PROJECTS: PRIVATE-PUBLIC PARTNERSHIP
Construction Weekly, 31.08.2015
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.