November 28, 2006

Infrastructure

Handle variations with care

Hospital PPPs are tricky to alter in mid-stream

PETER KENTER

correspondent

TORONTO

Hospital PPP projects rely on specific and predictable construction parameters, responsibilities and timelines to realize maximum value for all participants.

While changes that occur during the construction phase might be considered a necessary evil, they aren’t necessarily evil, provided they’re handled in a predictable fashion.

“My advice on variations is ‘don’t do them,’” says Paul Webster, a consultant with the Private Finance Unit, Finance and Investment Directorate, Department of Health in the UK. “They’re expensive and they’re time consuming.

“If you are thinking about changing the way a working hospital operates or thinking about getting workers back into a working hospital, it’s going to be complicated.

“If you do it during the construction phase, I think you are completely mad as opposed to just merely mad.”

Webster says unnecessary and unplanned variations actually return risk to the public sector, defeating the purpose of the PPP model.

Particularly expensive are “what-ifs” in which public sector partners identify wish-lists during the construction phase. Even examining these options can result in considerable additional expense, he says.

“If you think a variation is genuinely likely, then you need to get as much of it agreed in advance as possible,” he says.

“In the UK, we’re increasingly seeing that, where variations are anticipated, facilitation is put into place at financial close, so funding is already there and can be drawn down.”

Health care facilities evolve rapidly, incorporating new technologies and treatment methodologies while experiencing changes in diseases and patient demographics, says Peter Papagiannis, vice president, Finance and Real Estate, BLJC. Papagiannis outlines five principles to guide variations during the construction phase of a hospital PPP project.

Ian Marshall

Peter Papagiannis

1. Change will happen. “The more work we can do up front as an investment in and understanding of the functional program of the hospital, the better,” he says. “We can’t clarify everything, but we can at least set some estimates and guidelines for those variations we know will come about.

2. Seek to create a strong governance framework. Agreements must provide for collaboration of all stakeholders in a defined process.

3. Seek to minimize workscope confusion and misunderstanding. “Identify out-of-scope activities relating to the occupants’ use of the facilities and make any additional costing mechanism clear,” he says.

“What may be treated as an out-patient service today may in fact come in as an in-patient service tomorrow, so prepare for these types of changes in the occupant’s business.”

4. Communication is a priority. Key performance indicators must be monitored, maintained and communicated, with documentation provided of meeting minutes.

5. Recognize that disagreements will occur. “Escalating dispute resolution should be imbedded in the agreement and should encourage settlement at the local contract community level for minor matters,” says Papagiannis.

“Disagreements can be relationship builders if the framework is there to handle them correctly.”

The initial physical design of a health care facility can also minimize later variation costs, says Ian Marshall, vice president and general counsel, William Osler Health Care Centre in Brampton. Generous ceiling heights, for example, can accommodate a wide range of new diagnostic equipment.

“Designing for ‘soft’ spaces next to ‘hard’ spaces allows flexibility for expandability in the future,” he says.

“Classrooms and group rooms can be designed for multipurpose use, examination rooms can be adapted to other uses, and you can build extra capacity into mechanical and electrical services.”

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