PPPs in Spain: critical financial analysis of toll road and healthcare cases

Transcription

1 PPPs in Spain: critical financial analysis of toll road and healthcare cases Basilio Acerete, University of Zaragoza Anne Stafford and Pamela Stapleton, University of Manchester Address for correspondence Dr Anne Stafford Manchester Accounting and Finance Group M44 Crawford House Manchester Business School Booth Street West Manchester M15 6PB Telephone: +44 (0) Abstract Spain has long been a user of PPPs, with a toll road business dating back to the 1960s, and more recent investment in healthcare, light rail, high speed rail, prisons and waste/water. Its infrastructure construction companies are now world leaders in their field and its Alzira model for healthcare has been hailed as an international success story. However to date there has been little empirical financial analysis of Spanish PPPs and the context in which they operate. This paper highlights the role that critical financial analysis can play in evaluating the role of stakeholders as winners or losers in PPP policy. We conduct a rigorous analysis of the financial figures for toll roads and healthcare projects and their wider context. Our focus is on examining the private sector partners financial statements, thus addressing, in part, Hodge et al. s call (2010) to examine the private sector s role and perspective. The analysis exposes the role that politics and public subsidies have played in the outward success stories, suggesting that other countries, when comparing their traditional procurement performances against PPP successes, need to be wary and take care to examine the full story. 1

2 Introduction Global interest in the use of PPPs continues to increase, as governments, faced by both cash flow and capital funding constraints, seek to find solutions to the problems of delivering social and economic infrastructure projects in a time of austerity. Western democracies see the PPP model as attractive since it transfers costs to later periods, therefore making the policy attractive in terms of current vote-seeking, whilst additionally in many jurisdictions it keeps debt off government balance sheets. For emerging economies, PPPs are promoted by the World Bank and comparable organisations as appropriate mechanisms for delivering necessary improvements to economic and social infrastructure. International consultancy firms also promote PPPs as being a sustainable way to deliver certain welfare services such as healthcare over the long term. The figures involved are substantial PWF (2012) reports cumulative worldwide totals of $821 trillion for projects funded since 1985, with a further $684 trillion in projects at the planning stage. Significant sums of government funding are tied up in long term payments for such projects- it will typically cost around three times the original capital outlay to pay the charges over the project life, whether payment is via government or directly from users. Given the worldwide interest in PPPs and the substantial funds involved there is clearly a need for careful evaluation of operational PPPs, to ensure that they are delivering what was promised and that they remain affordable for governments over the long term. The market has now matured sufficiently for there to be a number of ex post empirical studies examining different operational aspects of PPP projects from both national and comparative perspectives, as noted by Hodge et al. (2010). There is a need for careful analysis of underlying factors, such as national characteristics or the role of government guarantees, which can easily be hidden by the rhetoric, but which can have significant impacts on project outcomes. Hodge et al. (2010, pp602ff) have identified themes relating to national culture and history, extent of public management reform, political dynamics, and concerns around value for money calculations and risk transfer. In relation to studies evaluating PPP performance and outcomes, Boardman and Vining (2012, p126) list thirty-one studies across a range of jurisdictions. However Hodge et al. (2010, p605) note that rigorous analysis is rare and that many 2

3 of these studies do not draw sufficient wider lessons learned. They go on to call for further more rigorous analysis of PPP performance of PPPs, and also note the need for an emphasis on the private partner perspective. To date there has been very little study of detailed financial performance of operational PPPs, partly because of the technical expertise required yet also due to the well-documented problems of obtaining access to sufficient financial information (Edwards et al., 2004; Jeffares et al., 2012). But such studies are needed to unpick the numerical reality that underlies much of the rhetoric around PPPs, that is, to provide evidence to show who benefits, and to what extent, from the financial investment in PPPs. The financial statements, comprising of both the primary statements (income statement, statement of financial position and cash flow statement) and accompanying notes, can provide the raw data which, when subjected to a critical financial analysis, shows how corporate behaviour can impact on different stakeholders (Shaoul, 1998). So, although such work needs to be mindful of the fact that financial statements are accounting constructs, it can help us to understand the way in which resources get divided up between different stakeholders, and how this can lead to conflict when resources are inadequate, or when contracts are written in such a way as to privilege some stakeholders over others. Our research group has used this approach in relation to UK transport (Shaoul et al., 2012) and UK PFI hospitals (Shaoul et al. 2008, 2011) to offer some wider lessons for PPP policy worldwide. We have shown how expensive the PPP policy has been, costing considerably more than public procurement whilst not mitigating risk. In addition, the extra funding required to pay for the private finance means that other public services must be curtailed. This paper aims to offer a summary of preliminary evidence based on critical financial analysis for Spain, a country with a different set of conditions to the UK in terms of legal and accounting jurisdiction and PPP implementation (Stafford et al., 2010). Spain has a long standing history of PPPs and it has exported its infrastructure companies and its healthcare model around the world. However there has been limited academic study of the Spanish case to date. There are some general ex ante style studies, such as Torres and Pina (2001), Allard and Trabant (2008), Allard and Cheng (2009) and Norton and Blanco (2009) which introduce issues around implementation, in some cases comparing Spain and the UK. In relation to empirical studies focusing on individual sectors, Dinica (2008) discusses wind power and Boxmeer and 3

4 Beckhoven (2005) examine general issues around the implementation of PPPs in a comparison of Dutch and Spanish urban regeneration projects. The most extensive work relates to the toll roads sector, where Vassallo and colleagues (cf Vassallo and Sanchez-Solino, 2007; Baeza and Vassallo, 2010; Vassallo, Ortega and Baez, 2011, 2012a, 2012b) have published a number of studies focusing on aspects of the concessions. Poor forecasting is a particular issue, also noted by Carpintero and Barcham (2012) in relation to light rail projects. Finding robust evidence about Spanish projects is not easy. Whilst financial statements for companies have become much easier to obtain through electronic filing at each regional Register of Companies, government information is not easy to obtain as there is little transparency. Carpintero and Barcham (2012), for example, tried to address financial analysis, in relation to light rail projects, but were unable to carry out any meaningful analysis due to a lack of financial information. This paper seeks to summarise and extend previous empirical work using financial statement analysis by Acerete et al. (2009, 2010, 2011, 2012; Stafford et al., 2010) on Spanish toll road and healthcare PPPs, two sectors where there is transfer of the model across jurisdictions. It draws out some themes relevant to the Spanish experience which are then developed to provide some wider lessons learnt in relation to the need for care in transferring PPP experiences across international jurisdictions. The paper proceeds as follows. Next there is some background to the legal and organisational environment within which Spanish PPPs operate. This is followed by our research methodology, and brief case studies relating to toll roads and healthcare PPPs. Finally we conclude with a summary of our findings in relation to Spain and the wider lessons for the international community when deciding on PPP models. Background to legislation, financing and governance of Spanish PPPs Spain was an early user of PPPs, with a toll road BOT-style business dating back to the 1960s. Further investment followed due to the need to keep debt off the government balance sheet post the Maastricht Treaty (Allard and Trabant 2008; Benito et al. 2008), combined with the right wing People s Party coming to power in 1996 and wishing to see greater use of the private sector in the delivery of public services. It ranks second to the UK in terms of European investment in PPPs. 4

5 Investment has included healthcare, light rail, high speed rail, prisons, waste/water and wind, in addition to further toll roads, with tenders reaching a cumulative total high of 9.7 bn in 2007 (DLA Piper 2009). A notable feature in relation to infrastructure projects has been the international rise of Spanish construction companies, who benefited from the lucky legacy (The Economist, 09/03/13) of entry into the European Union in 1986, a time when there was substantial European cash being invested. Spain s long tradition and experience of concessions in the roads and wider infrastructure sector has now been exported to countries all over the world (Albalate et al., 2009). Table 1 shows the top ten international transportation developers, of whom six are Spanish, who in total invested $200 bn in 2012 in global transport projects (PWF, 2012). Insert Table 1 about here It is difficult to determine a definitive list of PPPs as Spain does not have a public administration PPP unit, instead operating on a sector basis. Moreover, it operates a federal system of government and most PPP investment takes place at regional government level, thus information is highly fragmented. Following the financial crisis its regions have moved into greater use of PPPs for two main reasons. There is the usual rhetoric around attempting to limit costs and move away from the inefficiencies of public sector employment contracts, although our previous work has shown that this is rarely achieved in practice (Acerete et al., 2009, 2010). In addition, cash-strapped regional governments want to push more spending to the future, the rent the money argument (Boardman and Vining, 2010). These policies have been particularly predominant in those regions controlled by the People s Party, such as Valencia and Castilla La Mancha. Implementation of PPPs has not been carried out in a systematic way. Allard and Trabant (2008, p8) criticise the government s approach to PPPs as a hands off search for private financing, rather than a desire to set up the necessary structures to manage the policy, such as a specific PPP unit, model contracts, the requirement for a public sector comparator, or any method of project evaluation. The focus was instead on passing the necessary legislation to enable all public sector areas, not just 5

6 highways, to enter into PPP concessions. This was necessary because early regulation (Act 8/1972) only introduced a general legal and regulatory framework. Further legislation followed in 2003 (Act 13/2003 Public Works Concessions), which clarified the law in relation to the allocation for concession risks and elevated the concession model as the main vehicle for the development of PPP in Spain (CMS Legal Services EEIG, 2010, p123). More recently Act 30/2007 on public sector contracts includes a specific section on public works concession contracts, with the introduction of a legal definition of PPP. Some regional governments have also enacted their own legislation, thus leading to a fragmentation of PPP policy throughout the country. This is particularly noticeable in healthcare contracts, which vary across regions. Spanish PPPs have mainly been financed by bank debt, under project finance-type schemes (Gómez-Acebo and Pombo 2007, p102). Sources of finance have typically been from domestic, rather than international, banks. Even when international financing has been used on larger projects, international banks have only taken a tranche, with the majority of finance coming from the domestic banks (Gómez-Acebo and Pombo 2007, p103). Here distinction needs to be made between the national commercial banks and the regional savings banks (cajas de ahorro), as the latter are heavily involved both in PPP financing and equity investment. They are also closely connected to regional politics in ways that affect infrastructure investment decision making. Spanish savings banks were originally charitable institutions, typically operating in a geographical region, and do not have formal owners. Instead they have been governed by a Board and a General Assembly, both consisting of representation by different groups of stakeholders: depositors, local and regional governments, employees and founding institutions. They were non-profit making and governed by a separate Spanish law, which required them to invest their surpluses in works of social interest and other strategic actions to encourage regional socio-economic development. Representatives of the ruling political parties within a region could hold up to 50% of the votes in the governing body. This created the opportunity for the politicisation of corporate governance mechanisms (Ysa et al., 2012), so that politicians have been able to dominate bank strategy. Contributions to regional development thus became the overriding goal for some savings banks (García- 6

7 Cestona and Surroca 2008). As governance mechanisms have been weak, performance monitoring has also been poor (Grifell-Tatjé 2011) and this has led to some of those savings banks dominated by politicians making extremely risky investment decisions. A well quoted example is the case of Caja Castilla La Mancha, which was taken over in March 2009 by the Bank of Spain following liquidity problems relating to its investment in the Ciudad Real airport, described as a monument to financial folly (FT, 25/02/11). Understanding this relationship between the savings banks, regional politics and infrastructure investment is essential in order to understand the true risks and cost of financing of many Spanish PPPs. The financial crisis has had a major impact on the Spanish banking system. One aspect is that the downgrading of their credit rating has meant that raising finance for PPP projects has become a lot more difficult, as less finance has been available and terms for financing have altered (DLA Piper 2009). In addition, following EU stress tests in 2010 in which five out of the seven failed banks were Spanish savings banks, the Bank of Spain has required the savings bank sector to undergo a significant restructuring process, establishing a Fund for Orderly Bank Restructuring (FROB - Fondo de reestructuración ordenada bancaria) to assist with the bailout. Firstly this has seen the number of savings banks reducing from 45 to less than 10, in order to ensure that the weakest lenders merged with stronger partners for protection. Secondly, in a major organisational shakeup the banks financial activities have been completely separated from their social investment activities. The financial activities are now run by new national commercial banks, whose governing bodies and aims resemble those of corporate banks. The social investment role has been taken over by newly established foundations, with assets consisting of equity investments in the commercial banks which will deliver a much decreased dividend income stream for investment in social funding. There are several consequences to this. Firstly, this means that formally the regional element in the new national commercial banks is significantly diluted, although the extent to which informal relationships will continue is unclear. Secondly, regional governments will not be able to rely to the same extent as previously on support from foundations in social investment projects. These factors are likely to impact on the role of savings banks in PPPs going forward, and in relation to refinancing of existing schemes, as Spanish banks tend to refinance when the construction phase is complete 7

8 (DLA Piper 2009). Thirdly, the crisis has meant huge government intervention in supporting PPPs as savings banks are significant shareholders in some of the major Spanish infrastructure developers. La Caixa, the recipient of 6.5bn from the FROB 1, holds 23% of the equity of Abertis (listed at number 3 in Table 1). Bankia, the recipient of a massive 22.4bn from the FROB, holds 50% of the equity of Global Vía (number 2 in Table 1), and 50% of the equity of Ribera Salud, the main partner in healthcare PPPs. Banco de Sabadell, a commercial bank which took over a number of failed savings banks, holds the other 50% of equity in Ribera Salud and has received 5.2bn from the FROB. These strong links between government, savings banks and infrastructure companies, coupled with a history of government interventions in times of crisis, have meant there is continuing pressure and expectation that the government will step in to resolve liquidity problems. Empirical analysis of Spanish PPPs The focus of the paper is on understanding the financial outcomes of Spanish PPP projects from a stakeholder perspective. Importantly, this approach goes further than classical stakeholder theory (cf. Freeman et al., 2010), which is concerned with the extraction of financial value from organisations in such a way as to maximise financial value as much as possible for all stakeholders. This is of course impossible to achieve in practice, as one stakeholder s gains must necessarily be at the expense of another group (Shaoul, 1998). This paper therefore adopts Shaoul s definition of the stakeholder in accounting terms as one who has a claim on the distribution of revenues (Shaoul, 1998:241). Given that there are competing claims for revenues from the various stakeholders, who include government, private sector, financiers, users and taxpayers, relevant agents must therefore make decisions about which stakeholders are privileged over others. This type of analysis therefore attempts to engage with practice and methodology in the way called for by Chapman et al. (2009) through locating financial analysis in its social and institutional context. 1 Source: accessed 21 May

9 The critical financial analysis approach adopted in this paper therefore examines financial statements for the years 2008 to 2011 to provide a more detailed study of the empirical material in terms of hard numbers. Up until 2007 financial statements were prepared in accordance with national Generally Accepted Accounting Principles (GAAP), but in the period under review Spanish adaptation of international GAAP was used between 2008 and 2010, and in 2011 a new toll road sector-specific variant of the Spanish adaptation of international GAAP was applied. Since the Spanish government has yet to address issues of fiscal transparency raised by, for example, the OECD (Heald 2012), the focus is necessarily on the private sector financial statements, that is, those of the relevant special purpose vehicle set up for the concession. The majority of these are constituted as public or private limited companies which are subsidiaries of larger organisations, thus giving shareholders the opportunity to ringfence liabilities, but some early healthcare PPPs have used joint venture bodies instead. In addition, other publicly available documents from both the private and public sectors and relevant press reports are drawn upon. Financial statements have been collected from the relevant Register of Companies. For toll roads, some concessions operate more than one road, but prepare their financial statements at concessionaire level, hence this is our unit of analysis. Our sample is 21 concessionaires that account for 90% of the length of Spain s toll motorways and 80% of the concessionaires. They have all been in operation prior to For healthcare, we focus on the integrated Alzira model, where the private partner provides both clinical services and facilities management. Our sample consists of five projects which all have Ribera Salud S.A. as their parent, as sufficient financial statements for others are not yet publicly available. The earliest two are constituted as joint ventures, whilst the three more recent cases are private limited companies. We discuss the background and context, followed by some preliminary updated analysis and findings of our previous work, of each sector in turn. Toll Roads Spain s experience with toll roads is characterised by government intervention over and above terms laid down in contracts. As already indicated, a close relationship 9

10 exists between the relevant infrastructure companies and the government, and the companies have successfully lobbied over the years for beneficial accounting and financial treatment. In relation to accounting treatment, Stafford et al. (2010) found that the technical accounting support provided through a sector-specific standard has provided real economic benefit to the toll companies, as expenses can be deferred during the early years of the contract. Further support has been given through ad hoc asset revaluations. For finance there have been benefits in the form of loans, subsidies, guarantees and bailouts over a long period of time. When Spain s toll road programme began in 1967 with the publication of a plan to construct 3,160km of new highways 2, there was significant government support, with almost every risk being borne by government, and government guarantees for foreign loans and exchange rate risk (Bel and Fageda, 2005). Economic problems in the 1970s and early 1980s meant that the government stepped in to rescue the concessions when they became financially unviable (Engel et al. 2002), thus setting a precedent for government intervention. A period of road building based upon conventional public procurement followed. After the adoption of the Maastricht criteria that constrained public expenditure based on debt financing, and the return of the right wing People s Party in 1996, the government and the regional authorities once again turned to the private sector and toll roads as a means of financing the construction of new roads.once again however, this included extensive government support, and acknowledgement that many of the new toll franchises required huge public subsidies due to low traffic projections. Renegotiation of extensions to the existing agreements occurred without entering into competitive bidding. Bel and Fageda (2005) cited Izquierdo (1997), who claimed that half of the projected highways in the first phase of the programme required subsidies ranging from 40-65% of the total investment. Toll highways are governed by statute and fall within the remit of the Ministry of Public Works, which is responsible for public works and transportation, but is not a specific regulatory body. Bel and Fageda (2005) state that prices were set at financial close but have since been renegotiated on an individual basis. They are also subject to 2 Programa de Autopistas Nacionales de Peaje (National Programme of Toll Highways ). 10

11 a formula for yearly price adjustments based on the retail price index that takes no account of quality of service, maintenance, or additional lanes 3. With strong traffic growth in the late 1990s, profits rose and in 2001 in response to public pressure, the formula was amended to include traffic volumes and a cap as a way of sharing excess profits. Since then charges have risen by 3% or more a year 4. Concessions awarded before 1988 are less constrained by price cap regulation, and Albalate and Bel (2009) find that in the case of the two oldest concessions, the increase in traffic volume has led to user overpayment and increased company profits. We (Acerete et al., 2009) analysed the financial statements of concessionaires and found that, in addition to the public support provided which creates risk for taxpayers, the cost of finance is nearly double that of public finance. Interestingly, despite the long toll road history, several regions have also entered into contracts for shadow toll roads mimicking the UK payment system (Pina et al., 2003). This enabled necessary improvements to the road network required for economic growth without either contravening the Maastricht criteria or imposing unpopular new direct tolls on the motoring public (Benito et al., 2008). The tariffs are set out in the contract, but are not in the public domain, and are not subject to the formula for annual adjustments applicable to the other post 1988 private toll roads. Our study (Acerete et al., 2010) comparing Spanish toll and shadow toll roads with UK shadow toll roads confirmed the high cost of finance, showing that in 2003 the returns to providers of finance were 55% of toll road income and 65% of shadow toll income, comparable to the UK figure of around 60%. We concluded that the use of private finance in roads was a classic example of privatising the benefits and nationalising the costs (ps59). Since the financial crisis the Spanish toll road sector has run into considerable financial problems. Curcio (2013) lists four reasons for this: Free state highways around the Madrid area were upgraded using EU funds, thus taking traffic away from the tolled radial routes 3 Real Decreto 210/1990, sobre el procedimiento de revision de tarifas de autopistas de peaje (Royal Decree 210/1990, procedure for revision of toll highways tariffs). 4 Art. 77, Ley 14/2000, de medidas fiscales, administrativas y de orden social (Law 14/2000, fiscal, administrative and social issues). 11

12 Planned tourist developments on the Mediterranean coast did not take place, therefore traffic levels did not rise to meet forecasts Public and private sector pay cuts of up to 20%, combined with rising fuel costs, has led to a 30% fall in average traffic on mature toll roads A change in the land compensation formula has increased valuations by up to 20 times. However Baeza and Vassallo (2010) argue that there is a history of over-estimation of traffic forecasts for Spanish contracts, finding actual traffic to be 62% less than forecast for old toll motorways ( ) although this improved to 25% less than forecast for toll roads since Such over-estimation is a common problem throughout Europe (Bain, 2009). The fact that Spain does not have a robust procurement system for PPPs has meant that some toll road routes were never likely to be viable, and Spain has been criticised for its over-investment in uneconomic infrastructure (AFP, 29/10/12). The low level of traffic compared to forecasts, plus the problems listed above, has meant that once again the government has intervened with plans to nationalise 10 concessions in A state-owned highways agency is to be set up which will guarantee outstanding bank loans of 5.6bn, paying 3.5% on the mostly 30 year debt, funded through tolls on the nationalised toll roads, for which the concession periods will be extended. Parent companies, including Abertis, Acciona, Cintra, Sacyr, Globalvia and ACS, have lost their equity stakes in these concessions (PWF, 2013). In an update to previous work (Acerete et al. 2009, 2010) we have carried out a preliminary analysis of the four most recent years of available comparable financial statements for toll road concessionaires (see Table 3). Due to the changes in GAAP referred to above, we analyse years , prepared under the Spanish adaptation of international GAAP, separately from year 2011, prepared under the new toll road sector-specific variant. Years show falling revenues, profits and equity, with fluctuating interest expenses and steadily rising debt. Finance expenses as a percentage of overall debt range from 11-13%, lower than the 17% we reported previously (Acerete et al., 2010). Our analysis for 2011 is still ongoing. There is a 4% improvement in revenues over 2010, and profit for the year is 74% higher, 12

13 although this is artificially high, due to an exceptional item for ACESA, one of the concessionaires. Finance expenses have increased both in absolute terms and as a percentage of revenue at 14.4%. In part this is because debt continues to rise but interest rates are also rising as concessionaires struggle to find finance deals. Insert Table 3 about here What is significant, however, is the continued level of retained profit margin and the return on equity percentages, especially given that the number of concessionaires delivering losses worsened from four in 2008 to seven in The aggregates figures remain very high for both 2010 and 2011, at 34% and 57% respectively for retained profit as a percentage of revenue and 11.0% and 20.1% respectively for return on equity. This provides evidence that contract terms have been very favourable for some concessions over many years. In summary, the toll road sector is dominated by powerful well-connected international companies, some of whom are entwined with regional savings banks. They have benefited from preferential accounting treatment in Spain, which, prior to the implementation of IFRS, gave them real economic benefits. Recently they have succeeded in lobbying to retain such benefits for their national concession companies. Our analysis shows that very healthy rates of profit are being earned on these contracts for the sector as a whole, although some individual concessionaires have struggled due to poor planning decisions, over-optimistic forecasts and the austerity crisis. Companies and consortia have entered into contracts with very optimistic traffic forecasts which have led to the building up of 7bn of debt. Once again the Spanish government has intervened to assist with a massive bailout. Although the international holding companies have lost the equity invested in these concessionaires, as liabilities were ringfenced at concessionaire level there was no further impact. We would speculate that overall these companies have benefitted, as they have been able to take out higher cash dividends from these concessions in the past, on the back of favourable accounting treatment to permit this. We are currently undertaking further analysis to test this hypothesis. 5 The change in basis of financial reporting in 2011 meant that only three concessionaires showed losses in

14 Healthcare Spanish healthcare PPPs have a much more recent history than toll roads. In 1997 legal changes were made in the Ministry of Health firstly to enable the separation of financing, purchasing and provision of health services, and then to enable the private sector to be involved in the provision of free and universal public healthcare 6, with the requirement that a healthcare services company was one of the members of the partnership. This meant that for the first time the private sector could enter into contracts to self-manage hospitals. The right wing Valencian regional government was the first to take advantage of this new opportunity, entering into an administrative concession in 1997 with a joint venture consortium, made up of a healthcare services company, three regional savings banks and two construction companies (see Figure 1), to construct and operate the Alzira hospital. This first project, opening in 1999 and known worldwide as the Alzira model after the town where it is located, thus predates the more widespread and well known PFI hospital model. A significant difference is that whereas the PFI typically does not involve clinical services, in the Alzira project the government has entered into a long term contract for up to twenty years, with the operator designing, building, financing, operating and managing both the clinical and non-clinical services at the new hospital and the specialized health care of the corresponding health area. Payment in the Alzira model is through an inflation linked capitation fee, that is, an amount per year per resident of the health area, standing at 660 for 2013, paid whether or not residents attend either the hospital or primary healthcare facilities during the year. Insert Figure 1 about here The Valencian government have been extremely pleased with the performance of Alzira, claiming that it costs around 25% less per capita than the publicly managed hospitals (Bes, 2009) and there has been overwhelmingly positive promotion of the Alzira model as an international success story increasingly focused around the need to transform traditional models of public healthcare provision to ensure 6 Ley 15/1997, de 25 de abril, sobre habilitación de nuevas formas de gestión del Sistema Nacional de Salud. 14

15 sustainability of services in the future (Rechel et al., 2009; TGHG, 2010; PwC, 2010). We carried out critical financial analysis of the financial statements and examined other relevant documents, using a narrative and numbers approach (Acerete et al., 2011). Initially the contract, covering the provision of hospital services only, was unviable, leading to a government bailout, just six years after the concession was granted, and new contract in The contract scope was extended to also include the primary healthcare services for the surrounding healthcare area, thus passing control of patient referral to the private sector partner. This feature has been overlooked in many studies, and may not be transferable across jurisdictions. In addition, the payment mechanism for calculating the capitation fee was revised to link it to the (at the time) more generous increases in the Valencian health budget, rather than the Consumer Price Index. These changes led to the contract becoming viable from 2003 onwards. The Valencian Regional Audit Office (2002) was highly critical of the government s role in the contract renegotiation, as although a premium was paid by the private partner for the new contract, the government paid compensation for lost profit on the first contract. In addition, the strong political influence exerted by the Valencian government over the regional savings banks shows that in this case the regional savings banks not only provided equity capital (at 25% in total it is well above the usual proportion of 1-5% for PPP projects), but also supplied debt at preferential rates of interest to the private sector partner, in some years below the equivalent rate of interest for a Spanish public debt 10 year bond. The result has been further obscuring of the full cost of the PPP. We identified several problems that are generic in relation to the global privatisation of healthcare PPPs (Acerete et al., 2012), now updated (El País, 06/01/13). First, some of these savings are due to changes in labour contracts and staffing. The private sector contracts of employment have worse terms and conditions, including less job security, lower pay scales and longer working hours. An ex-director of Capio (now called IDC), the other healthcare PPP player in Spain, explained that this creates productivity increases of around 20-30% over the public sector (El País, 06/01/13). Second, there is an incentive for these PPP managers to cherrypick the most profitable medical and surgical specialities. Third, there may be costs which are still 15

16 borne by the public sector, such as out-patient pharmacy and transport. Finally, there may be invisible monitoring costs paid for by the public sector. These issues lead to an understatement of the full cost to the public purse of providing healthcare services accessible to all. Although there was a long gap until the next healthcare project using the capitation model opened in 2006, by 2012 there were seven healthcare PPPs open in Spain, with another two healthcare PPPs under construction (see Table 4). Further existing public hospitals are likely to be transferred to private operator healthcare PPPs as regional governments implement austerity cuts. There are also nine PFI hospitals open, with three more under construction. It is notable that all regional governments interested into entering into these private finance arrangements for new hospitals are those dominated by the People s Party (Galicia, Castilla-León, Castilla-La Mancha, Balearic Islands). Insert Table 4 about here Unlike the UK, where standard contracts are now available, and Australia, where contracts, albeit with some information redacted, are publicly available for download from state websites, in Spain it can be difficult to find reliable contract information. This means that determining the scope of the various contracts requires care, as there can be significant differences. For example, at first sight it is difficult to recognise that the healthcare PPPs contracts in the Valencian region cover both primary and specialised healthcare, whilst those in Madrid cover hospitals only. It is also unclear as to what clinical expenses may or may not be included in the contract, for example, some contracts list oxygen therapy, outpatient pharmacy, transport and transplants as specific exclusions whilst for other contracts it is unclear what is and is not excluded. These differences exist because regions are free to develop their own PPP policies. We have been unable to find any evidence relating to how the Valencian regional government determined its policy. In relation to Madrid, the Regional Audit Office (Cámara de Cuentas de las Comunidad de Madrid 2010) has been critical of the lack of government explanations as to its choice of healthcare provision, stating that whilst there are viability studies available to justify the need for the projects, the government has not provided any evidence to explain how they justified both the system chosen and the form of financing it. It states: 16

17 All in all, the Administration hasn t provided evidence which, in terms of economy, efficiency and effectiveness, analyses the terms of the different management models, comparing them against each other as well as against a publicly funded hospital. (our translation) Our previous analyses (Acerete et al., 2011, 2012) speculated that after 2008 the Alzira hospital contract would become less profitable, due to austerity cuts. This is because, according to the contract, the annual increase in the capitation charge should be equal to the increase in the Valencian government healthcare budget, although there are two caveats - it cannot be less than the CPI and it cannot be more than the annual increase in central government consolidated healthcare expenditure. Table 5 shows the substantial increases in the early years have now been replaced by very small annual increases. This means that there is unlikely to be sufficient cashflow generated to pay back the investment made by the SPV in both primary and secondary healthcare facilities. Such a situation increases the political risk to the Valencian government, as its readiness to bail out the first contract together with its close political links with the regional savings banks indicate very clearly that rather than risk transfer being achieved, there is instead a political lock-in of the regional savings banks to the long term investment, which in turn is supported by government. Insert Table 5 about here Table 6 shows selected figures for the years drawn from the notes to the financial statements of Ribera Salud S.A., in relation to the Alzira hospital. As predicted, profits as a percentage of revenue are falling, as is return on equity. This is despite annual decreases in the amount of debt and hence finance expenses. Table 7 shows the contrast between the figures for Alzira, and figures for other healthcare PPPs with significant ownership by Ribera Salud for the year These all show extremely high levels of debt and the three newer subsidiaries, Elche, Manises and Torrejón, are unable to deliver profits. Given that Ribera Salud, as stated above, is 50% owned by Bankia, created as a result of government bailout of the savings banks, these are projects that continue to carry both risk and ongoing cost for the government. 17

18 Insert Tables 6 and 7 about here Whilst the government bailouts seen with toll roads have been very public, the extensive political involvement in healthcare is less visible. We have commented (Acerete et al., 2011) on the way in which the Valencian government still went ahead with the initial Alzira model, even though it was never going to be viable, and then used the opportunity of a new contract in 2003 to extend the scope to include primary care of the surrounding healthcare area, increase the capitation fee and link future increases to the more generous increases in the Valencian health budget. The Valencian Regional Audit Office (2002) was highly critical of this action. Moreover the UK NHS Confederation, which made a study visit to the Alzira hospital in 2011, was concerned about this level of political involvement, commenting that: Study visit participants were concerned that to a certain extent the representatives of the Valencia community administration were very close to the concession holders, which could reduce the effectiveness of the oversight they were providing. (NHS Confereration 2011:15) The lack of public accountability about these PPPs is therefore a concern. There are no publicly available formal reports on performance. In relation to monitoring, the NHS Confederation (2011:15) reported on the Alzira model that in this model, the commissioner confines the contract to the specification of outcome measures and only a small number of process measures. They also note that the regional health department s formal powers are more limited than is the case in the UK. There is no systematic way of finding any scrutiny about the policy or contracts. In our financial analysis of the Alzira model (Acerete et al., 2011), we were only able to find reference to that contract, for the years 1999 to 2004, in the reports from the regional auditor about the health care programs of the regional health department, by carrying out extensive searches on its website. Further information was obtained through contact with a relevant trade union, Sindicato de Médicos de Asistencia Pública (SIMAP), and through examining press articles rather than from official government websites. Since financial statements for public hospitals are not publicly available, it is not possible to carry out comparisons between the healthcare PPPs and other hospitals. 18

19 Such an evaluation is necessary in order to fully assess whether these healthcare PPPs are able to deliver full clinical and facility management services without creating large affordability and risk issues for the government, which is under pressure to move to a much more market-based system, as called for by the Fundación Bamberg (2011) amongst others. This is not a new finding nor is it unique to Spain. We found a similar lack of transparency of information and insufficient evaluation when comparing the Alzira PPP to other similar healthcare models in Australia, Portugal and the UK (Acerete et al., 2012). However it is a concern when there are calls from PPP proponents such as TGHG (2010) and PwC (2010) to implement this model in developing countries without evidence of the true cost of such projects. The World Bank and IFC have in fact invested $120m in a healthcare PPP, built and run by the South African private healthcare operator Netcare, in Lesotho which opened in This will cost the Lesotho government an annual $33m index-linked unitary charge, a 100% increase over previous provision, and a third of its health budget for the year, meaning that primary healthcare budgets for its rural population will need to be slashed, whilst profits are earned by Netcare and its sister organisation, who remain unaccountable due to a lack of government oversight mechanisms (Lister, 2011). Such action does not fit well with claims that PPPs can create sustainable healthcare systems. In summary, the Alzira healthcare PPP was able to deliver cheaper healthcare because it negotiated a favourable contract in relation to Valencian government healthcare budgets, at a time when public healthcare budgets were rising rapidly. It was able to generate savings on labour costs, coupled with cherrypicking of other profitable services, which meant that overall costs were around 20% cheaper than public hospitals. However more recent hospitals have been unable to replicate this success. Healthcare budgets are now less generous, and opportunities for all small regional hospitals to cherrypick are limited. However, given that in reality these hospitals are being financed to a great extent by public funds, since Bankia is a major investor in Ribera Salud, the government has not relinquished any responsibility. As with toll roads, strong political links, through the savings banks and developed over a long period of time, mean that although management control has passed to the private sector, financing and funding responsibility remains squarely in the public sector. 19

20 Discussion and conclusions This paper has sought to show how critical financial analysis of Spain s experience in relation to two sectors of international significance in PPPs toll roads and healthcare can add to our overall understanding of how PPPs work in different jurisdictions. Taken as a whole, our approach shows that financial analysis can provide robust evidence about the operation of PPPs. This close examination of the numbers, notwithstanding their nature as accounting constructs, provides evidence that is the most objective available as it delves beneath the rhetoric of PPPs. In relation to Spain s experience, what is notable, and largely unreported in the literature, is the role played by the Spanish savings banks. They have had continued involvement in financing toll road and healthcare projects, without necessarily undertaking rigorous project assessment due to their political objectives of delivering projects of social value to their regional communities. However, this failure to apply sensible economic principles to projects, coupled with poor forecasting techniques, has led to significant government intervention in bailout and support funds, most notably in relation to the nationalisation of ten toll roads and the financing package to set up Bankia. But there are two further structural issues which characterise the Spanish case. Firstly there is a long-standing cronyism between the government, particularly members of the People s Party, and the big corporations, which has created an environment characterised by scant innovation; insufficient investment in human capital, and research and development; fiscal irresponsibility, among the rich and big corporations; and weak corporate governance (Pascual-Ramsay, 2013). This relationship has fed the expectation in Spain that the government will intervene, as it has done, repeatedly in the case of toll roads, whereas in countries such as Australia there is more acceptance that the private sector partner will bear the costs when projects fail. Secondly there has been a failure over many years to reform the working conditions of the public sector civil service, so that the gap between public and private sector working conditions is larger than in many other western countries. This has fuelled the international myth that the Alzira model can deliver significant cost savings 20

21 compared to public hospitals. As our preliminary analysis of the successors to Alzira shows, generating profits from a contract based on a much less generous healthcare budget, even with productivity gains, is difficult when finance costs on investment have to be paid as well. Spain is now taking its use of healthcare PPPs to new levels. Due to the austerity budget which is imposing a 1bn cut in the Madrid budget, further public hospitals are being converted to healthcare PPP models based on fixed amount contracts in order to save costs. This means that clinical services, and the employees associated with delivering them, are transferred to private management, a move which has led to strikes in Madrid. And the move to private management severs the link between government oversight of services other than healthcare, as management now have full control over all aspects of running a hospital. There has been comment (El País, 06/01/13) over the Ryanisation of healthcare, as operators such as Capio (now called IDC), talk of moving to a low-cost model where, although clinical services will be delivered free of charge, other services such as catering will need to be paid for by the patient. The growing involvement by private equity companies in healthcare PPPs will drive this agenda faster, given their objective to derive maximum capital gain from projects over a relatively short period of time. In related work on UK transport (Shaoul et al., 2012) we have argued that the case for PPPs offering better efficiency and risk transfer has not been made, rather the real effect has been the redistribution of wealth to companies and financiers. Our work analysing Spanish toll roads and healthcare projects highlights that PPP projects do not yet demonstrate a stable form. Spanish companies involved in toll roads have taken their expertise to the US, Canada and South America in particular, but this expertise has been won at a cost to the European taxpayer, as the Spanish toll road industry has been characterised by government bailouts and EU subsidies. The Spanish healthcare model is being promoted to developing countries, but in Spain its long-term profitability is not yet established. We argue that there is a need for much more and better collection of cost and profit data from existing projects, together with transparent evaluation and comparison on a like-for-like basis, as far as possible, with public projects. In addition there is a need 21