People in the know in financial affairs maintain that there are two aspects to public private partnership (PPP) agreements. One is the financing of the capital expenditure and the other is the outsourcing of the management of a government service.
In the case of the Vitals agreement, the PPP agreement covers both aspects. The supposed purpose is the financing of the refurbishment and the running of the hospitals for 30 years (eventually 99).
However, a PPP for the financing of a capital project such as a hospital is inherently more expensive because: governments can not only borrow more cheaply than the private sector but also have a lower cost of capital than most private companies; governments do not need to budget for a return of and on capital and for profits.
This means that if the government needs to borrow to finance the construction of a hospital, the markets will lend the money at cheaper rates than to private sector as the government is sovereign debt.
Indeed, the yield on a Maltese government long dated bond is around two per cent per annum.
In the case of Vitals, these could not raise the capital. Governments borrow without security or hypothecations while Vitals had to hypothecate the hospitals for a miserly €900,000. On top of this, the anonymous Vitals financier would have to add his profit margin depending on the risk involved.
All this makes the financing of government projects through PPP inherently more expensive.
To give an example, a 30-year loan of €100 million at two per cent means that the total out payments would be €133 million including capital and interest.
If the private financing works out at a meagre four per cent (just two per cent more) the total outlay over the 30-year period rises to €172 million.
So, why has the Maltese government chosen the path of a more expensive outlay, by at least 30 per cent, at the taxpayer’s expense?
When Malta was much poorer, governments financed St Luke’s Hospital, the Gozo Hospital, Karin Grech, Mater Dei and Sir Anthony Mamo Hospital.
So, in the specific case of Vitals, why did the government require private finance for the refurbishment of the three hospitals?
It’s L-Aqwa Żmien; we have a surplus; hundreds of millions from the sale of citizenship. Couldn’t part of this bonanza be invested in Malta’s medical infrastructure?
With regards to the outsourcing of operations, we have the same inherent financial consideration.
The private entity must include in its pricing a profit element which the government does not include, as it is a public service and does not need to.
Starting from the premise that the operator is using the same workforce at same wage rates and benefits, it is impossible to make a profit with the same wage costs. Thus, if the government employs 40 nurses with a wage bill of €1 million, the private operator has the same cost as it has to employ the same workforce at the same wage rates and benefits.
Therefore, in order to make a profit Vitals has to charge the government say €1.1 million. If it were to charge the government less than one million the operator has to fire some of the nurses or pay them less. Which means the staff loses out, the quality of services decreases and the efficiency in the running of the hospitals decreases.
If Vitals works at a profit, it is the Maltese taxpayer that loses out.
If the government insists on having Vitals running the hospitals, does this mean that the government trusts Vitals to run hospitals better than the Deputy Prime Minister and Minister of Health Chris Fearne?
If this were the case, apart from being a veritable first, this would be an indictment of the government’s own administrative abilities. Maltese governments have run their own State hospitals for so many years with excellent outcomes. Why is it only now that we cannot run our own hospitals?
Apart from all the murky Konrad Mizzi dealings in this affair, the question that springs naturally to mind is: if Fearne and his ministry cannot be trusted to run a small Gozo hospital efficiently, how can he be trusted to run the major hospital in Malta that is Mater Dei?
Published on the Times of Malta – 10 February 2018