WHAT DOES FINANCIAL ANALYSIS TELL ABOUT PPP AFFORDABILITY?

In an era of tight fiscal constraints, many public hospital/healthcare organisations across the world are engaging with private finance to meet their investment needs and Public Private Partnership (PPP) contracts are chosen... [ view full abstract ]

In an era of tight fiscal constraints, many public hospital/healthcare organisations across the world are engaging with private finance to meet their investment needs and Public Private Partnership (PPP) contracts are chosen for their allegedly capacity to deliver new infrastructure on time and on budget (NAO 2009). In China, for example, the recent reform for the healthcare sector could pave the way to the introduction of forms of PPP for hospitals development (Daemmrich 2013).
Despite these worldwide trends, the affordability of these contracts is still under discussion and it is a salient issue for policy makers that are approaching PPP for the first time or desire to re-launch policies already in place.
Recently, the Independent reported that the UK owes more than £222bn to banks and businesses as a result of 720 PPP contracts. Also, the academia has provided evidences about the lack of affordability of these transactions (Hellowell and Vecchi 2015).
However, affordability analyses are still very problematic, as a consequence of confidentiality clauses that protect contracts and financial models.
In order to shed the light on financial mechanisms which can hamper the affordability of PPP projects, this paper carries out an analysis of five Italian projects in the healthcare sector, with an overall capital value of 1,2 billion euro, more than the 50% of the value of signed PPP contracts. Data used are unique and PPP contracts’ financial models have been accessed by the authors under a strict confidentiality agreement.
The analysis is based on a comparison between the figures forecasted in the financial models elaborated during the procuring phase and those sourced from the financial statements of the concessionaires.
It shows that in many cases the revenues from the non-core services are not necessary to secure the financial equilibrium, which is fully supported by the availability charge, reducing the incentives to the private investor. Further, sophisticated and expensive financial structures are substituted by leaner financial agreements, which generate lower rolled up interests and savings that are retained by the private consortium. Finally, inflation is often used as a mechanism to sculpt the cash flow and to move forward the margins necessary to remunerate the equity invested, whose return is often calculated on non-objective approaches (such as the dividend discount model).
This paper provides an essential contribution to the literature on the PPP and also a methodology that can be replicated in order to generate larger and more consolidated evidences about the affordability of these transactions.
Furthermore, as many emerging counties are now approaching PPP, the lesson learnt from this paper can stimulate the policy maker to introduce mechanism to increase the transparency of PPPs’ financial models ultimately and their affordability.