Privately funded hospitals… a fool’s paradise

SvD revealed in June 2015 that the New Karolinska Solna is not just SEK 8-10 billion more expensive than planned. It is also at least two years behind schedule. Nevertheless, the finance councilor,  Torbjörn Rosdahl (M), keeps on repeating that “the County Council knows to the last cent what NKS will cost and at what hour when it will be finished.”

Ervin Révai, a planning consultant, with nearly 50 years in the construction industry with experience of over 40 hospital projects around the country was commissioned in 2009 by the Stockholm County Council to develop a production schedule for the New Karolinska and then evaluate incoming tenders.

“While there was incredible secrecy within NKS administration – it was very unprofessional. On one side, you had a bunch of ignorant amateurs, on the other, a company that knew they sat at a winning the hole. It was devastating…”, says Ervin Révai.

HUS-Kiinteistö Oy is responsible for building and maintaining hospitals and medical facilities in Finland’s metropolitan for over 1 million people. It has the expertise and capacity to build and maintain all the required specialized infrastructure in a professional manner.

Säätiö Uuden Lastensairaalan Tuki has been created to build a new Childrenss’ Hospital (Lastensairaala) which HUS will lease from the Foundation (Säätiö). The Säätiö is financing the project with 50% public grants, 31% debt and 19% from private donations. We are told that the rationale behind this solution was to bring forward the building in time because public funding was not available until several years down the road.

The creation of a new entrant, the Säätiö, appears to be an expensive and unnecessary business unit for the region that creates significant costs and unnecessary complexity. The rational for the project seems to be specious because only 19% of the project funding comes from private donations and the existence of the new entities and the structures involve significant costs over the long term. This sum raised through donations could have easily been contributed by public sources and/or through increased debt funding from the government or from HUS member municipalities.

  1. The Säätiö is an ad hoc body and has no prior experience in project management. This is a significant source of risk that can only be mitigated in part by outsourcing professional services, at a high cost.
  2. The €50 million loan agreement made by Nordea, Pohjolapankki and Handelspankki has not been placed in the public domain but it is clear that the cost of borrowing by the Säätiö is significantly higher than what the government or HUS pays for debt. A 1% difference in borrowing costs is around €10 million over a 30-year loan period.
  3. It is prescribed that the Säätiö is a non-profit-making body. However, no financial statements or budgets are visible on its website that set out its own organization and annual administration costs. The annual costs of running the Säätiö are probably high when taking into account its 30-year existence. Assuming low annual costs of €300,000 means another €9 million. Such an extra layer of administration cannot be a very efficient way to run a new hospital wing within the largest public/university hospital organization in Finland.
  4. Financial management is being duplicated, as is legal documentation and probably consulting services, since HUS, HUS-Kiinteistöt Oy and the Säätiö will probably all need to avail themselves of advisors. The agreements for consulting services relating to the project are not to be found on the websites of HUS or the Säätiö.
  5. The lease agreements between HUS and the Säätiö are not to be found on the websites of HUS or the Säätiö.
  6. It is unclear from the absence of documents in the public domain if HUS has to pay for the buildings in 30 years’ time when the contracts come up for renewal.

HUS and the public sector must bear all the risks and costs of this long term project. It must also absorb the time and money that is spent negotiating with a 3rd party that is running the project without prior project experience or substantial risk-taking capacity of its own.

In conclusion, it appears that political points are being scored at the taxpayers’ expense for a project which naturally appeals to the very core or society. I know of no other such venture in Europe where for-profit commercial interests coldly extract extra rent under the guise of a not-for-profit project. A children’s hospital is the most basic service of a welfare state – it is not a place where politicians and businessmen queue up to make a profit or further their individual careers.

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