Demonstration of Guangxi Elderly Care and Health Care Integration and Public–Private Partnership Project (RRP PRC 50391)

ECONOMIC ANALYSIS

1. The economic analysis for the Demonstration of Guangxi Elderly Care and Health Care Integration and Public–Private Partnership Project was undertaken in accordance with Asian Development Bank (ADB) guidelines. 1 The $100 million project is proposed for ADB loan financing. The project will support the Government of Guangxi Zhuang Autonomous Region (GGZAR) to develop integrated elderly care and health care services and improve elderly people's access to coordinated elderly care and health care services. The analysis covers a 20-year implementation period (2019–2038).

A. Background

2. The project impact is aligned with the government’s goal to establish integrated elderly care and health care services in Guangxi Zhuang Autonomous Region (GZAR). The project will construct four elderly care facilities and a medical facility, of which one elderly care facility will be created under a public–private partnership model, in Nanning and Hezhou municipalities in GZAR, the People’s Republic of China (PRC). Subproject 1 consists of reconstructed facilities for elderly care in Nanning Social Welfare Institute, subproject 2 consists of a medical facility and elderly care facilities within the same hospital complex in Nanning, subproject 3 consists of elderly care facilities at two sites in Hezhou, and subproject 4 comprises an elderly care facility under a the public–private partnership model.

3. Nanning has a population of 7.2 million people and Hezhou has a population of 2.1 million.2 In 2017, GZAR had a gross regional product of CNY2,040 billion, of which Nanning contributed CNY412 billion (20%) and Hezhou contributed CNY55 billion (3%). Nanning’s per capita annual income is CNY57,948 and Hezhou’s is CNY26,802—both below the national average of CNY59,660.

4. The PRC has a large and rapidly growing elderly population. In 2017, people aged 65 years and above represented 11.4% of the population in the PRC. The situation is same for Hezhou and Nanning, which had elderly populations totaling 10.1% (Hezhou) and 11.4% (Nanning) in 2017. Hezhou and its surrounding counties are noted for longevity because of their commitment to ecological health and community engagement.3 As a result, people in Hezhou tend to live slightly longer than people in the rest of the country, with an average life expectancy of 78 years compared with 76 years in the rest of the country.4 Population growth of the elderly in Hezhou and Nanning exceeds the rate in other parts of the country. By 2030, the elderly’s share of the population in Nanning is expected to increase to more than a fifth of the population.5

5. The increasing elderly population is accompanied by higher rates of age-associated chronic diseases. A 2019 survey found that more than half of the elderly population in both Hezhou (58%) and Nanning (52%) have hypertension. Arthritis or rheumatism is also common (37% in Hezhou, 39% in Nanning), followed by cervical or lumbar spondylosis (25% in Hezhou,

1 ADB. 2017. Guidelines for the Economic Analysis of Projects. Manila; and ADB. 2000. Handbook for the Economic Analysis of Health Sector Projects. Manila. 2 Guangxi Zhuang Autonomous Region Statistics Bureau. 2018. Guangxi Statistical Yearbook. Nanning. 3 Gxnews. 2015. China announces 71 "China's Longevity Towns" Guangxi Ranks First in the Country. 9 September. (accessed 3 January 2019). 4 World Bank. World Bank Databank. https://data.worldbank.org/indicator/SP.DYN.LE00.IN?locations=CN (accessed 12 April 2019). 5 ADB. PRC: Internal Calculations to Feasibility Study Report of the Nanning Traditional Chinese Medicine Hospital Rehabilitation Comprehensive Maintenance Center (Nanning First Nursing Home) Project. Unpublished. 2

28% in Nanning), osteoporosis (13% in Hezhou, 25% in Nanning), and heart disease (19% in Hezhou, 22% in Nanning).6 Mental health disorders, such as dementia and Alzheimer's disease, also become more prevalent as people age.

6. An increasing number of elderly people live in so-called “empty nests.” Economic and social pressures mean that children of elderly people move out of their parents’ houses in search of better economic opportunities. About 20% of elderly people surveyed in Hezhou did not have someone in their family to provide care; this percentage rises to 40% in Nanning (footnote 6). Elderly people tend to rely on pensions and income support from their children. More than 70% of the elderly people in Hezhou and Nanning have savings below CNY50,000 ($7,240). Low savings indicate that the elderly may be sensitive to long-term care prices, especially from private facilities, which tend to be more expensive.

7. Many elderly care and health care facilities are not well coordinated to provide comprehensive services, such as fast-track referrals. This creates additional time and travel burden on the elderly. The cost and level of service vary widely, especially between public and private facilities. In Nanning, pervasive problems reduce the quality of service, such as lack of standards, lack of skilled staff, inadequate equipment, and uneven geographic coverage.7

8. The Government of the PRC is aware of the growing elderly care needs and has taken policy actions to improve the sector. In 2015, it issued the policy on elderly care and health care integration.8 In 2017, the GGZAR issued its provincial policy and selected Nanning and Hezhou as pilot cities for elderly care and health care integration.9 It also issued a policy to enhance the role of the private sector in promoting elderly care services.10 The PRC’s Thirteenth Five-Year Plan, 2016–2020 aims to develop the elderly care sector by defining the roles of the government, the private sector, and civil society organizations; and by promoting the integration of elderly care and health care services.

9. Elderly people in Hezhou and Nanning are currently underserved. About 26,000 beds are available at elderly care institutions in Nanning (about 19 beds per 1,000 elderly people). This fails to meet the city’s target of 40 beds per 1,000 elderly people. The target falls short of potential needs, as internal calculations indicate a need of more than 80 beds per 1,000 people. Hezhou only has seven integrated medical and elderly care facilities, with 1,143 available beds, providing less than half of the beds currently needed. Demand for institutionalized elderly care is estimated at 30–50 per 1,000 people.11 Hezhou will need to provide an additional 6,673 beds by 2020 to achieve the national target of 35 beds per 1,000 elderly people.

6 Beijing Normal University, Research Center for Aging. 2019. Report on Demand Survey in Hezhou. Beijing; and Beijing Normal University, Research Center for Aging. 2019. Report on Demand Survey in Nanning. Beijing. 7 Nanning Municipal Bureau of Statistics. 2015. The Present and Future of the Old-Age Service Industry in Nanning. (translated). 8 Government of the PRC, State Council. 2015. Notice [84] on the Integration of Elderly Care and Health Care. Beijing. 9 Hezhou Municipal People’s Government. 2017. Notice [90] on Pilot of Promoting Elderly Care and Health Care in Hezhou City. Hezhou; and People’s Government of Nanning Municipality. 2017. Notice [235] on Implementation of Elderly Care and Health Care Integration Promotion. Nanning. 10 GGZAR, Department of Civil Affairs. 2016. Promote Involvement of Private Sector in the Elderly Care Sector. Nanning. 11 Dahua Engineering Management Group Co. Ltd. 2019. Hezhou First Nursing Home Project Feasibility Study Report. Unpublished. The feasibility study report estimates that the demand in 2017 was 2,600 beds based on a demand for beds of 40 per 1,000 elderly people. 3

B. Demand and Distribution Analysis

10. In Hezhou, 20% of the elderly population needs either supportive or institutionalized care, rising to 26% in Nanning (footnote 6). In Nanning, about 15% of surveyed people have some form of impairment requiring long-term assistance; this percentage is slightly lower in Hezhou, at 14%. More than one third of surveyed elderly people in Hezhou and Nanning were hospitalized at least once in a year. A survey by Hezhou People’s Hospital found that 70% of elderly people aged 60– 70 required special care and rehabilitation.12

11. Policies, directives, and subsidies will support the elderly population in accessing the level of care they need from elderly care facilities. Current assistance in Nanning includes free or subsidized public transport and access to cultural attractions for residents aged 60 and above. Nanning also provides an allowance for people over the age of 80. Elderly people in Nanning are exempt from outpatient registration fees in non-profit medical institutions.13 Similar assistance is provided in Hezhou, including the ability to fast-track medical services for elderly people.

12. In 2014, the GGZAR released a decision to accelerate the development of elderly care services (Decision No. 58 of 2014), which in part aims to provide subsidized elderly care services to the vulnerable elderly population, including people with special needs. The decision also seeks to create a comprehensive social welfare service in each county or city. The GGZAR provides monthly operating subsidies of CNY60–CNY160 per person to privately operated elderly care institutions, depending on the quality of service and the disability of the elderly person. It also provides capital subsidies per bed for elderly care institutions. Nanning also provides capital subsidies and an operating subsidy of CNY100 per person per month for non-profit entities for a maximum of 3 years.

13. These subsidies will allow the project to provide affordable long-term care for the elderly. The project will also provide care for the elderly suffering from dementia. Subproject 1 is a social welfare institute that offers long-term care for those with low incomes. It is assumed that the project will equally benefit men and women.

C. Economic Rationale

14. Ensuring effective delivery of integrated elderly care and health care services will provide social and economic benefits. It will improve the social conditions and health of the elderly population in GZAR. The expansion of these services will ensure that the elderly population can manage the condition of chronic diseases and reduce the need for emergency services.

15. The project will provide direct, cumulative benefits to an estimated 160,000 elderly people in Hezhou and Nanning over the project lifetime. The project will provide nearly 2,200 jobs during the construction and operation phases, including skilled and unskilled jobs.14 It will also provide resources for ongoing trainings and visits for staff.

16. The benefits are both incremental and non-incremental. Incremental benefits of this project include (i) the possible increase in life-years gained, (ii) the transition of family members from informal care giving to the labor market, (iii) medical cost savings (from the reduced

12 Based on a survey conducted for Hezhou no. 1 elderly care facility feasibility study report. 13 Nanning Municipal Government. 2018. What are Preferential Treatment Projects for Elderly in Nanning? News release. 21 December. 14 These include medical staff (doctors, nurses, dieticians, and pharmacists); social workers and elderly care staff; and other supporting staff. 4 emergency admissions by preventing accidents and falls as well as better monitoring and response to acute and chronic disease), and (iv) more trained caregivers. Non-incremental benefits include (i) the improved quality of life of the elderly by providing better care services; and (ii) more efficient integration of elderly care and health care services, leading to administrative savings. The incremental benefits are larger than the non-incremental benefits because of the current undersupply of elderly care services in Nanning, especially in Hezhou.

D. Proposed Solutions and Outputs

17. The project aims to develop integrated elderly care and health care services and strengthen the capacity of such services in Nanning and Hezhou. The expected outcome of this project is increased utilization of coordinated health care and elderly care services in GZAR. The expected outputs of this project are (i) coordinated care service and facilities improved, (ii) public– private partnership project for integrated elderly care and health care services provision developed, and (iii) management and policy development capacities in promoting integrated elderly care and health care services developed.

E. Economic Cost Assumption and Effectiveness Analysis

18. Accurate measurement and monetary valuation of the social benefits of health sector projects is difficult because of the complexity of the health improvements involved. For this reason, a cost-effectiveness analysis (CEA) was used—estimating the project’s impact (the number of elderly people served) and comparing this with the project and alternative project costs that have the same level of impact—in accordance with ADB guidelines (footnote 1). Health benefits are usually measured as a reduction in disability-adjusted life years. The proposed project and the alternative project, in serving the same number of people, are assumed to achieve identical benefits in terms of disability-adjusted life years.

19. The project costs include the investment cost of civil works; installation and equipment for all components; the economic value of land; and operation and maintenance (O&M) costs. Financial costs and physical contingencies have been converted to economic costs. Taxes and price contingencies were not considered in the economic analysis. Prices are expressed at the domestic price numeraire. Unskilled workers’ wages were adjusted according to a shadow wage rate factor of 0.67. A shadow exchange rate factor of 1.08 was applied to traded goods. The CEA focused on total life cycle costs and the economic O&M costs were discounted at 6%. Increases in O&M costs over time are the result of real wage increases and more or better quality materials consumed.

20. The economic value of land was calculated as the opportunity cost of land use. For subproject 3, this was calculated as the average purchase for an apartment in Hezhou, at CNY8,500 per square meter. For subprojects 4 and 5, this was calculated as forgone agricultural output, calculated at about CNY65.57 per square meter per year. Subprojects 1 and 2 do not have land costs since there is no change in land use.

21. The CEA compared two designs of the five subprojects to assess if ADB’s proposed design minimized resource use to achieve the desired outcomes. The five alternative subproject designs changed in different ways. These designs included taller buildings to reduce land use; a different layout with the same number of floors to increase ventilation; or a lower-rise, compact building to facilitate the mobility of patients and staff. The results of this analysis are shown in the table below, in constant 2019 United States dollar prices.

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Cost-Effectiveness Analysis Results ($ million) ADB Project Alternative Analysis Year Land Cost Capital Cost O&M Land Cost Capital Cost O&M 2019 9.68 18.46 0.00 9.68 17.40 0.00 2020 0.70 22.64 0.00 0.70 23.18 0.00 2021 0.70 39.74 0.00 0.70 39.64 0.00 2022 0.70 21.49 10.98 0.70 20.38 10.98 2023 0.70 19.72 12.62 0.70 18.73 12.63 2024 0.70 24.35 14.28 0.70 31.96 14.29 2025 0.70 1.14 17.99 0.70 0.55 18.00 2026 0.70 0.00 19.67 0.70 0.00 19.44 2027 0.70 0.00 20.14 0.70 0.00 20.10 2028 0.70 0.00 20.53 0.70 0.00 20.60 2029 0.70 0.00 20.78 0.70 0.00 20.95 2030 0.70 0.00 20.95 0.70 0.00 21.12 2031 0.70 0.00 21.12 0.70 0.00 21.30 2032 0.70 0.00 21.31 0.70 0.00 21.48 2033 0.70 0.00 21.49 0.70 0.00 21.66 2034 0.70 0.00 21.68 0.70 0.00 21.85 2035 0.70 0.00 21.88 0.70 0.00 22.05 2036 0.70 0.00 22.08 0.70 0.00 22.25 2037 0.70 0.00 22.29 0.70 0.00 22.46 2038 0.70 0.00 22.50 0.70 0.00 22.68 NPV at 6% social discount rate 327.09 330.73 Number of beds 2,100 2,100 Elderly served 160,722 160,722 Cost-effectiveness ratio 203.51 205.78 ADB = Asian Development Bank, NPV = net present value, O&M = operation and maintenance. Source: Asian Development Bank.

22. The results of the CEA show that the cost-effectiveness ratio for the proposed ADB scheme is lower than that of the alternative scheme. Over the lifetime of the project, the alternate design would cost $3.64 million more than the proposed design. The ADB project has a cost- effectiveness ratio of 203.51 while the alternative scheme has a ratio of 205.78. The suggested project is therefore the more cost-effective option.

23. The result holds under various sensitivity analyses. The sensitivity analyses considered (i) an increase in capital expenditure of 20%, and (ii) an increase in O&M expenditure of 20%. Scenario 1 shows a total net present value (NPV) of $345.98 million for the ADB project and $355.40 million for the alternative project—a difference of $9.42 million. Scenario 2 shows a total NPV of $362.16 million for the ADB project and $368.67 million for the alternative project—a difference of $6.51 million.