Public-Private Partnerships' Contribution to Quality Healthcare- A

PUBLIC-PRIVATE PARTNERSHIPS’ CONTRIBUTION TO QUALITY HEALTHCARE: A CASE STUDY FOR SOUTH AFRICA AFTER 1994

MONGI JAMES JOKOZELA

submitted in partial fulfilment of the requirements of the degree

Magister Commercii

Economics

in the

Faculty of Economic and Financial Sciences

at the

University of Johannesburg

Supervisor: Professor Ronald Mears

May 2012

Johannesburg

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.

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

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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

iv 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.

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

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

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 3.7 Summary of the main findings and conclusions 68

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 4.6 Summary of the main findings and conclusions 100

CHAPTER 5 CONCLUSIONS AND RECOMMENDATIONS, AREAS FOR FURTHER RESEARCH AND LIMITATIONS OF THE STUDY

5.1 Summary of the main findings and conclusions 106 5.2 Recommendations 113 5.3 Areas for further research and limitations of the study 114

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

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

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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

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.

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

3 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

4 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

(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

6 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

7 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

8 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.

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.

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

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

Priceofservices physician (P) 0 q0 q1 Quantity of physician services (q) 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

12 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.

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

d1 Priceofservices physician (P)

0 Quantity of physician services (q)

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.

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. ∆Q P Mathematically price elasticity of demand is given by: E = × , where E is the D ∆P Q D ∆Q price elasticity of demand, represents the percentage changes in quantity ∆P P demanded, and is the original change in price. Elasticity could be inelastic, that is Q a percentage change in price is greater than the percentage change in quantity ∆ = ∆ demanded, unit elastic where the percentage QP D , 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

p0 D1 Relatively elasticity D2 Relatively inelasticity Priceof physician services (p) 0 q2 q1 q 0 Number of visits (n)

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

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.

Figure 2.4 The production function of medical services

• C Total output curve

• B Quantitymedical of services (q)

0 Nurse-hours (n) 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.

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

Total cost of medical services (a)

B A

Quantity of medical services (q)

Cost of medical (b) SMC services SAC

Quantity of medical services (q)

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

18 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

19 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

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 power 0% ... 100% Characteristic Perfect Monopolistic Oligopoly Pure monopoly competition competition Number of sellers Many Many Few, dominant One Individual firm Tiny Small Large 100% market share Type of product Homogeneous Differentiated Homogeneous or Homogeneous by differentiated definition Barriers to entry None None Substantial Complete

Consumer Perfect Slightly perfect Perfect or imperfect Perfect or imperfect information 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

21 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.

Table 2.2 Types of national health systems Economic level Health systems policies and market intervention

(GNP per capita) Entrepreneurial Welfare orientated Universal and Socialists and and permissive comprehensive centrally planned Affluent and United States Germany United Kingdom Soviet Union industrialised Canada New Zealand Czechoslovakia Japan Norway

Developing and Thailand Brazil Israel Cuba transitional Philippines Egypt Nicaragua North Korea South Africa Malaysia

Very poor Ghana India Sri Lanka China Bangladesh Burma Tanzania Vietnam Nepal

Resource-rich Libya Kuwait Gabon 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.

Table 2.3 Models of healthcare systems Model and Coverage Funding Control Status categories Beverigde Universal Taxation Public Social service Bismarck Universal Social insurance Mixed Social right Modified market Partial Private Private Insurable risk insurance 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

24 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.

Provision

Public Private Public Publicly financed Publicly financed Publicly provided Privately provided 1 2

Privately financed Privately financed Private Publicly financed Privately provided 3 4 Finance Finance 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

25 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

26 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.

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

28 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.

Figure 2.7 Typical private sector consortium for PPP Funding advisers Government Public advisers sector

Debt funding

Operating SPV advisers company Equity funding (SPV)

Construction/ Design/ Operation manufacture specifications “Soft” “Hard”

Facilities Catering Service Building Equipment Services management support installer contractor provider

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

30 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

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 organisational relationship Loose organisational relationship Tight financial relationship Joint venture Build, Own, Operate and Transfer Joint stock Build. Operate and Transfer Joint development 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 Financial resources Informal arrangements One-level involvement organisations Human resources Physical resources Formal arrangements Multi-level involvement Spin-offs Organisational resource

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.

Table 2.6 Types of PPPs 1. DBO or Design, build and Here the private sector designs, builds and operates a PPP project operate which is financed by the public sector 2. DFBO or Design, finance, build, Under DFBO the private sector finances, designs, constructs and and operate 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 It is a variation of the BOO model with the ownership and operation in and transfer 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 In these arrangements the private sector provides only operation and maintenance maintenance services for an asset owned by the public sector. 6. LBO or Lease, build and These are lease contracts that do not cover project finance. These are operate 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

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 The private company designs, builds, finances and operates the hospital as per , operate) 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, The public authority purchases services for a fixed period for example 30 years, transfer) 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

34 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

35 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 that is as a result of higher operation and maintenance costs. risk 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.

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).

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.

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

39 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

40 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.

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

42 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

43 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).

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

45 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

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).

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).

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).

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-

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 Legislation 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 Established the Colonial Medical Council and the Pharmacy Board to regulate of 1891 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 Created the Colonial Public Health Department with the post of medical officer 23 of 1897 for the colony and local authorities medical officers. Source: Adapted from Van Rensburg (2004:57).

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

52 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 19th 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

53 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

54 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

55 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,

56 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

57 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 Dentistry personnel Pharmaceutical personnel personnel Countries Number Density Number Density Number Density Number Density per 10000 per 10000 per 10000 per 10000 population population population 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).

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

59 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 Per capita Life expectancy Infant mortality expenditure as expenditure at birth, 2008 rate per 1000 percentage of GDP, on health (PPP live births, 2008 2007 international $),2007 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).

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

61 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 243 6,355 department 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.

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

63 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.

Table 3.7 National PPP projects signed as at May 2010. Project Government PPP Contract duration Net Present Value to institution type and date of government agreement State Vaccine Institute Department of Equity 4 years, January R15 million systems Health partners 2004 extended to investment hip December 2009 Head office Department of DFBOT 25 years, Value to government R870 accommodation Trade and Industry August 2003 million Information systems Department of DBFTO 10 years, Value to government R1.5 Labour December 2002 billion National fleet Department of DFO 5 years, R919 million management Transport September 2006 Head office work Department of DBFOT 27 years Capital value R512,264 environment Education May 2007 million Serviced head office Department of DBFOT 25 years Capital value R1.4 billion International Date not stated Relations and Cooperation Source: Adapted from National Treasury PPP Unit (2010:5).

Table 3.8 Provincial PPP projects signed as at May 2010. Project Government PPP type Contract duration Net Present Value to institution and date of government agreement Humansdorp district Eastern Cape DFBOT 20 years Value to government R4.5 hospital Department of June 2003 billion Health Fleet management Eastern Cape DFO 5 years Value to government R553 Department of August 2003 million Transport Inkosi Albert Luthuli KwaZulu-Natal DFBOT 15 years Value to government R4.5 hospital Department of December 2001 billion Health Eco-tourism Limpopo DFBOT 30 years R25 million cash Department of December 2001 Finance Universitas and Pelenomi Free State DFBOT 21 years R43 million cash and R38 hospitals co-location Department of November 2001 million capital investment Health Chapman’s Peak drive Western Cape DFBTO 30 years R450 capital investment toll road Department of May 2003 Transport

Cradle of Mankind Gauteng DBOT 10 years R39 million cash Interpretation Centre Department of October 2003 complex Agriculture, Conservation, Environmental and Land Affairs Gauteng Rapid Rail Link Gauteng DBFTO 20 years R23.09 billion capital value Department of September 2006 Public Transport, Roads and Works Western Cape Western Cape Facilities Duration not stated R334 million capital value Rehabilitation Centre Department of managem November 2006 Lentegeur hospital Health -ent

Polokwane hospital renal Limpopo DBOT 10 years Value to government R88.35 dialysis Department of December 2006 million Health Port Alfred and Settlers Eastern Cape DBFOT 17 years Capital value R168 million hospital Department of May 2007 Health De Hoop nature reserve Western Cape DBFOT 30 years Capital value R40 million Nature Date not stated Conversation Board Fleet management Northern Cape DFO 5 years Capital value R342 million Department of Date not stated Transport, Roads and Public Works Whale Trail nature Western Cape DBFOT 20 years Capital value R29 million reserve Nature July 2006 Conversation Board 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

66 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

67 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.

3.7 Summary of the main findings and conclusions

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.

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.

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

70 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

71 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.

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.

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.

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

86 Nurses 14

40 Doctors Public 60 Private

26 Pharmacists 74

0 20 40 60 80 100

Source: Adapted from Havemann and van der Berg (2002:26)

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

76 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. Service coverage and affordability Utilisationbankruptcy, levels cream e.g. skimming, bed occupancy. legal and political, natural disaster risk. 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).

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

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 occupancy has never exceeded 65 percent, because of a poor referral system and late commissioning of services at the IALCH. 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 Edwards, Greys and 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 (2007a:30).

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. Although the calculated value for money is a R360 million cost savings and delivery of a state of art central hospital, the under utilisation of the hospital is costly to the province. Mtshali (2011) argues that this is not the problem with the PPP, but the referral system within the healthcare system in the country. Possible risks to the project were identified as commissioning and start- up delays, client specification changes of equipment, IT systems design change,

80 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

9 160 .50 .814 7 4 4 4 1 1 151.364 140

120 9 .7 5 100 9

12 80 2 66. 60

Thousands 40 48 .208 .513 75 8 8 1 1 18.5 5 11.5 .217 20 6 .046 8 .1 6 1 0

4 5 6 0 0 0 0 0 2002 2003 2 2 20 2007

Number of inpatient Number of outpatients

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

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 To provide private hospital beds to the Bloemfontein equipments. area.

To provide tertiary and academic services to the To improve the appearance and grounds of Pelonomi private partner. 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).

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.

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.

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). It has been extended and is still in operation to date. The NDoH used Pricewaterhouse Coopers and Deneys Reitz as transaction advisors.

With regards to financing the project, a R15 million systems investment into the project will be realised as a result of the PPP. In addition the net present value (NPV) value of R60 million is calculated over the concession period (National Treasury 2007d:5). In calculating the Public Sector Comparator (PSC) the costs of carrying 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. The lower bid costs are 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 and hence, accepted by the NDoH. Another positive spin-off of the project is an incentive to local and foreign vaccine manufacturing

86 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

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)

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

89 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

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

Yes Yes Catering

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 Yes Waste management Yes

Help desk services Yes Yes

Hard facilities

Procurement, maintenance and replacement of No Yes medical equipment

Procurement, maintenance and replacement of No Yes non-medical equipment

Western Cape Department of Health 2010:3.

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 R514.54 R926 PPP

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.

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

93 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

140 118.616 120 106.393 96.982 100 R million 80 72.983

0 Risk adjusted PSC UPFS rates NRPL rates including Clinix fee - as per bid including transport transport

Source: Adapted from LDoH 2006:23

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

95 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

96 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

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, Reconstruction, revitalisation and Request for approval completed – Gauteng Department of Health. upgrading. awaiting approval. Tygerberg Hospital, Western Cape Redevelopment of the hospital. Inception Department of Health. Limpopo Academic Hospital, Building of new facility. Feasibility study Limpopo Department of Health and Social Development. Nelson Mandela Academic Hospital Reconstruction, revitalisation and Inception Complex, Eastern Cape Department upgrading. of Health. King Edward VIII Hospital, KwaZulu Replacement and refurbishment Inception Natal Department of Health. of hospital. George Mukhari Hospital, Gauteng Reconstruction, revitalisation and Feasibility study Department of Health. upgrading. 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

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.

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).

4.6 Summary of the main findings and conclusions

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

100 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

103 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

5.1 Summary of the main findings and conclusions

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

106 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

108 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

109 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

111 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

113 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

114 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.

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