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Public-private health partnerships: a warning from Lesotho

Posted by Anna Marriott Health Policy Adviser

7th Apr 2014

Lesotho health budget diagram
The Queen 'Mamohato Memorial Hospital in Lesotho, built under public-private partnership, has been described as a new era for healthcare in Africa. However, as Anna Marriott explains, the hospital's 18-year contract is consuming more than half of Lesotho's health budget, leaving few resources for tackling serious health problems in one of the world's poorest countries.

We are calling for the World Bank to stop all IFC health PPP advisory work until... the case has been... investigated.

Oxfam and the Consumer Protection Association of Lesotho launch a new report today, A Dangerous Diversion, explaining how the costs of Africa's first hospital public-private partnership (PPP),  advised by the International Finance Corporation (IFC), have spiralled to over half the government budget while providing returns of 25 per cent for the private partner and a success fee of $723,000 for the IFC

The consequences for Lesotho are considered so severe that we are calling for the World Bank to stop all IFC health PPP advisory work until and unless the case has been fully and independently investigated.  

Waiting room in the flagship hospital

Lesotho is a small and beautiful mountainous country entirely surrounded by South Africa. It is also one of the poorest and most unequal countries with nearly 60 per cent of people living below the poverty line and the richest 10 per cent of households accounting for more than half of total consumption. Three quarters of the population live in rural areas where poverty is 50 per cent higher. 

Lesotho faces enormous health challenges. It has the third highest HIV and AIDS prevalence in the world and infant and maternal mortality rates are rising. A quarter of the poorest people in rural areas live more than three hours away from their nearest health facility. 

There is little question that the old main national hospital in the capital of Lesotho, Maseru, needed either serious refurbishment or replacement. Under the advice of the IFC, the government pursued a PPP to design, build, partly finance and run the clinical services of a new replacement hospital for 18 years. 

...the running and loan costs... [are] at least three times more expensive than the old hospital it replaced.

It is the first PPP of its kind in a low-income country and amongst only a handful of similar projects worldwide. The promise was that the PPP would provide vastly improved, high-quality healthcare services for the same annual cost as the old public hospital. However, today, the running and loan costs of the three-year-old hospital and three filter clinics have blown out to $67m a year, at least three times more expensive than the old hospital it replaced.

What our research found....

  • The hospital has necessitated a projected 64 per cent increase in government health spending over the next three years, 83 per cent of which can be accounted for by the budget line that covers the PPP
  • It is diverting urgently needed resources from primary and secondary healthcare in rural areas where all stakeholders (including the World Bank) agree investment must be a priority. Despite the severe shortage of qualified health workers, the human resources budget will see a real-terms cut over the next three years, rising by an average of just 4.7 per cent per year (significantly lower than inflation)
  • It's expected to generate a 25 per cent rate of return on equity for the PPP shareholders and a total projected cash income 7.6 times higher than their original investment
  • The hospital is costing the government so much that it believes it will be more cost effective to build a brand new district hospital in the capital to cater for excess patients rather than pay the private partner to treat them - a plan that was announced in the budget speech in February 2014. 
The high cost, high risk nature of health PPPs was already clear from international evidence in rich countries...

The high cost, high risk nature of health PPPs was already clear from international evidence in rich countries and raises serious questions about why the model was pursued by the IFC in such a low-income, low-capacity context. 

There have been challenges and inefficiencies with a range of PPPs in Australia, with a significant number of them ultimately returning to public ownership. Japan's government has defaulted on some of its PPP deals due to affordability problems. 

The UK's National Health Service is under pressure to cut jobs and salaries because of the 'PFI affordability gap'. At least 22 hospital trusts in the UK have said PFI (Private Finance Initiative) bills are endangering their clinical and financial future. The UK House of Commons Treasury Select Committee has recommended that PFIs should be used "as sparingly as possible".

Despite the evidence, the IFC seems determined to continue promoting the Lesotho PPP as a model to replicate, and similar IFC advised projects are already well advanced in Nigeria, and in the pipeline in Benin. The large number of flaws in the Lesotho PPP contract raise serious doubts that the IFC is best placed to advise low-income countries on these kinds of deals - another thing we have asked the World Bank leadership to review.

Borrowing capital via the private sector will always be more expensive than governments borrowing on their own account. The theoretical cost saving and value for money potential of PPP financing and delivery therefore lies in effective risk transfer to the private sector and, in turn, the effective management of that risk by the private sector in the form of improved performance and greater cost efficiency in its operations. 

In the case of Lesotho - as with so many health PPPs internationally - this potential benefit has not been realised, and the costs are already escalating to unsustainable levels. 

The biggest concern is that, as these costs increase for the PPP hospital in the capital, fewer and fewer resources will be available to tackle serious and increasing health problems in rural areas where the need is greatest and where the vast majority of people live.

Read more

Top image: Lesotho's health budget and the costs of the PPP, 2007-2013 (The US$ equivalent amounts for the health budget total are 2007: $57m; 2012: $108m; 2013: $133m.)

Central image: waiting room in the Lesotho hospital

Blog post written by Anna Marriott

Health Policy Adviser

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Anna Marriott