Denis Kachkin, the Managing Partner at Kachkin & Partners, talks on ways of private investments return in PPP projects in health care.
Soon, the first health care facility built according to the public-private partnership (PPP) scheme at the cost of around 7 bln rubles will be opened in St. Petersburg. This mechanism was first tested in 2014, and today more than 60 projects of budgetary medical centers with the involvement of private capital are being implemented across the country.
A tender for construction and maintenance of a new building of the Sestroretsk municipal hospital No. 40 based on PPP was announced by the Investment Committee in the middle of July. As «Construction Weekly» already reported, the winner will have to construct a new hospital building 30,000 square meters in area on a 2.1 ha plot in Borisova street in Sestroretsk at their own expense, as well as connect it to utility systems and purchase medical equipment – again, at their own cost. The agreement with the investor will be signed for 10.5 years. Maximum 3.5 years after the signing will be allotted for design and construction, and for the rest of the time the company will be managing the new building. The total contract value will amount to about 6.9 bln rubles.
The mechanism of partnership between the state and business is widely used on the federal level, too. At the end of July, Prime Minister Dmitry Medvedev lead an extended session dedicated to attraction of private investments into the health care area. The head of government then said, that around 60 PPP projects are now being implemented in innovative medicine, and about a half of them – in the concession agreement form. Others are investment agreements of one kind or another. 90% of funds were invested by private sector. It has to be noted that the Ministry of Healthcare launched a pilot project in 2014, which implied conclusion of a concession agreement concerning a health care facility – federal ownership of the Novosibirsk Research Institute for Trauma Surgery and Orthopedics named after Tsyvyan. This project became the first federal concession agreement not only in the health care industry, but more generally in the social sphere. Even before that, in 2012, the first Medical technopark in Russia was opened on the premises of the same institute. It specializes in implementation of innovative medical products and technologies.
Currently a lot of similar projects are launched, acknowledges Timur Nigmatullin, IC FINAM analyst. According to him, the Moscow Region is planning to transfer to PPP a project for construction of two cancer centers valued at several billion rubles. The Northwestern Federal District has some perspectives, too. As Alexandra Koroleva, head of the civil projects department at GC Hosser, stated, hospital No. 40 will be the first, but, most likely, not the last object built in St.Petersburg based on the PPP scheme. Today the city government is considering the possibility to create a perinatal center at the premises of maternity hospital No. 17 using this scheme, as well as a number of health care facilities for primary medical care for residents of Slavyanka district and Lensovetovsky and Detskoselsky communities in the Pushkin district of St. Petersburg. The Leningrad Region has a potential, too: the Regional center for aftercare in Kommunar, says the expert.
According to Koroleva, when developing the project, the city authorities together with consultants monitored the market to find out which businesses could potentially take part in the PPP project. They held meetings and negotiated with such companies, as Macquarie Renaissance Infrastructure Fund, LSR Group, Sacyr, Pizzarotti, General Electric, Siemens, Ramsay Health Care, Renaissance Construction, Gorod JSC, SMU-303 and Gazprombank. By the way, the latter refused to comment on the project’s perspective for «Construction Weekly», making a reference to their corporate interest. «I believe that, being capital intensive, this project should look interesting for sponsoring organizations, infrastructure investors, as well as western concession operators, dealing with investments in the health care industry,» added Alexandra Koroleva. «The range of potentially interested parties is very wide: funds, big medical clinics, classic investors who can subsequently lease their property,» agrees Olga Sharygina, NAI Becar asset management department managing director. She says that a good example of successful commercial activities in the area of health care are dental and multi-discipline clinics that pay off in 10 years.
This is how the experts describe the way to achieve payback of investments: «According to agreement conditions, the concession operator undertakes a part of the regional order. The region will pay for it from the local compulsory medical insurance fund and through subventions from the local budget. According to preliminary estimates, the project will reach the break-even point in two years after construction is completed, and investments will pay off in approximately 5 years,» explains Timur Nigmatullin. «In the health care industry, profits can be generated by maintenance services, medical treatment under compulsory and voluntary health insurance policies, commercial medical services and other associated services,» added Koroleva. She says that terms of PPP projects implementation in the area of health care vary significantly. Western investors prefer longer terms for PPP projects – 20 to 35 years. In the established Russian practice it is usually 10-15 years.
According to Denis Kachkin, managing partner of Kachkin & Partners, funds received by a medical organization from compulsory health insurance can at their best compensate operating costs. It is caused by regulatory specifics, so for return of capital investments, income from commercial services and voluntary insurance are considered, – as well as budgetary aid, without any doubt. «Eventually the owner of new health care facilities is the state,» says the expert.
Dmitry Medvedev, Prime Minister of the Russian Federation:
– A few years ago, PPP projects in the health care industry seemed quite exotic. Investors didn’t want to enter this market, thinking that the profits are too small and risks are higher then in, let’s say, construction sector or others. I wouldn’t say that in terms of investment volumes we have reached the level of countries that are well-developed in this aspect. Nevertheless, the situation has changed, and the state, business and science have a common goal to provide conditions where achievements of modern medicine could be used in practical health care.
- Legal support for an investor at the stage of preparing a proposal on a PPP project in the field of medicine
- Legal support of the largest PPP project in the field of public transport in Russia — building and operating a tram network with total investment of about RUB 26 billion.
- Legal support for two projects involving the creation of swimming pools in Leningrad Region, implemented on the basis of private concession initiative
- Development of a concept for the creation of an Innovational medical cluster in the Caucasian Mineral Waters Region spanning a total area of several tens of thousands sq km and an action plan for its implementation
- Legal support in preparing the private investor’s proposal on implementing a concession project in the field of medicine
- Support of conclusion of concession agreements on hotels construction in the frames of private initiative procedure in favour of private investors
- Legal support for a project involving reconstruction and operation of the Leningrad Regional Medical Rehabilitation Center in Leningrad Region on the basis of PPP
- Drafting of PPP legislation in Pskov Region
- Legal support for the participant in a tender for the right to conclude a concession agreement on highway construction
- Support of real property buyout in respect to the St. Petersburg Ring Road construction
- Legal study of prospects for the entry into economic circulation of the Peterhof State Museum-Reserve “Ropshinsky Palace” on public-private partnership terms
- Joint work aimed at ensuring constructive interaction between government agencies, business and public organizations and support for interregional investment projects implemented on the basis of PPP
- Preparation of the Concept for the implementation of an investment project involving the construction and operation of a social-services facility on the basis of PPP
- Formulation of legal arguments for the implementation of a recreational project on the basis of PPP
- Support for a project involving the design, construction, operation and maintenance of road infrastructure in Moscow Region
- Advising the Lipetsk region public authorities on the regional legislation improvement
- Advising the Slantsevsky municipal district’s governing bodies within the stadium construction project with the PPP mechanism application
- Advising the Slantsevsky municipal district’s governing bodies on the improvement of municipal legal and regulatory framework
- Legal advice to KIT Finance holdings on construction of chain of boarding houses with medical treatment for elderly people
- Legal support to the project on creation a large landscape and leisure park located in the Moscow region
- Advising a large food manufacturer in frameworks of acquiring state co-funding to a project to be fulfilled in Volga region (factory erection)
- Anti-corruption expertise of the existing laws and draft laws and subordinate acts of the Republic of Tatarstan (Volga Federal District of the Russian Federation)
- Advising the government of the Leningrad region on the review of regional PPP legislation
- Expert review and development of recommendations on improvement of draft law on Public Private Partnership of Sakha Republic (Yakutia)
- Advising on a PPP project involving comprehensive repair of the city lightning networks fulfilled in one of Ural region major cities
- Comprehensive support for a project involving the creation of a “Regional Medical Rehabilitation Center” in Leningrad Region on the basis of PPP
- Participation in expert review and development of the draft federal law on PPP of the Russian Federation
- Expert review of draft law on Public Private Partnership of Udmurt Republic (Volga Federal District of the Russian Federation)
- Legal support of a PPP project on water utilities
- Advising the City of St. Petersburg authorities on the PPP project implementation