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Lesotho: "Model" Project Drains Health Budget

AfricaFocus Bulletin
April 14, 2014 (140414)
(Reposted from sources cited below)

Editor's Note

A new hospital in Lesotho, touted as a model for public-private partnership by the World Bank's International Finance Corporation (IFC), is already draining the country's health budget and diverting resources from rural health, charges Oxfam International in a new report released on April 7. Cost overruns, high earnings by the private partner, and clauses imposing additional financial risks for the government offset the advantages of the new hospital in improved hospital care in the capital Maseru, the report contends.

While this issue is particularly critical for Lesotho, the implications, Oxfam notes, are far broader. The IFC is that part of the World Bank system most dedicated to pushing expanded roles for the private sector, without considering the possible negative effects or compatibility even with development strategies advised by other parts of the World Bank. In contrast, Oxfam argues, the costs and risks as well as potential benefits of any public-private partnership should be carefully and transparently evaluated. The record of the Lesotho project is a prime example of the failure to do so.

For a summary article on this Oxfam report, see http://allafrica.com/stories/201404081107.html

For previous AfricaFocus Bulletins on health issues, visit http://www.africafocus.org/healthexp4.php

For previous AfricaFocus Bulletins on Lesotho, and other information links, visit
http://www.africafocus.org/country/lesotho.php

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A Dangerous Diversion

Will the IFC's flagship health PPP bankrupt Lesotho's Ministry of Health?

Oxfam International

http://www.oxfam.org/en/policy / direct URL - http://tinyurl.com/ngwn5be

The Queen 'Mamohato Memorial Hospital was built to replace Lesotho's old main public hospital under a public-private partnership (PPP) - the first of its kind in a low-income country. The PPP signed in 2009 was described as opening a new era for private sector involvement in healthcare in Africa, and was seen as the International Finance Corporation (IFC)'s flagship model to be replicated across the continent. Instead, the Ministry of Health in one of the poorest and most unequal countries in the world is locked into an 18-year contract that is already using more than half of its health budget (51 per cent), while providing high returns (25 per cent) to the private partner. This is a dangerous diversion of scarce public funds from primary healthcare services in rural areas, where three-quarters of the population live. Lesotho's experience supports international evidence that health PPPs of this kind are high risk and costly, and fail to advance the goal of universal and equitable health coverage. The IFC should be held to account for the poor quality of its advice to the Government of Lesotho and for marketing this health PPP as a success internationally, despite its unsustainable costs.

1 Introduction

The Queen 'Mamohato Memorial Hospital, which opened in October 2011, was built to replace Lesotho's old main public hospital, the Queen Elizabeth II (QE II) Hospital, in the capital, Maseru. It is the first of its kind in Africa - and in any low-income country - because all the facilities were designed, built, financed, and operated under a public-private partnership (PPP) that includes delivery of all clinical services. The PPP was developed under the advice of the International Finance Corporation (IFC), the private sector investment arm of the World Bank Group. The promise was that the PPP would provide vastly improved, high-quality healthcare services for the same annual cost as the old public hospital.

Today, the PPP hospital and its three filter clinics:

  • cost $67m per year - at least three times what the old public hospital would have cost today - and consume more than half (51 per cent) of the total government health budget;
  • have 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;
  • are diverting urgently needed resources from primary and secondary healthcare in rural areas where mortality rates are rising and where three-quarters of the population live. 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);
  • are expecting 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;
  • are 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.

Lesotho, a small, mountainous land-locked country surrounded by South Africa, faces enormous development challenges. One of the most unequal countries in the world, the Gini coefficient is 0.531 and the richest 10 per cent of households account for more than half of total consumption. More than 57 per cent of its population (the Basotho) live below the poverty line. Poverty is 50 per cent higher in rural areas than in urban areas.

Lesotho has the world's third highest burden of HIV and AIDS, with prevalence 26 per cent for women and 19 per cent for men. Life expectancy has fallen from 60 years in 1990 to just 50 years in 2011, and infant and maternal mortality rates are rising. Underfive mortality is 40 per cent higher for the poorest quintile than for the richest, and the variations in mortality rates between those living in the capital region and those in rural areas are as wide. Poor households are less likely to seek healthcare, citing cost and distance as the major barriers; 25 per cent of the poorest quintile and 25 per cent of people who live in rural areas have more than three hours to travel to their nearest health facility.

The need to address poverty and extreme income and health inequality in Lesotho could not be more urgent. Oxfam's recent research has highlighted the powerful role that free, universal and equitable public health services can play in reducing inequality in rich and poor countries alike. The International Monetary Fund (IMF) agrees that spending on health and education is critical to achieving economic growth and tackling inequality. The World Bank Group itself is guided by two clear goals - to end extreme poverty and promote shared prosperity - and its President, Jim Yong Kim, has repeatedly emphasised the central role played by universal health coverage (UHC) and equity in health in achieving these goals.

To advance UHC and redress health inequity, the World Bank has recommended that Lesotho prioritise health and nutrition in the heavily under-resourced rural areas. The government's ten year health sector reform plan in 2000 - partly funded by the World Bank's International Development Association (IDA) - emphasised the need to improve essential health interventions in under-served areas. While few questioned the need to radically refurbish or replace the capital's dilapidated public hospital, a World Bank document did raise questions about the cost effectiveness and equity of the proposal, citing evidence that it is generally the wealthier in society, and men rather than women, who make heaviest use of expensive hospital services.

Given this context, and the fact that it appears that alternative public financing options were available and should have been further explored with the Government of Lesotho, it is very worrying that the IFC was able to pursue such a costly and risky strategy for replacing the old national hospital.

2 The Lesotho Health PPP

...

Some form of PPP exists in almost every national health system. The most common example is the sourcing of medical products from the private sector. This paper examines a particular type of health PPP - the construction of a health facility and ongoing provision of services by a for- profit private partner within a public system of provision.

...

In 2009, the PPP contract was awarded to Tsepong Ltd, a consortium led by Netcare - a private South African hospital operator and a major multinational company - and a group of local economic empowerment shareholders.

Under the PPP, Netcare is contracted to treat all patients presenting at the Queen 'Mamohato Memorial Hospital, up to a maximum of 20,000 inpatients and 310,000 outpatients annually. Patients pay the same user fees as they would in any public facility. Certain services such as transplants, elective cardiac and vascular surgery, chemotherapy, and radiotherapy are excluded from the contract for reasons of affordability.

...

In return, the government pays an annual unitary fee that covers capital repayment and service delivery costs. The fee should be adjusted only for inflation or if additional services beyond those in the contract are agreed and incorporated. ...

Well before the PPP contract was signed, the IFC, as transaction advisor to the Government of Lesotho, said it was a major success, proposing it as a model for other countries to replicate.

...

Despite a significant body of evidence highlighting the high risks and costs associated with health PPPs in rich and poor countries alike (see Section 5), similar IFC-supported health PPPs are now well advanced in Nigeria, and in the pipeline in Benin. ...

The IFC has consistently highlighted its own role as transaction advisor to the Government of Lesotho for the health PPP, for which it earned a 'success' fee of approximately $720,000 when the contract between the government and Tsepong was signed. The central role of the IFC - which included acting on behalf of the government in the planning, tendering and contract negotiation and agreement - was confirmed by all of the Lesotho health PPP stakeholders interviewed for this report.

...

3 How the Project has Failed to be Cost Neutral

Far from being cost neutral (the main selling point of the PPP), soon after the new hospital opened in 2011, one health PPP academic and journalist, John Lister, used the limited data that were available to suggest that costs for the new privately run hospital were already double that of the old public hospital. Lister also identified several unfavourable terms in the PPP contract that left the government exposed to escalating costs in the future.

Calculations commissioned and published by the IFC confirmed that in 2012/13, the annual cost of the new hospital was between two and three times the costs of the old hospital. In its most expensive year before closure, in 2006/7, the old hospital cost 28 per cent of Lesotho's total health budget. In 2012/13, the new private hospital cost $45m - more than 41 per cent of the total health budget. ...

Figures made available by the Lesotho Ministry of Health suggest that in 2013/14 the cost of the new private hospital has escalated further to between 3 and 4.6 times what the old public hospital would have cost today. The figures suggest that the PPP now consumes as much as 51 per cent of the total health budget, or $67m per year. The real cost of the new privately run hospital is already nearly two and a half times the amount that was agreed as affordable between the Government of Lesotho and the IFC before the contract was awarded.

...

One government minister Oxfam spoke to confirmed that the PPP is 'eating more than half of the health budget' and is 'hitting the government hard'. ... Costs are predicted to spiral further. For 2014/15, the government allocation for the PPP had already been exceeded by costs submitted by Tsepong before the new financial year started.

...

While costs of the PPP escalate for the Government of Lesotho and Basotho taxpayers, the financial model for the Lesotho PPP confirms that the IFC helped to structure a contract projected to generate a 25 per cent rate of return on equity for Netcare and the broader Tsepong shareholders. This compares with a norm of between 13 per cent and 18 per cent equity return on similar hospital Private Finance Initiative projects in the UK - a rate already considered to be highly profitable.

...

Factors contributing to rising costs

[see full report for detailed explanation]

Implications for the rest of the health system

There is no doubt that costs for the Lesotho health PPP are rising at an unsustainable rate. In an effort to fulfil its legal obligation to meet these costs, the Government of Lesotho has proposed an extraordinary 64 per cent increase in the total health budget over the next three years. Such commitment to increased health spending would normally be celebrated. However, in this case, at least 83 per cent of the proposed increase can be accounted for by the budget line that covers the health PPP. And as a senior Ministry of Health official confirmed: 'The main reason the budget is increasing is because of Tsepong.'

With such severe skewing of the budget, detrimental impacts on other national health and development priorities are unavoidable. While the total health budget is set to increase by 64 per cent by 2016/17, agriculture and education will experience a cut in real terms, with below inflation rises of just 14 per cent and 7 per cent respectively over the same period. The ramifications of this are likely to be significant; as the Minister of Development Planning said: 'Health is increasing but this will be at the expense of something else. We may be able to treat people if they get ill but we will not be able to ensure they have enough to eat.'

The resource squeeze for rural health care

Lesotho is off track to meet its health-related Millennium Development Goals (MDGs), and there is agreement that while more spending is important, reversing the country's poor progress in health and advancing equitable universal health coverage requires prioritising investment in primary and secondary health services in rural areas, where more than three-quarters of the population live.

...

'Not enough money goes into primary health care and the biggest budget has always gone to QE II. It is worse with the new hospital, which takes even more. If primary health is meant to be the cornerstone of our health system, you think this should take priority rather than it being the other way around.' - Dr Ntsekhe, Manager of Senkatana Clinic

For example, the maternal mortality rate in the capital Maseru is four times lower than the national average. So while it is encouraging that the new PPP hospital is reporting a 10 per cent reduction in maternal mortality, there is an urgent need for more resources to address the significantly higher numbers of pregnant women who die in poor rural areas for want of access to antenatal care, skilled delivery attendance, and emergency obstetric care.

...

Government health expenditure was already skewed towards tertiary, urban-based care. The health PPP has dramatically exacerbated this inequitable trend by absorbing over half of the Ministry of Health's budget in 2013/14, up from 28 per cent for the old public hospital in 2006/7. The Christian Health Association of Lesotho (CHAL) runs approximately 40 per cent of the country's health facilities, predominantly in rural areas. Yet in 2013/14, the government allocation to CHAL was equivalent to just over a quarter of that spent on the health PPP.

...

Supporters and critics of the health PPP interviewed for this report agreed that the poor state of the rest of the health system and lack of investment in primary healthcare is encouraging those sick patients who can afford to travel to the capital to seek care at the new hospital. This problem is only set to get worse, as the PPP consumes ever-increasing amounts of the national health budget. The Minister of Planning and Development has said that in hindsight, 'the new hospital should have been part of a broader package of investment to upgrade the entire health system'.

The proposed 'cost neutral' health PPP is now 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 Netcare to treat them - a plan that was announced in the budget speech in February 2014.

The biggest losers of the health PPP in Lesotho are the majority of Basotho people who live below the poverty line in poor rural areas, who have little or no access to decent healthcare. As the country's health financing crisis escalates, the option of reintroducing and increasing user fees at primary and secondary level facilities has already been tabled for debate. Such a devastating and retrograde move in Lesotho would further exacerbate inequality and increase rather than reduce access to healthcare for the majority of the population.

...

6 Conclusions and Recommendations

The Lesotho health PPP has been described as opening a new era for private sector involvement in health care in Africa. Instead, the Ministry of Health in one of the world's poorest and most unequal countries is locked into an 18 year contract which already consumes 51 per cent of its budget. Far from being cost neutral, government spending on the IFC's flagship health PPP is spiralling; drawing resources away from other urgent healthcare needs and exacerbating health inequalities across the country.

Lesotho's experience supports the international evidence that health PPPs can be extremely high risk and costly, and strongly suggests that they should be avoided, especially in low-income, low-capacity contexts where they constitute a threat to the entire health system. Instead, lessons should be learnt from successful countries making most significant progress towards universal health coverage, all of which rely heavily on public financing and delivery of healthcare. As such, explicit preference should be given for financing health infrastructure and services via lowercost publicly channeled financing. This could include concessional and non-concessional multilateral and bilateral funding.

IFC should be held to account for the poor quality of its advice to the Government of Lesotho and for marketing this health PPP as a success internationally, despite its unsustainable cost.

Oxfam and the Lesotho Consumer Protection Association make the following recommendations.

In Lesotho

The World Bank Group should:

  • finance and publish a fully independent and transparent expert financial audit and broader review of the Lesotho health PPP in partnership with the Government of Lesotho, including a presentation of the full range of options available to remedy the negative impact of the partnership. The review should cover, but not be limited to options for contract renegotiation, termination and mitigation in order to reduce costs to the government. The World Bank Group should finance independent, not IFC provided, advice and support to the Government of Lesotho in this process if requested;
  • scale up funding to support the Lesotho Ministry of Health to uphold and fully implement its commitment to revitalise primary healthcare and especially to rapidly increase the number of nurses, doctors and other health workers.

The Government of Lesotho should:

  • fully implement its commitment to revitalise primary healthcare, prioritising investment in rural areas where more than threequarters of the population live;
  • build and strengthen the capacity of the Ministry of Health and Ministry of Finance to manage the PPP contract and reduce cost escalation as effectively as possible. This should include supervision of Tsepong's performance and ensure that financial penalties are applied when standards fall. Tsepong should be held to account for its obligation to operate the PPP hospital as a fully functioning teaching hospital;
  • create a platform to actively engage civil society in monitoring and evaluating service delivery at the PPP hospital and across the health sector more generally;
  • publish a full financial statement and explanation of costs of the PPP to date, to support public scrutiny and understanding;
  • avoid further health PPPs unless and until the Tsepong PPP has been fully reviewed, audited and the findings published; and it can be proven, using national and international evidence, that health PPPs constitute a more appropriate, cost-effective, and equitable approach to healthcare financing and delivery than publicly financed options in Lesotho.

Tsepong Ltd should publish a full financial statement and explanation of costs to date invoiced to the Government of Lesotho. This should include a full explanation for services that are not yet provided that are included in the original PPP contract and any additional services agreed with government and invoiced for since that time. Tsepong Ltd should also provide evidence to demonstrate how it is upholding its contractual obligation to local economic empowerment.

Internationally

The World Bank Group should cease all IFC advisory work in support of pipeline health PPPs until and unless:

  • the IFC's role in the Lesotho health PPP has been fully and transparently audited and reviewed and explanations have been published as to why the high-risk and unaffordable contract was pursued;
  • the competency and appropriateness of the IFC as a transaction advisor on health PPPs on behalf of low- and middle-income country governments has been fully and independently investigated, with results published and reviewed by the World Bank Group Board;
  • a full independent review has been undertaken and peer-reviewed evidence provided to support the appropriateness, costeffectiveness, clinical and equity impact of health PPPs in lowincome, low government capacity contexts;

...


AfricaFocus Bulletin is an independent electronic publication providing reposted commentary and analysis on African issues, with a particular focus on U.S. and international policies. AfricaFocus Bulletin is edited by William Minter.

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