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A Report of Procurement Routes for the Expansion of Baroda

Hospital
Vijesh Morkothi Chevidichi
Student ID: H00175532
Introduction
With the down turn of the global economy which has affected the government of
India in delivering the key health targets. It is well known that the healthcare industry
is dedicated to meet the health requirements of the nation.
The aim of the report is to suggest a suitable procurement route for the expansion of
Baroda Hospital located in Gujarat and also evaluating the feasibility of PFI/PPP.
As there is always a demand for the critical care service in India it becomes a
responsibility of the Government to provide health care system for the growth of the
nation, hence the government has decided for the expansion of the Hospital which
would facilitate an additional of 250 beds with a build up area of 4,000 sqm. As the
existing one is a land mark building the expansion also should be a state of art with a
cutting edge technology and is expected to be environmentally sustainable. The
hospital is expected to run full fledge within five years from the commencement of
the construction.
This report is structured as follows. It begins with the introduction to PPP, its
advantages and disadvantages. It then introduces the formats of PPP attention has
also been drawn to private finance initiative. The latter section of the paper describes
about the basic procurement routes which can be implemented for the expansion of
the Baroda Hospital project. The conclusion of the project is discussed at the end of
the paper.
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Introduction to Public Private Partnership (PPP)
The public-private partnership (PPP) is a procurement route where a public sector
need is met by collaborating with the private sector providing service, assets and
funding. PPP usually is a long term (20 to 25 years) agreement between public and
private sector to deliver a project which will serve the public without any capital cost
for construction from the government.
Principles of PPP
PPP schemes are of higher capital value with a wide range of activities and which are
run for a long period by the private sector. This schemes provide access to public
sector agency to the finance, design, construction and operating for the private sector.
PPP is a form of public sector procurement designed to achieve value of money and
risk transfer to the private sector. Despite of financial crises PPP are widely used
with the assistance of private finance.
PPP are well structured with the risk allocated properly. PPP schemes are developed
and implemented efficiently
The main objective of PPP is to ensure that the government service are delivered in a
most economic and effective manner.
PPP are procured at minimum cost, ensuring that procurement is competitive.
PPP are being widely used in various parts of the world as it does not incur public
sector funding
Merits of PPP
Speedy, efficient and cost effective delivery of projects
Long term agreement between government and private sector resulting to a strong
working relationship between the both sectors
In a hospital PPP the private sector receives the revenue from the public sectors on
performance basis during the operation phase thereby ensuring the continuity of the
performance of private sector.
The private sector has to make an investment upfront to the working capital, making
it more preferable by the public sector as it does not incur public sector funding.
PPP provides an alternative source of finance and better value of money than
traditional procurement route
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PPP projects results in lower cost and are likely to be delivered on time and works
best for the projects that do not have significant uncertainty
Demerits of PPP
Hospital PPP is consideration to be a challenging task due to its complexity and
changing needs due to medical advancement, developing health policy and
technology.
Public and private sector are looking for a mutual gain from the relationship in which
the public sector seeks to increase the social economic profitability where as the
private sector likes to maximise its financial profits.
PPP is not suitable for projects that are subjected to uncertainty.
PPP formats for the proposed project
Following are the PPP formats proposed for the expansion of Baroda hospital
Build Transfer (BT)
This is a form in which private sector is responsible for the design and builds the
facility and after the completion; the project is handed over to the public sector it
then maintains and operates the service for the public.
Build Lease Transfer (BLT)
This form of contract facilitates the private sector to design and build the complete
facility and upon completion the private sector leases it from the public sector to
operate for an agreed period of time. Upon completion of the lease agreement, the
facility is handed over to the public sector thereafter operates and maintains the
facility.
Build Transfer Operates (BTO)
This is a single point of contract which facilitates the private sector to design and
build the facility for the private sector. Upon completion of the project, the
ownership is transferred to the public sector. Operation and maintenance of the
facility remains with the private sector till the end of the PPP agreement.
Build Operate Transfer (BOT)
In BOT type of contract the public sector raise the funds for the construction of the
project. It is also responsible for the design and builds the facility. Upon completion
it then operates and maintains the facility for the stated period in the agreement, the
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revenue generated with the facility should be sole property of the private sector. The
facility would be transferred to the public at the end of the agreement.
Build Own Operate Transfer (BOOT)
In BOOT form of contract the public sector contracts a private sector to finance,
design and build the facility as stated in the agreement without any cost to the public
sector, upon completion of the facility the private sector operates and maintains the
facility as stated in the agreement for a specified period. Upon completion of the
agreement the facility is handed over to the public sector. BOOT contracts are used
for large infrastructure projects which need private funding.
Design Build Finance Operate (DBFO) or Design Build Finance Maintain
(DBFM)
Under this form of procurement route the private sector is responsible for the design,
build, finance and operating the facility for the public sector. The revenue is collected
by the private sector from the user as a user fee as agreed in the agreement for a
specific time. Upon completion of the agreement the private sector handover the
facility to the public sector. DBFO or DBFOM schemes are often used for complex
projects.
Built Own Operate (BOO)
Under this form, the private sector is completely responsible for the finance, design,
build, own and operation of the facility. The private sector owns and operates the
facility and keeps the functional revenue risk, which makes BOO differ from others.
The ownership of the facility is not passed to the public sector client at the end of the
project; it remains in the private sectors ownership.
Suggestion for a PPP format for the hospital project
The expansion of a Hospital is most complex due to its wide range of output
specifications. The DBFO or DBFOM type of contract would be more suitable for a
hospital project when there is no uncertainty with regard to the cost and output
specifications. The private sector would be paid on a unitary basis for an agreed
monthly rate and for a certain period of time. The operational risk such as amenities
for staff, patients and visitors and the functional requirements such as accessibility,
security, safety etc. is the responsibility of the private sector. If the private sector fails
to provide the facilities a reasonable penalty would be imposed which will guarantee
the function of the facilities provided by the private sector.
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Viability of Public Private Partnership (PPP) and Private Finance Initiative
(PFI)
The Private Finance Initiative (PFI) is a type of Public Private Partnership (PPP)
which is most dominated and well documented form in the UK.
In PPP contract each sector contributes to the relationship by transferring some
resources such as money, land, material etc. to the partnership and there can be a
shared responsibility and liability for the mutual benefit between the two parties.
Public private partnership takes many forms. However PFI is most popular model of
PPP adopted in UK, as a major vehicle for delivering the additional resources to the
health sector, in order to achieve a great investment in the healthcare facilities.
The Private Finance Initiative (PFI) was introduced in UK by Conservative
Government in 1992. One crucial premise for this adoption is that the newer
approach results better value for money and achieves better risk management.
PFI was the original form of PPP where a consortium, technically known as Special
Purpose Vehicle (SPV) is formed that includes private sector organisation including
investors/banks, construction contractors, management contractors and other
specialist is formed as a legal body, from which the public sector procures the facility
required. The funds will be used to build and maintain the facility till the end of the
contract. The services would be provided by the consortium for the public sector and
will be paid on a no service no fee basis.
The public sector client designs and specifies the output required and what is
expected from the consortium, if the consortium does not meet any of the agreed
standards it will lose a part from its payment.
PPP/PFI is about the public sector services that are passed on to the private sector in
a form of output specification. PPP/PFI requires a much longer lead-in time before
the commencement of the construction and the projects consist of 13 main stages
starting with assessment and ending with handing over the completed and operational
building to the client. As PPP/PFI contracts last for 25 to 30 years, inevitably
changes will be required to healthcare service delivery and updates to service
specifications.
Prior to financial crises PFI projects were funded through the revenue collected from
the sale of bonds, since the crises PFI projects are funded by banks in the form of
senior debit. The consortium repays the bank from the revenue collected by the
public sector during the life span of the contract. [approx. 13 screens].
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University hospital, Queens Hospital and Primer Royal university hospital are some
of the examples of successful PFI Projects in UK.
PFI helps in the improvement of the public services without the need of finance by
the public sector for construction. The risks associated are shared between public
sector and private sector consortium. PFI schemes transfers the facility performance
risk to the private sector which ensures the new assets are maintained to the agreed
standard. The public sector clients retain only those few risks, which they are well
equipped to handle.
In 2009 a report published by National audit office states that 69% of PFI
construction projects were delivered on time and 65% were delivered at the contract
price. [approx. 13 screens].
Decisions about health care development involve making assumptions about cost,
value and outcomes of their interaction. It is increasingly being realised that financial
risk are more likely to arise when design build are used which make projects more
susceptible to particular risk.
Basic Procurement Routes
The Traditional procurement route
This is the most common route used for projects for the last 150 years following the
emergence of consultants and the contractors. The client appoints a consultant who
prepares the contract documents which includes the design, general and particular
specification, drawings and the tender documents. The contractors are invited to
submit their tender price based on the drawings, specification, and bill of quantities
provided by the client. The client then selects and appoints a contractor through the
tender (usually the lowest one is selected). If required further negotiations are done
with the selected contractor.
The client has direct involvement in design through the appointed consultant. The
contractor has no design responsibility. In this route the client has to be experienced
and knowledgeable about the design and the construction activities. This route has
poor durability as the contractor is not involved in the design.
This procurement route requires a full detailed design prior to the start of
construction activities. There is a cost certainty in this route.
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Types of Traditional Contracts are
a. Lump Sum Contract
With Lump Sum Contract the final contract price is fixed before any construction
activities are started. The contractor quotes are based on the contract drawings,
specification and the bill of quantities provided at the time of tender. With this
contract the risk of cost is transferred to the contractor who has to complete the
construction in line with the contract drawings.
This type of contract is not suitable for a complex projects where there is no certainty
of the design.
b. Re-measure Contract
This type of contract is used where there is no certainty of the quantities.
Approximate quantities are measured and the bill of quantities is prepared by the
consultant. This contract is based on drawings and schedule of rates. The contractor
is paid according to the work progress against the item in BOQ. The contract amount
is not finalised till the completion of the project.
Re-measure contracts are commonly used for complex projects, where there is a
probability of design change and the quantities are hard to determine with the
preliminary design drawings.
The Design and Built procurement route
With this type of contract the contractor undertakes the responsibility of the complete
design and construction activity for the required work. This procurement route can be
used for fast track construction as the construction activities can be started prior to
full detailed design.
Design and built tender documents usually contains only the functional brief i.e. the
requirements are clearly set-out by the client. These documents are provided to the
contractor when he/she is invited for a tender in order to bid for the proposed project
with the design.
The client contracts a consultant to manage the contract. The client also enters into a
contract with the selected contractor to design and build the facility. The consultant
does not have any contract with the contractor.
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From the clients perspective the design and built procurement route is simplified, as
the client does not involve in the design and do not have the risk of the design. The
design risk remains on the contractor.
As the design is under the contractors control the possibility of variation is reduced.
The speed delivery of the project is more compared to traditional route as the
construction activities are stated prior to the finalisation of the complete design.
The contractor has the risk of design, construction planning, organisation and control.
The design is more likely to be buildable. This route is more cost effective as cost
certainty is achieved as the contractor uses his experience and expertise for the
design.
The disadvantage of the route is that the client has less control over the design.
The Management Contracting route
This is an approach where the client appoints a management contractor in the early
stage through traditional route, which advices on the design, programming and
durability, the management contracting are experienced contractors. The
management contractor then programs, packages and obtains tenders for the work,
however the clients consultant is responsible for the design.
The management contractor only manages the works, all the works are subcontracted
under management contract and however the approval of the packages is under the
client.
The management contractor involves in the design and contributes construction
knowledge, management expertise and recommends the division of the work
packages. The management contractor has a single point contractual and payment
arrangement with the client and is paid by client on a fee basis for their management
inputs. The management fee can be fixed which makes cost certainty.
The management contractor has direct communication with the client hence it is
easier for them to identify the clients needs and interest.
The client is provided with an estimate of the final project cost in the early stage of
the project by the consultant, however the final price is not known until the last
contractor is secured.
Management contract is helpful for fast track and complex projects where design
information is less at the initial stages of the project.
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The Construction Management route
This is a route where the client appoints a construction manager who advices the
client. The construction manager is paid on a fee basis throughout the project life.
The client gets directly involved with the contracts, which makes the client fully
involved throughout the project life, by which a fast response to decisions are
ensured. Under this route the design responsibility remains on the client.
This route is suitable for experienced clients. The use of this procurement route has
been reduced. As the client has direct involvement he/she has better control over the
cost and the budget.
Conclusion
The hospital project is one of the most complex infrastructure projects to be
constructed
The Government budgets available for the Infrastructure project are shirking as a
result of Global financial downturn. The growing population of India has shifted the
government priorities and has put pressure on the existing infrastructure to expand. In
a democratic country like India the government has to fulfil the growing demand.
Such a demand cannot be met by the government from its own revenues, hence has
to go for a PPP contract to catch up with the demands.
The expansion of Baroda Hospital project should be implemented through public
private partnership for a period of 25 years. A SPV should be formed as a legal body
and in order to implement the project the SPV should procure a management
contractor (through traditional route) and for the design a consultant will be
appointed. The consultant will work closely with the management contractor for the
design. The works will be divided into packages by the management contractor, and
the construction part will be implemented. Upon completion of the construction the
upgraded hospital would be attached to the existing one and the existing facility
management should provide the facilities for the expansion in a separate package.
Example of PPP Projects in India
Metro MAS Hospital & Heart Institute, Jaipur, Rajasthan inaugurated on
December 2012.
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