PUBLIC-PRIVATE PARTNERSHIPS’ CONTRIBUTION TO QUALITY HEALTHCARE: A CASE STUDY FOR SOUTH AFRICA AFTER 1994 by MONGI JAMES JOKOZELA submitted in partial fulfilment of the requirements of the degree Magister Commercii in Economics in the Faculty of Economic and Financial Sciences at the University of Johannesburg Supervisor: Professor Ronald Mears May 2012 Johannesburg 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. ii 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 iii 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. v 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 vi 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 vii 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 viii 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 ix 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 x 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