and

transfer skills to the LDoH staff. All staffing requirements will be provided by the

private partner. The project is a DBFOT type of PPP. The legal contract was signed

on the 1st December 2006 and is effective for 10 years. The parties to the contract

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are the LDHSD and Clinix Renal Care. Clinix Consortium comprising of Clinix Renal

Care (Pty) Ltd shareholding comprises of Fresenius Medical Care 60 percent and a

black economic empowerment partner, Matseke Medical Investment 40 percent

shares. Ignis and Phathsoane Henney Incorporated were used by the LDHSD as

transaction advisors for the project for financial and legal advice respectively (LDoH

2003:5).

The total finding for the project amounts to R6,53 million covering building

improvements, equipment and furniture. All funding is to be provided by Clinix Renal

Care (Pty) Ltd in the form of shares with no external debt. The unitary payment

payable to Clinix Renal Care is based on 80 patients requiring 960 treatments per

month (LDoH 2006:19). As the number of treatments increases, government makes

savings in terms of unitary payments. LDoH (2006:20) cites a cost saving of R3,2

million if 100 patients or 1200 treatments are done per month. The unitary payments

are to be adjusted by CPIX annually to ensure that Clinix Renal Care receives a fair

return to their investment. Value for money is determined using a risk adjusted PSC,

purchasing the service at Gauteng public health or purchasing the services from

private healthcare. Figure 4.5 compares the risk adjusted PSC, UPFS rates including

transport and private rates as published in the National Reference Price List (NRPL).

Figure 4.5 Option analysis of the Polokwane Renal Dialysis Unit

Source: Adapted from LDoH 2006:23

72.983

106.393118.616

96.982

0

20

40

60

80

100

120

140

Risk adjusted PSC UPFS ratesincluding transport

NRPL rates including

transportClinix fee - as per bid

R million

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Figure 4.5 shows that purchasing the service from the private sector will be more

costly at R118,616 million, followed by purchasing the service from a Gauteng public

institution. The cheapest option will be the provision of the service by the LDHSD at

R72,983 million. But this does not take into account the Department’s inability to

attract suitably qualified staff to operate the renal unit. These costs also do not

include the PPP benefits of a relatively new renal unit transferred to the DoH after 10

years, less inconvenience to patients of travelling to Gauteng for treatments and

prices adjusted to CP, which is approximately 3 percent less than medical inflation

(LDoH 2006:23).

Risk transfer assessment shows the key risk areas. Technology risk is allocated to

both the private and public parties. Design and construction risk is borne by the

private partner, while the public partner bears the market demand and volume risk.

Inflation and insurance risk are shared but mostly borne by the public partner. The

effects of force majeure are allocated according to standardisation to both parties

(LDoH 2006:32).

The PPP is expected to provide world class renal care matching modern standards.

This modern facility will be at the door-steps of the Limpopo population and thus

saving them inconvenience of traveling 2-3 times a week to Gauteng. Moreover,

public sector nurses will be trained by the private partner during the concession

period and the facility has the backing of a nephrologist over the concession period

(LDoH 2006:23). Service coverage is expected to increase as the number of dialysis

machines is increased from 12 to 18. The unit is expected to treat up to 50 peritoneal

dialysis patients from the current 30. It is anticipated that there will be no more

transfers of renal dialysis patients to Gauteng.

4.4.8 Port Alfred and Settlers Hospitals

The name of the project is Port Alfred and Settlers hospitals PPP in the Ndlambe

and Makana districts in the Eastern Cape Province. It caters for level one referral

patients in the Port Alfred, Alexandria, Kenton-on-Sea and Bushmen River sub-

districts for Port Alfred hospital. Grahamstown, Alicedale, Riebeek East, Paterson

and Port Alfred sub-districts are catered for by the Settlers hospital. The Port Alfred

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hospital has 60 beds, while the Settlers hospital is a 219 bedded institution. Because

of poor maintenance, both facilities needed significant repairs and upgrades and

hence a decision by the ECDoH to consider the PPP route to meet those needs

(ECDoH 2006:3). The two regions also had a growing private patient population.

Their private patient profile complemented each other in the different seasons of the

year.

The objectives of the project are to improve infrastructure management of hospitals

and service delivery through PPPs. These objectives are part of the strategic vision

of the EDoH (ECDoH 2006:3). The compliant bid that was awarded the project was

signed for a 15 year operating period with approximately one year construction

period. Ignis and Phatshoane Henney Incorporated advised the ECDoH on financial

and legal matters. The PPP agreement is between the ECDoH and Netcare or

Community Health Consortium. Equity funding for the Netcare Consortium is made

up of 40 percent BEE shares (ECDoH 2006:18).

According to the concession agreement Netcare Consortium is to upgraded and

refurbish Settlers Hospital so that the private and public sides look virtually the same.

The concessioner is tasked to build new theatres, private wards, maternity, ICU and

High Care Unit in Port Alfred. While at Settlers hospital the private partner is required

to construct a new theater, Central Sterilising Service Department (CSSD), expand

casualty and relocate OPD at Settlers hospital. In both hospitals the private partner

undertakes to provide and maintain new medical and IT equipment, maintenance of

buildings and sites and provide all soft management facilities (ECDoH 2006:9). Soft

facilities management include catering, cleaning, security, grounds and gardens

maintenance, pets control, linen and laundry and utility management. The final

agreed on unitary charge of R22.225 million per annum is set for the provision of the

above services by Netcare Consortium.

The total financing requirements of the project were calculated at R188.4 million.

ABSA bank is the main funder of the project with a debt of 78 percent of total funding

to be paid at a fixed rate of 11.07 percent over 13 years (ECDoH 2006:17). The BEE

shareholding is also to be provided by ABSA at the same rate, but over a 6 year

period. PPP revenue is based on initial bed occupancy of 30 percent and final

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occupancy rate of 60 percent over a period of 5 years. It is estimated at R1053.9

million for the life of the project. The private party is required to pay 30 percent of its

excess revenue to the ECDoH. As stated above the final unitary charge to the

ECDoH payable to Natcare is R22.225 for all services delivered and transfer of risks.

In calculating the value for money the NPV of the PSC and the compliant bid were

compared. The value gained from the co-location of private facilities with the public

hospitals and the cost per bed per day was also compared.

Although the compliant bid NPV cash flow of R251,340,00 is lower than the risk

adjusted PSC of R260,525,00 the private hospital revenues make up 61.5 percent of

total revenue. Moreover, the PPP arrangement decreases the cost per patient bed

day to the ECDoH (ECDoH 2006:20-23). There is also an element of cross-

subsidisation in the project by the bigger Settlers to Port Alfred hospital. Risk

allocation shows that the main risks identified are technology, completion, market

demand and volume, operating and maintenance, force majeure and currency and

exchange risks. Technology, completion, exchange and interest rate risks are borne

by the private partner. Market demand and volume, force majeure and operating and

maintenance risks are shared by the private and public partner. In the shared areas

both Netcare and the ECDoH share maintenance and operating risks (ECDOH

2006:33).

As a result of the PPP the number of beds has increased from 60 to 90 for Port

Alfred Hospital and from 219 to 239 for Settlers Hospital. This includes 30 and 32

private beds for Port Alfred and Settles respectively. Furthermore, there are

additional theatres, an ICU, CSSD and casualty department. Quality healthcare is

expected to improve because of the PPP. For example, the facilities management

and equipment maintenance contracts may contribute to quality care. Moreover,

referrals to either Port Elizabeth or East London may decrease as modern public and

private facilities are nearby.

4.5 Issues and concerns

Vrangæk (2008:155) identifies six issues and concerns with PPPs in the Danish

health sector. This research builds on that foundation and the preceding case

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studies have identified five issues and concerns with PPPs in healthcare in South

Africa.

Despite an attempt to define PPPs, the concept itself remains ambiguous both in

terms of its scope and contents. Health PPPs in South Africa are concentrated in the

provincial and national government levels. In fact, of the seven health PPPs only one

is at national level, namely the SVI project by the National Department of Health. The

other six projects are at provincial government level. Of note is that the economic

hub of the country, namely Gauteng Province has no implemented PPP. There are

also no implemented health PPP projects in Mpumalanga,the North West and the

Northern Cape provinces (National Treasury PPP Unit 2010:5). However, the

government has proposed six flagship PPP projects, which include Gauteng

province. The six flagship PPP projects are listed in Table 4.9.

Table 4.8 Proposed six health flagship projects

Project name and sponsor Project purpose Status

Chris Hani Baragwanath Hospital,

Gauteng Department of Health.

Reconstruction, revitalisation and

upgrading.

Request for approval completed –

awaiting approval.

Tygerberg Hospital, Western Cape

Department of Health.

Redevelopment of the hospital.

Inception

Limpopo Academic Hospital,

Limpopo Department of Health and

Social Development.

Building of new facility. Feasibility study

Nelson Mandela Academic Hospital

Complex, Eastern Cape Department

of Health.


upgrading.

Inception

King Edward VIII Hospital, KwaZulu

Natal Department of Health.

Replacement and refurbishment

of hospital.

Inception

George Mukhari Hospital, Gauteng

Department of Health.


upgrading.

Feasibility study

Source: Adopted from National Treasury PPP Unit (2011:3)

Table 4.8 shows that the proposed projects cover the big hospitals in the major

metropolitan areas of the country. The proposed projects also show that a market for

PPPs has grown to the tertiary level of healthcare. Furthermore, it shows that the

subsector covered by existing projects is mainly at primary and secondary level

healthcare. Rehabilitative care is catered for only in the Western Cape’s WCRC and

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LGH project.

The favoured route is co-location as evidenced by the two projects in the Eastern

Cape and in the Free State co-locations. These projects are characterised by large

industry players, namely Netcare and Life Healthcare Group. The risk of cream

skimming is increased as private partners only get involved in projects that yield

large profit margins. A direct consequence of cream skimming risk is that the public

sector may be drained of skills and competencies to the private sector (Vrangæk

2008:156). Moreover, the skills and costs of the bidding process limit competition to

a few large companies or oligopolies. In the case of the Humannsdorp project the

BEE partner’s inability to raise funds caused them to pull out of the project (ECDoH

2007:8).

A third issue with PPPs is the risk of failure by the private partners to deliver

services. In South Africa this has not yet happened, but possibilities of bail-outs are

discussed in Western Europe and Australasia (Vrangæk 2008:156). On the contrary,

others urge that PPPs present more stable long-term contracts to deliver services.

Contract management enables government to appoint private partners that have

capacity and less chances of failure. However, these long-term contracts limit future

governments’ decision making scope. On a positive note PPPs protect service

delivery from political interference and disruptions. A case in point is the review done

on the costs of the IALCH PPP by the KZNDoH after the departure of Mkhize and

Green-Thompson (National Treasury PPP Unit 2007a:31). However, the contract is

still intact, because of its long-term nature.

The fourth issue for PPPs is the contract management approach. Joint management

committees set-up at institution level at IALCH, Humansdorp District Hospital,

WCRC and LGH Universitas and Pelonomi co-location hospitals are a step in the

right direction. The reviewed case studies point to helpdesks formed at these

institutions to assist in solving problems as they arise. Public and private perceptions

about the quality of healthcare have resulted in problems of shared services in

PPPs. Examples of these challenges are cited in the Humansdorp project (National

Treasury PPP Unit 2007b:34) and for the Universitas and Pelonomi hospitals.

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Maintenance of public sector values of democratic participation, social responsibility

and equality are threatened by private sector profit driven values. Moreover, the

public sector in South Africa has been associated with poor quality healthcare and

bureaucratic management. Hence, it takes a long time to fill vacant posts in the

public sector. In the Polokwane Hospital Renal Dialysis Centre all staffing

requirements are supplied by the private partner. This also enables the private

partner to enforce discipline (LDoH 2006:4). The provision of maintenance for

medical equipment, facilities management and supply of new medical equipment and

IT in most PPPs has contributed to better quality care and improved interactions

between the public and private sector.

Finally, the cost of delivering services via PPP has been perceived to be very high.

Calculations of risk adjusted PSC are thought to be underestimated to justify the

PPP route of delivery (Hall 1998:121). IALCH project was subjected to a review

because of its extensive cost to the provincial budget. It is estimated that 40 percent

of its budget is paid to Impilo Consortium (National Treasury PPP Unit 2007:31).

However, the bed occupancy rate is not related to the PPP, but it is a result of the

referral system. Mtshali (2011) emphasises that the role of the partner are limited

only to the project description. The transaction costs are another large cost element

that also acts as a barrier to entry in the PPP industry. She estimates that bidding

costs are approximately 10 percent of the project’s total costs. However, efficiency

gains through PPP delivery are realised, for example at an additional cost of

R365.59 the WCRC and LGH is able to provide all hard and soft facilities

management as well as maintenance of all buildings (WCDoH 2010:15).


Chapter 4 analysed the quality of healthcare in the public and private sectors in

South Africa. Furthermore, it presented an analytic review of the implemented PPPs

in the healthcare industry. The analysis demonstrated that access to quality

healthcare has increased as a result of the implementation of PPPs in South Africa.

Quality healthcare is a difficult concept to measure and to define. This study takes

the definition provided by Donabedian which states that quality medical care consists

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of technical, interpersonal and social elements. The approach followed to asses

quality healthcare is based on the outcomes, structure and process approach.

Following this approach the research found that there are differences between

quality healthcare in the public and private sectors in South Africa. These differences

originate from the historical development of the hospital industry and healthcare

industry in general. The health outcomes in the public sector are poor, for example

the increase in under-five mortality rate from 59 in 1998 to 104 per 1000 live births

2007. The process of medical care is also compromised in the public sector as

evidenced by poor patient satisfaction survey results and accuracy of medical

diagnosis. The latter is related to inadequate technical expertise and equipments. In

mission and mining hospitals the process of care is better and this improves their

quality of healthcare. The settings in which health care delivery takes place vary

considerably between the public and private sectors. The percentage distribution of

key health personnel shows that the private sector is better resourced than the public

sector.

This study asserts that the quality of healthcare in the public sector is inferior to that

of the private sector in South Africa. This is because the private sector is better

resourced in terms of personnel, finances and equipments. However, there are

limitations to this conclusion because it is based on secondary data published in

articles. No survey was done to determine healthcare quality standards in the public

and private sector. Moreover, the National Department of Health’s audit of all public

health facilities is currently underway, although no report is yet out. Another area for

further research is the quality healthcare comparison with differentiated amenities

such as Folateng hospitals in Gauteng. Folateng wards are privatised wings in public

hospitals (Gauteng Department of Health 2011:1)

The approach followed to analyse PPPs in the health sector is intended to answer

the research question of whether PPPs in healthcare improve access to quality care.

The study adopted the policy, financial and governance approach as appropriate to

answer the research question. The framework for analysis is used to review the 7

implemented PPPs in healthcare. As stated in the research methodology, data and

information used is secondary in nature. It comes from a document review of the

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National Treasury PPP unit. There is a limitation in that service coverage data, is not

the latest available data, but for 2007 in certain instances.

The key finding in the review of PPPs is that there were 20 implemented PPPs in

South Africa in December 2011. Of these, 7 are in the healthcare sector. The first

PPP project was implemented in March 2002 and the latest was concluded in May

2007. This gives a rate of about one PPP concluded per annum in. The slow rate of

concluding PPP projects in South Africa and other emerging markets is due to

capacity and skills constrains in government. The South African government has

established the PPP unit in the National Treasury and in the provincial treasuries to

assist in this regard. More trained staff and simplifying the PPP procedures may

assist in this regard. A policy position to venture into PPPs as a method of delivering

services and social infrastructure by the government is in competition with traditional

procurement of privatisation, out-sourcing and vouchers. The lack of commitment by

government to PPPs as a mode of public infrastructure and service delivery may be

contributing to the slow rate of concluding PPPs in South Africa.

The argument put forward by critics of PPPs is that these projects cost the

government more than traditional procurement methods. For example, in the case of

the IALCH, it costs the KZNDoH more to deliver tertiary services using the PPP than

at Addington, King Edwards and Greys hospitals. The main reason for this higher

cost for IALCH is its low bed occupancy rate. The PSC as a criterion to measure

PPP projects is alleged to be unreliable and subject to manipulation to justify PPPs.

In the preceding case studies the key decision criteria has been value for money and

affordability of projects. Value for money is obtained through refurbishment or

upgrades, at the end of the contract when the private partner’s facilities are returned

to government and revenue streams that flow to government if there are any shared

facilities.

Affordability means that the funds spent on the project should not exceed the funds

received from the project or its NPV. The review of the 7 implemented health PPPs

showed that they bring value for money to the South African government. Therefore,

PPPs in totality are a good investment in terms of capital infrastructure and effective

service delivery for both the private and public partners.

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The value for money is derived from PPP projects because of the transfer of risk to

an appropriate party to achieve outcomes in a collaborative manner. Risk that is

shared or transferred may be anything from financial, construction, operations and

governance risks. In the example of IALCH the volume risk is transferred to the

KZNDoH. This has resulted in higher costs to government due to low bed occupancy

rates. The Polokwane Hospital Renal Dialysis project’s market demand and volume

risk is borne appropriately by the public partner. Operations and maintenance risks

are featuring in case studies that have IT, medical equipment and facilities

management. The LGH and WCRC project is an example of this risk sharing and

transfer. Currency, insurance and interest rate risks could be transferred to either the

public or private partner. In essence the study has demonstrated that an appropriate

risk transfer or sharing results to a sustainable PPP.

Governance of PPP projects cuts across all the 6 stages of the PPP life cycle. It

featured in the collaborative arrangements and different roles of the partners. Joint

management committees at local institutions have improved relations and service

delivery as shown in the review. In the Hummansdorp District Hospital, the LGH and

WCRC and IALCH projects local joint working committees improved effectiveness of

PPPs. A noticeable governance point is the use of common transaction and legal

advisors in most PPP contracts implemented and those still proposed. Moreover, the

duration of PPP contracts ranges from 5 to 15 and even 20 years to allow the

partners enough time to evaluate the projects. Although this may be perceived as

market oligopoly, the long-term relations may shorten contracting times. Employing

skilled staff at institutional level in both the public and private sectors to manage

PPPs improves cooperation and ultimately efficiency.

Quality healthcare accessibility has improved as a result of the implementation of

PPPs. The study has shown that quality healthcare improved indirectly, because

PPPs afforded hospital personnel to concentrate on core clinical services and

directly through services provided by the PPP projects. In the co-location projects of

the Eastern Cape and Free State, the IALCH and the Western Cape’s LGH and

WCRC, equipment and facilities management services provided by the private

partners have allowed hospital management and staff to concentrate on core clinical

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services. This has also improved appearances and cleanliness of hospitals. In

addition quick maintenance of medical and IT equipment resulted to an improvement

in the process of care. Accessibility to quality healthcare improved as the number of

private and public hospital beds increased after implementation of PPP projects in

Hummansdorp, Port Alfred, Settlers, Universitas and Pelonomi hospitals. At the

IALCH project the number of public tertiary level beds increased, while the

rehabilitative hospital beds in LGH and WCRC decreased. These changes in

hospital beds are not related to the two projects.

PPP projects have improved access to quality care directly and positively, as

exemplified in the SVI and the Polokwane Hospital Renal Dialysis projects. The SVI

project has maintained an adequate supply of vaccines for the EPI programme by

government. It also initiated a vaccine supply industry for the whole SADC region

and transferred vaccine development skills to scientists in South Africa. The dialysis

project increased the number of service points, resulted to effective operations

management and high quality renal dialysis services for the population in the

Limpopo Province.

The study identified five issues and concerns about health PPPs. Firstly, there is a

concentration of health PPPs in the primary and secondary levels of healthcare.

However, the proposed six flagship PPP projects are mainly in the tertiary sector.

These will also spread PPPs to almost across all provinces. Secondly, the study

found that the favoured route of PPP projects is co-location and it is characterised by

oligopoly with large industry players as private partners. A thirds issue with PPPs is

the risk of failure by the private partner to deliver a service. This could be due to

bankruptcy or disagreements with contracts. However, this has not as yet happened

in South Africa. A lack of contract management skills from both the government and

the private partner is another issue of concern for PPPs. Training of staff and

simplifying contracts may assist in improving contract management. Finally, the cost

of delivering public services using PPPs is perceived to be more expensive than

traditional government procurement. Moreover, the high costs to venture into a PPP

are also a barrier to entry in the industry. As a result, the sector is characterised by

oligopolies such as Netcare, Life Heath Group and Mediclinic. However, the study

showed that PPP service delivery is cost-effective.

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Chapter 5 presents a summary of the main findings and conclusions,

recommendations, areas for further research and limitations of the study.

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CHAPTER 5

CONCLUSIONS AND RECOMMENDATIONS, AREAS FOR FURTHER

RESEARCH AND LIMITATIONS OF THE STUDY


The aim of the study was to obtain a better understanding of the relationship

between public-private partnerships and access to quality healthcare in South Africa.

PPPs are beginning to be used to address the strengths and limitations of the public

and commercial sectors and to improve economic development in the world.

Governments throughout the world are faced with limited budgets to deliver public

services and are investigating the option of PPPs as an efficient mechanism to

ensure value for money. In South Africa, PPPs are a relatively new concept. The

research employed both quantitative and qualitative data to gain a better

understanding of PPPs and to measure access to quality healthcare. The literature

review, comparative analysis and document review were used to derive the research

findings and conclusions.

Chapter 2 shows that the basics of health economics and the economics of PPPs

can complement each other. It defined the key concepts of health economics and

PPPs. Health economics is the branch of economics that analyses the costs and

benefits of healthcare interventions. This definition is based on the assumption that

healthcare interventions can result in better health. The economic concepts of

demand for healthcare, the production or supply of medical services, healthcare

markets and health systems all contribute to better healthcare. The demand for

healthcare is a derived demand, because people buy medical care in a quest to

improve their health. The demand for labour is another example of a derived demand

and is applicable to healthcare. There is an inverse relationship between the price of

medical services and the quantity demanded. As the income of consumers of

healthcare services and the price of complementary goods increases, quantity

demanded increases ceteris paribus. On the contrary, an increase in the price of

substitutes will result in a decrease in quantity demanded. The demand for medical

services is inelastic with respect to its price. This means that it is a merit good and

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demand will increase by a relatively small amount when the price decreases. Hence,

the quality and quantity an individual receives is not entirely determined by their

income level, but by the clinical need and level of healthcare of that country.

Economies of scale and scope are employed by medical firms to produce healthcare

efficiently and to save costs. In the short-run the production of medical services

occurs under fixed capital and variable labour inputs. However, in the long-run both

inputs can be altered. Economies of scale and scope may be achieved for example,

through having general hospitals rather than specialist hospitals and regulating the

number of hospital beds and advanced equipments, such as CT scans. Regulation in

the healthcare industry is done by government because of its imperfect market

conditions. Healthcare markets are characterised by asymmetry of information.

Consumers of healthcare do not have enough information to make rational decisions

and choices as producers, such as doctors and hospitals. As a result the market

structure in healthcare is mainly pure monopolies such as pharmaceutical firms that

control drug patents and oligopolies, for example the hospitals. In the absence of

perfect competition there is bound to be market failure resulting in the misallocation

of scare medical resources and welfare losses. This market failure necessitates

government intervention comes in the form of healthcare provision and financing.

Health insurance either paid by consumers or subsidised by government may result

in consumer or producer moral hazard and adverse selection problems. These in

turn result in an increase in the price of healthcare.

The extent of government intervention in healthcare delivery depends on the

healthcare system adopted in the country. Healthcare systems are either providing

partial or universal coverage and are funded by general taxation, social insurance or

private insurance. The third element of health systems is control, which could be

public, private or mixed. The South African health system is a mixture of a publicly

funded and market modified system without universal coverage. The review literature

recommends a centralised and publicly funded system as a better option to ensure

public satisfaction, equity and effective care. However, this does not cater for the rich

as the quality is poor and has deteriorated after 1994.

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PPPs have developed out of a realisation by governments that to improve health

systems efficiency there is a need to involve the private sector. Health systems

around the world are facing challenges of how to raise funds, pool risks and

recourses and deliver healthcare in the most efficient and cost-effective manner.

PPPs are adequately defined in the current literature, although from the financial,

policy and governance perspectives. However, distinct elements of participation,

cooperation, resourcing, durability and risk sharing form the basis of understanding

PPPs. Moreover, PPPs are different from traditional procurement methods of

privatisation, out-sourcing and vouchers. The Special Purpose Vehicle (SPV) is the

driving force of PPPs combining private and public parties to deliver public services.

For PPPs to succeed there need to be cooperation and commitment, not just a

principal-agent relationship amongst the parties.

The research identified two major types of PPPs, namely economic and social

partnerships. The study focused on economic partnerships wherein the private

sector with its public partners participates in the design, financing, building and

operating of a service or infrastructure. The study found that the Private Finance

Initiative (PFI) model pioneered as a PPPs developed in the UK. It further identified

the seven common types of PPPs as DBO (Design, build and operate), DFBO

(Design, finance, build and operate), BOOT (Build, own, operate and transfer), BOO

(Build, own and operate), O&M (Operate and maintenance), LBO (Lease, build and

operate) and BBO (Build, buy and operate). Health PPP models are not different to

these. Variations are possible as there is currently no common classification in the

literature.

The next step in the study was to explore the economic and social rationale of PPPs.

The research found that the economic rationale of PPPs is efficiency and fiscal

savings. Efficiency of PPPs derives from the notion that the private sector is

technically more efficient and x-efficient than the public sector. The private sector

thus uses fewer inputs to achieve maximum outputs and prevents the wasteful use

of resources in order to maximise profits. However, the study found that the private

sector is not always more efficient than the public sector citing examples in the NHS

and potential producer moral hazard in private healthcare in South Africa. In addition

the study emphasised that in certain instances effectiveness in service delivery may

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overrule the need for efficiency, for example to promote equity and accessibility. The

Public Sector Comparator (PSC) was identified as the main method to evaluate PPP

project efficiency. However, the study warned against possible manipulation of the

PSC to disguise project viability.

On the fiscal theme, the use of PPPs affects both the expenditure and revenue sides

of the budget. The immediate effect of the PPP delivery mode is to reduce

government expenditure and budget deficits. However, capital expenditure increases

as a result of PPP because of large start-up capital requirements. User charges,

taxes and subsidies used to fund projects may present distributional and equity

effects on taxpayers. In the end, taxpayers may end up paying more in the form of

user charges and/or taxes. Finally, due to long-term contracts PPPs afford security

of service provision, but may tie up future governments and their budgets to past

agreements.

Chapter 3 examined the historical developments in healthcare and PPPs. Christians

founded hospitals in 1094 to 1291. The development of hospitals as social

institutions to care for the sick outside their homes is a principal element of the

history of healthcare. The development of hospitals went through four distinct

phases, marked by changing ownership, conditions in the hospitals, types of patients

who were admitted and funding of hospitals. The modern hospital is a center of

excellence where all social classes could expect to be cured. The control is

dominated by physicians who have medical knowledge to admit patients, prescribe

drugs and perform surgery. The arrival of the trained nurse and the laboratory

technician improved the quality of healthcare. The modern hospital is characterised

according to ownership, level of care rendered, control and financing structure.

Ownership is either private or public, while most hospitals deliver multidisciplinary

care and governance vests with the board of directors or trustees. However, the

influence of physicians limits their role. Hospitals are predominately financed through

third party payments via insurances or government agencies.

The history of medicine in Western Europe influenced the history of healthcare in

South Africa. The first hospital was founded by Jan van Reibeek in the Cape in 1656

to care for the sailor and employees of the DEIC. The first civilian hospital was

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opened in Somerset in1808. The inland expansion of the free burghers and the

discovery of gold and diamonds in the Orange Free State and Transvaal led to the

opening of mining and mission hospitals. Initially the conditions in the mining

hospitals were bad with overcrowding, poor sanitation and lack of medical supplies,

especially for Black miners. Mission hospitals assisted with the provision of medical

care to rural inhabitants where there were no state hospitals. In 1910, the Union of

South Africa was formed and the four colonies begun to consolidate healthcare

delivery. In 1919 a single Department of Public Health was formed. A notable reform

measure was the Gluckman Commission of 1944, which recommended the

establishment of a comprehensive state funded PHC approach. Its

recommendations were never implemented, as the apartheid policies increased

segregation, fragmentation, privatisation and nationalisation of mission hospitals in

the homelands.

Health reforms between 1990 and 1994 started promoting equity and accessibility of

health services to all South Africans. The RDP, amongst other things resulted in

more clinics built and free healthcare to pregnant women and children under 5 in

state hospitals. Thereafter, the GEAR policy helped to create an enabling

environment for private sector investment. PPPs started during the GEAR era.

Nevertheless, health outcomes are poor in South Africa compared to other

developing countries with less healthcare expenditure. Government in an attempt to

improve health outcomes and equity has considered a revision of the current health

system and thinking about PPPs.

PPPs originated in France in the 17th century, but their implementation was

accelerated in the UK and other countries that adopted the New Public Management

approach. The desire by government to engage the private sector in the delivery of

public services instigated the development of PPPs. The PFI is the dominant form of

PPPs in the UK with most capital investment in the transport sector. PPPs because

of large capital investment may cause market concentration with a few companies

controlling PPP projects, for example in France. In South Africa, 6 PPP projects were

piloted between 1997 and 2000 in all sectors.

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The PPP unit of the National Treasury was formalised in 2000 to provide the

regulatory and institutional framework for PPPs in South Africa. The Public Finance

Management Act of 1999 through its Treasury Regulation Number 16 regulates

national and provincial PPPs. The Municipal Management Act of 2005 form the legal

basis of municipal PPPs. In May 2010, there were 20 projects operated at national

and provincial levels and this translates to a rate of 2 PPPs formed per year. The

slow rate of concluding PPP agreements is mainly due to the lack of capacity in the

departments and provinces. In the health sector Public Private Initiatives (PPI) were

developed by the Department of Health to meet the health needs of the country.

These extend beyond PPPs as defined by the National Treasury. However, this

dissertation only investigates the contribution of PPPs to improve access to quality

healthcare.

Chapter 4 analysed the contribution of PPPs to quality healthcare and access in

South Africa. It presented an analytic review of the 7 implemented PPPs in South

Africa. The starting point was to define what quality healthcare is. Different people

have different opinions of what quality healthcare entails. However, the study follows

the definition by Donabedian (1980:95) which states that quality medical care

consists of technical, interpersonal and social elements. The approach to asses

quality healthcare is based on the outcomes, structure and process approach. With

regards to health outcomes, the study found that the public health outcomes are

poor. For example the under-five mortality rate increased from 59 in 1998 to 104 per

1000 live births in 2007. The process of medical care is also compromised in public

health as demonstrated by poor patient satisfaction surveys and inaccurate medical

diagnoses. Finally the structure in which healthcare delivery takes place is

characterised by much better resourced private healthcare than in the public sector.

The study found that the private sector is better resourced in terms of key medical

personnel, finances and equipments. It therefore concluded that the quality of

healthcare in the public sector is inferior to that of the private sector.

There were 20 implemented PPPs in South Africa in December 2011. Of these, 7

are in the healthcare sector. The first healthcare PPP project was implemented in

March 2002 and the latest was concluded in May 2007. The research found that

there are approximately two PPPs concluded per annum. The PPP unit established

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in the National Treasury provides the institutional and regulatory framework for PPPs

in South Africa. PPPs are competing with traditional procurement modes of

privatisation, out-sourcing and vouchers as a result of a cautious government

commitment to them. The cost of PPP projects compared with government

procurement is measured using the PSC. Despite the unreliability and possible

manipulation of the PSC, the study found that PPPs actually cost less than

government procurement of services. For example, it costs the KZNDoH more to

deliver tertiary services at the IALCH than at Greys, King Edward and Addington

hospitals, because of the low bed occupancy rate at IALCH. Moreover, PPPs are

affordable and bring value for money. Affordability means that the funds spent on the

project do not exceed the funds received from it. Value for money is obtained as the

infrastructure reverts back to government at the end of the contract and the revenue

streams that flow to government from shared facilities. In South Africa all the

implemented PPPs have been self-sustaining and there has been no need for

government bail-outs as yet.

Risk transfer and sharing is a key element of PPPs. The study showed that risk

transferred ranges from financial, construction, operations and governance risk. In

the IALCH example, volume risk is borne by the public partner and has resulted to a

low bed occupancy rate and higher costs. The Polokwane Renal Dialysis project’s

market demand and volume risk is handled well by the government as there is no

under utilisation of the services. While in the LGH and WCRC project operations and

maintenance risks are appropriately borne by the private partner.

Governance of PPPs is another key element that determines PPPs’ success. It

involves the collaborative arrangements and management of the PPPs contained in

the contract. Joint management committees formed at institutional level have

resulted in improved relations and ultimately better service delivery. The research

cites examples in the Hummansdorp District Hospital, the LGH and WCRC and the

IALCH projects. Using common transaction and legal advisors have shortened

contracting times. Both the public and private sectors need to employ experienced

and skilled people at all levels to effectively manage PPPs.

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The study found that quality healthcare improved following the implementation of

PPPs in health. For example, the co-location PPPs in the Eastern Cape and Free

State directly increased the number of private health beds, while indirectly allowed

staff and management to concentrate on core clinical services. In the IALCH and

Western Cape PPP, facilities management, IT systems and medical equipment

maintenance has indirectly improved quality healthcare by allowing staff to pay more

attention on clinical services. The Polokwane Hospital Renal Dialysis, the co-location

projects in the Eastern Cape and Free State, the State Vaccine Institute and the

IALCH projects, all increased the number of beds or access to newly created

services. It was demonstrated that the structure and process of quality healthcare

improved and thus better quality.

Five issues and concerns about PPPs were identified in the research. The first issue

is that health PPPs are concentrated in provincial and national level of government.

There are no health PPPs as yet registered with the National Treasury at local

government level. Moreover, PPPs are not evenly spread throughout the country by

location. There are no implemented health PPPs in Gauteng, North West,

Mpumalanga and Northern Cape provinces. Secondly, PPP projects are concluded

with large industry players, such as Netcare and Life Healthcare Group. This creates

a risk of cream skimming and oligopoly in the industry. In the South African arena,

the risk of failure by the private party to deliver services has not occurred to date. It is

a possibility that is being discussed in Western Europe and Australasia. The fourth

issue is lack of contract management skills from both the private and public partners.

In some instances, joint management committees and help-desks have assisted in

addressing local concerns and issues. Finally, there is a concern that PPPs are more

costly to the government than traditional procurement methods. The study

demonstrated that in the case of the IALCH the higher costs are related to a low bed

occupancy rate caused by an ineffective referral system.

5.2 Recommendations

In order for a country like South Africa to benefit from PPPs and improve quality

healthcare, several policy shifts need to be made. For instance, the pressure on the

budget caused by competing needs of society has made governments throughout

114

the world to begin to think about alternative delivery models such as PPPs. The

following tentative recommendations are suggested for policy consideration by both

government and private partners.

Firstly, the commitment of government to PPPs as a method of delivering public

infrastructure and service delivery should not be doubted in order to attract both

domestic and foreign investment. In South Africa there has not been a pull-out by

government in a PPP to date. Nevertheless, the delays in financial commitment and

calls for a review of projects that are perceived to be costly may threaten private

sector partners.

Secondly, the lack of capacity at provincial and local government levels slows the

conclusion of PPP contracts. The PPP unit at the National Treasury needs to assist

in beefing up capacity and skills through a dedicated programme. The public sector

staff should be able to take over the sites operated by the private partner at the end

of the concession period without compromising quality. A worrying element in this

regard is the flight of the capacitated and skilled individuals out of public service.

However, this may be prevented through improving working conditions.

Thirdly, government should tap into the expertise and finances of the private sector

to accelerate the refurbishment and upgrade of public hospitals especially those in

the large cities. The proposed six flagship health PPP projects are a step in the right

direction. This will increase capital investment and accelerate economic growth. In

this context, access to quality healthcare may increase significantly due to PPP.

Fourthly, in assessing the costs or viability of PPP projects, the PSC should be

considered together with value for money and affordability. Moreover, the project

description should be emphasised to determine the scope of the PPP versus its

costs. An example of this case is the low bed occupancy at the IALCH. In addition,

the cream skimming risk by the private sector needs to be prevented in PPP

projects.

Fifthly, the research showed that there is no updated data on the utilisation and

outcomes of PPPs. Therefore, the Department of Health needs to set-up a

115

monitoring mechanism to report on a periodic basis on health PPPs. The operation

of joint management committees is to be monitored to improve relations and

efficiency.

Sixthly, the review showed that PPPs are predominantly at provincial level and a few

at national level. Most are operated at district or regional level and in curative care. It

is recommended that the DoH facilitates PPPs at community level such as

partnerships to care for HIV/AIDS and chronic patients. In addition, purchased

services that deliver services directly to patients are suggested in the short to

medium term to ease staff shortages. An example of these could be pharmacy

services and experienced general practitioners to deliver PHC.

5.3 Areas for further research and limitations of the study

The study of PPPs is relatively new, particularly in South Africa and other developing

countries. In the field of healthcare and other social services it is at its infant stage

following transport infrastructure development. There is then scope for further

research in social services and other fields, particularly in South Africa and at the

local authority or municipal level.

Limitations of the research include the lack of recent data on PPPs. The data used

for the study from the document reviews is primarily dated 2007, although some of

the interviews were done in November 2011. Furthermore, there is no survey

conducted on quality healthcare in the public and private sectors after 2007. There is

no comparative analysis data of PPPs healthcare and access to quality healthcare.

This limits the possibility of a regression analysis. to study these relationships. These

gaps in information constitute one of the major difficulties and limitations of the study

This shows the importance of further primary research on different PPPs, especially

at municipal level.

116

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