Healthy investments – Can govt guarantees attract private players to hospital PPPs?

Brazil's government, through the federal investment partnerships program (PPI), is looking to promote PPP contracts for hospitals offered by local governments, but there are still various risks associated with these contracts that have to be considered by the participants.

Earlier this week, Brazilian consortium Smart Hospital, formed by Best Energy & Engineering and Sian Engenharia, won a PPP contract to manage the Souza Aguiar hospital in Rio de Janeiro, one of the largest health facilities in the country. 

Under the 30-year contract, the consortium is expected to invest some 850mn reais (US$177mn) to make improvements to the hospital.

Luiz Felipe Graziano, a partner and lawyer specializing in infrastructure, PPPs and concessions at law firm Giamundo Neto Advogados, talks to BNamericas about the particularities of these hospital contracts.

BNamericas: What are the advantages of a PPP contract for a hospital area compared with a concession or even government providing these services?

Graziano: PPPs are an interesting model because they allow the public sector to focus on the most important aspect, which is health care and medical care. Meanwhile, the private partner is responsible for everything that serves to support the proper operation of the health units, creating good structural conditions for medical activities to be carried out in the best possible way.

In this division of tasks, the private partner is responsible for the entire hospital infrastructure and the public sector doesn't need to spend time and money on that, simply focusing on health care.

BNamericas: The national treasury recently announced measures to provide guarantees for PPPs from local governments. Is that affecting PPP contracts for hospitals yet?

Graziano: The current legislation provides rules on care for public debt and that is always a focus of attention in PPP contracts. But to answer your question directly, the measures announced by the national treasury aren't having a direct impact on new PPP contracts yet as it's still a mechanism that needs to be developed.

The contracts linked to any infrastructure project are very long term and any change requires a lot of dialogue on the projects and frameworks to move forward. The measure that the national treasury announced does tend to foster PPP models, but not immediately.

What we are seeing more recently are PPP models that have been structured in the last few years. I see that there's a greater rationality on the part of governments in Brazil regarding the reach of the state in the economy.

BNamericas: Could the PPP for the Souza Aguiar hospital, one of the largest in the country, encourage other local governments to structure PPPs in this sector as well?

Graziano: This is a trend, yes, and also because of the stimulus that the national treasury wants to provide in relation to guarantees, as we have already mentioned.

Regarding hospital PPPs, they're mainly municipal government projects, there are always lots of doubts regarding the structuring of guarantees. Most of the private partner's investments in PPP contracts are made at the beginning of the contracts, while the return on the investment only happens towards the end.

Therefore, to attract private capital to these projects, a solid model of guarantees and legal security for contracts is essential.

BNamericas: Does the fact that hospital PPPs are most often used for hospitals with old infrastructure involve additional risks in terms of construction works?

Graziano: This is an important point of attention, but the contract notices should have clear rules on this. Many of the public hospitals in Brazil are quite old and some of them are even buildings with historical value for big cities.

These structures are usually very well located in cities, with ample access to public transport, so it makes much more sense to renovate these structures rather than start projects from scratch in areas further away from city centers.

Even with the challenges, there's much more benefit in renovating or restoring these buildings than starting construction from zero, even from an environmental point of view as well.

BNamericas: What is the profile of private investors interested in hospital PPPs in Brazil?

Graziano: There are groups already structured to compete for these contracts, as is the case of Opy Health, in addition to infrastructure companies abroad and infrastructure investment funds in Brazil, which are also interested in these contracts.