The New Royal Children's Hospital - a public private
partnership
1. Audit summary
1.1 Introduction
1.1.1 Background
In November 2007 the Government announced that it had selected a
private partner to construct a new Royal Children’s Hospital (RCH),
on a site immediately to the west of the current RCH site on
Flemington Road in Parkville. The existing research precinct
building and the front entry building will be retained and
incorporated into the new complex.
The new hospital is scheduled to open in December 2011, and
following RCH’s relocation, much of the old site will be demolished
and reinstated as parkland, replacing park land taken up for the
project. The Department of Human Services (DHS) has the lead role
in supervising delivery of
the project.
This project is the largest hospital redevelopment undertaken by
the state. The project outcomes are expected to have a major impact
on the quality of tertiary health services for children in
metropolitan Melbourne and other regions of Victoria.
The hospital redevelopment is being delivered as a public
private partnership (PPP) in accordance with the state’s
Partnerships Victoria framework. This application of the
Partnerships Victoria procurement model involves a private
sector consortium taking responsibility for designing, building,
financing, and maintaining the facility. The public sector keeps
full responsibility for the clinical services delivered within the
hospital.
Over the 25-year operating phase of the contract—which commences
after completion of construction and successful hospital
commissioning—the state will make total service payments of $3.742
billion in nominal terms to the private sector project company.
According to the 2007–08 RCH Annual Report, this was equivalent to
$1.016 billion in net present value terms, as at 30 June 2008.
In addition to the service payments over the operating phase of
the hospital, the
government approved:
- $27.3 million for project management costs
during the planning, procurement and construction phases of the
project
- $4.6 million for park reinstatement at the
end of construction.
The government committed funding for the project on the
understanding that RCH will contribute $90 million to reduce the
net cost to government of the project. RCH is expected to source
this funding from fundraising, borrowings and asset sales.
The objective of this audit was to assess the adequacy of the
state’s planning, procurement and management of the RCH PPP
redevelopment.
This involved examination of:
- project planning and development
documents, including the service plan and business case
- the procurement process
- contractual arrangements for the project,
and documentation and data relating to the management and
governance of the project.
1.2 Overall conclusion
Clear and sound advice was provided to government during the
decision-making process to commit to and invest in the project. The
business case was comprehensive and incorporated the key
information and analysis required by Partnerships Victoria
and other guidelines. It included transparent analysis of options,
including procurement options, as well as risk and project
management issues.
Service planning for the new RCH used relevant data available at
the time, including the results of a model used by DHS to develop
service demand projections. However, we were unable to conclude on
how well that data was applied due to:
- DHS being unable to demonstrate a
comprehensive understanding of the development, operation and
internal logic of the forecasting model
- an absence of evidence to confirm how
advice from clinicians was taken into account to enable appropriate
adjustments to be made to forecasts of admitted patient
activity.
The lack of a defined ‘network response’ for paediatric care in
Victoria, and a lack of clarity about RCH’s role in that
network—together with delays in developing models of care for the
new RCH—added to the complexity of the service planning process for
the new hospital. However, this did not invalidate the planning
outputs.
A competitive tender process was conducted to select the
preferred consortium to deliver the new RCH project. The evaluation
process at both the expressions of interest and project brief stage
was well documented. The decisions were justifiable on the basis of
the requirements and the selection criteria in the project brief
making the process fair to all bidding parties. Relevant government
requirements and guidelines were observed during the procurement
process.
The state’s involvement in the design and construction phase of
the project is being well managed. The governance arrangements for
the project provide an effective framework for communication with
the relevant parties as well as assessment, monitoring and
actioning of emerging issues and risks.
The project agreement includes a comprehensive performance
monitoring and reporting regime for the operating phase of the new
hospital. However, DHS needs to take steps to progress development
of the project contract administration manual and further enhance
project management documentation in place for the state’s project
team. Timely action on these matters will provide further assurance
that the state’s risks around this project are being managed
effectively.
The recent downturn in global financial markets has not had any
direct adverse impact on the project financing arrangements. All
project finance remains in place and the state is adequately
monitoring this issue.
1.3 Findings
1.3.1 Adequacy of investment planning
The investment planning for the new hospital was thorough and
sound.
There was detailed analysis of redevelopment options and the
government was given appropriate information and analysis at major
decision points in the investment planning process.
A ‘network response’ to paediatric services in Victoria has been
identified since 2002 as a key strategy to meet observed increases
in service demand but the detail of the implementation process is
still under consideration by DHS.
Delays in sufficiently developing models of care for the new
RCH—and the absence of a defined network approach to paediatric
care in Victoria—at the time of service planning added to the
complexity of the planning process for the new hospital. However
this lack of a strategic framework did not invalidate the planning
outputs.
Clarity around models of care and the RCH role in the wider
health network are significant for service planning as they:
- assist in defining the service delivery
approach
- inform the forecasting for service
demand
- ultimately define the design parameters
and facility requirements for a new hospital.
Models of care were sufficiently developed by the project brief
stage and continue to evolve.
Service demand for the new RCH was projected using a forecasting
model. There was limited evidence to show clinician involvement in
adjustments made to overcome a number of known limitations of the
model.
The forecasts of future service demand in the RCH service
planning process were based on a declining birth rate forecast made
by the Australian Bureau of Statistics (ABS). This was the most
appropriate and up-to-date data source available at the time.
However, more recent ABS data indicates that the actual birth rate
increased in Victoria over the period 2001 to 2005.
The new RCH has 50 more beds than the existing RCH and DHS has
demonstrated that this greater capacity—together with the inherent
flexibility and potential capacity for growth in the design of the
new RCH—should handle currently projected increases in service
demand.
However, DHS has not yet determined, or advised government, when
this additional future capacity may need to be taken up.
1.3.2 Assessing value offered by the private sector bids
A competitive tender process was used to select the preferred
consortium to deliver the project. An appropriate evaluation
framework, incorporating a value for money approach, was in place
to evaluate the bids.
Effective tools were employed to assess value for money during
the procurement process, including the Public Sector Comparator
(PSC), which is a theoretical estimate of the cost of the most
efficient public sector procurement model. The net present cost of
the bids was compared to the PSC cost in order to determine whether
the project could deliver better value for money if conducted under
a Partnerships Victoria structure.
Other qualitative value for money tests were also applied during
the procurement evaluation, including a public interest test.
The planned timelines for the procurement process were met,
which was a significant achievement, given the scale and complexity
of the project and procurement task.
The procurement approach complied with the expected elements of
Victorian Government Purchasing Board policy and guidance and the
Partnerships Victoria guidelines, and was adequately
documented. In particular, the following were observed:
- a PSC was constructed and updated
throughout the evaluation process
- an output specification was produced in
the form of the project brief
- appropriate sign-offs were sought and the
required approvals were obtained
- the evaluation of the bids was undertaken
against previously determined criteria stipulated in the evaluation
plan.
The risk allocation in the project agreement is also broadly in
line with Partnerships Victoria guidelines with no
significant departures.
1.3.3 Supervision of delivery of infrastructure and
services
The state is adequately managing its involvement in the design
and construction phase of the project. However, development of the
contract administration manual needs to be progressed and project
management documentation needs enhancement to provide greater
assurance about effective management of the state’s project
risks.
Appropriate governance structures have been established for the
project. The state’s actual project costs are also expected to be
within approved budget limits.
The construction schedule is on target and the independent
reviewer appointed for the project has recently reported that the
project remains on track for the 21 September 2011 technical
completion milestone.
The impact of the downturn in global financial markets on the
project is being actively monitored. All debt and equity funding
for the project—approximately $1.38 billion—was contributed in
December 2007 and remains in place, in authorised investments.
However, due to the impact of the recent global financial market
downturn, a promised donation to RCH of $35 million from the
original private equity sponsor is now much less certain.
The project agreement adequately defines the services to be
delivered by the project company during the operating phase of the
new hospital and includes a comprehensive performance monitoring
and reporting regime.
1.4 Recommendations
It is recommended that:
- DHS should develop and define models of
care beyond high level statements at the service planning and
business case stages for any future major hospital investments.
This will help to make sure that investment decision-making
processes are better informed by the service delivery strategy
expected to be adopted. (Recommendation
4.1)
- DHS develop a comprehensive understanding
of its service demand forecasting model—which is a statewide and
not hospital specific forecasting tool. This will help DHS to
better understand the model’s limitations and impacts when
forecasting demand for future service delivery.
(Recommendation 4.2)
- DHS expedite the development of a
strategic ‘network response’ framework for the future development
of paediatric health services in Victoria. (Recommendation
4.3)
- RCH consider the implications of a
strategic ‘network response’ framework for the future development
of paediatric health services in Victoria when finalising its
current service plan review. (Recommendation
4.4)
- DTF amend its guidance to require that
agencies implementing Partnerships Victoria projects:
- conduct and document quality assurance
reviews of PSC estimates and related financial models—irrespective
of whether they are internally or externally prepared—to reduce
risks of error or inaccuracy, and to ensure that the state has
sufficient understanding of these highly complex financial
models
- maintain adequate documented evidence to
support all costings and PSC calculations contained in a business
case. (Recommendation 4.5)
- DHS and RCH should promptly execute a
memorandum of understanding setting out their respective
responsibilities in relation to the project.
(Recommendation 6.1)
- DHS should complete and endorse the RCH
contract administration manual and address observed gaps and
weaknesses in project management documentation as a priority.
(Recommendation 6.2)