Portugal: Public/Private Partnerships in the Health Sector

Last Updated: 26 November 2002

Introduction

The Portuguese government has announced that, during the year 2003, five new hospitals (Cascais, Sintra, Loures, Vila Franca de Xira and Braga) would be built, financed and oeprated under public/private partnerships. At a second stage, tenders for the construction, financing and operation of five additional hospitals will be issued.

Under Decree-Law 185/2002, of 20 August 2002, on public/private partnerships in the health sector (Lei das Parcerias Público-Privadas no Sector da Saúde – the "SNS Public/Private Partnerships Law"), private companies will be allowed to build and operate hospitals within the National Health Service (Serviço Nacional de Saúde – "SNS").

The public/private partnerships in the health sector will allow private entities to invest and operate healthcare facilities that will be part of the SNS, providing medical services to SNS beneficiaries, with the aim of reducing public spending in new hospitals and improving the service quality and management.

It is expected that public/private partnerships will have a positive impact in the SNS by providing a benchmark for the operation of public hospitals.

Health sector in Portugal

The SNS Public/Private Partnerships Law establishes three types of management for healthcare facilities within the SNS:

  1. Hospitals under SNS direct management. Most Portuguese hospitals are owned, managed and operated by public bodies within the SNS, which was responsible for commissioning the construction of the facility. Hospitals under public management are financed by the government budget, although each hospital may enter into contracts with equipment and medical supplies.
  2. Public hospitals under independent public management. Under this model, public hospitals are operated by separate legal entities, having their own budget and legal capacity to operate the hospital under the supervision of the SNS. With the purpose of establishing a more flexible and efficient management structure than hospitals ran directly by the SNS, the government established an independent management system in the São Sebastião Hospital, in Santa Maria da Feira through Decree-Law 151/98, of 5 June 1998. The São Sebastião Hospital is operated as a separate legal entity managed by a board of directors with the power to propose the hospital’s investment and operating budget and the responsibility to manage the government’s grants under a specific contract with the SNS. In this model, the SNS has less of a managerial function and more a supervisory role. Notwithstanding the above, the end results of this model are not very different from those of other hospitals under direct management of the SNS.
  3. Public/private partnerships ("PPPs"). Hospitals built under public/private partnership schemes are a part of the SNS hospital system. PPP hospitals will be built, financed and operated by private companies under a concession agreement.

The management and operation model of the Amadora-Sintra hospital, in operation since 1996, has some features of the concessions that will be awarded under the SNS Public/Private Partnerships Law.

Unlike typical public/private partnerships derived from the design, build, finance and operate model, the Amadora-Sintra hospital was built and financed by the SNS to be operated by a private company, José de Mello Saúde S.A., under a management and operation agreement. This is a key difference from the public/private partnership model that the government wants to implement, but will provide valuable experience as to the financial and operational aspects of the SNS PPP programme.

The Legal Framework of SNS Public/Private Partnerships

A. SNS Public/Private Partnerships Law

The SNS Public/Private Partnerships Law establishes the legal framework for the private management and financing of hospitals.

The government’s goal is to establish public/private partnerships that will allow beneficiaries of the SNS to receive medical treatment in hospitals that will be constructed, financed and operated by private entities, improving the SNS’ capacity to provide medical services as well as the quality of such services.

It is also expected that public/private partnerships will provide standards for existing SNS hospitals under public management, and reduce public spending and risks associated with the construction of new hospitals. For private investors new opportunities will arise, as the SNS will be open to private initiative.

The SNS public/private partnerships will include the design, construction, financing and operation of hospitals. The SNS Public/Private Partnerships Law sets out the rules on procurement and tendering for the new SNS hospitals as well as on the contractual framework that will govern the relationship between the SNS and private entities.

Under the SNS Public/Private Partnerships Law, private investors and the SNS may enter into three types of arrangements:

  1. management and operation agreements (contratos de gestão);
  2. service agreements (contratos de prestação de serviços); and
  3. collaboration agreements (contratos de colaboração).

(1) Management and operation agreements

The management and operation agreement is the model agreement for public/private partnerships in the health sector and involves a public service concession to the private operators.

The agreement shall be entered upon by the State or another public body within the SNS and a private entity, which must be a commercial company incorporated in Portugal or with its main place of business located in Portugal (article 8 of the SNS Public/Private Partnerships Law).

(2) Service agreements

Services agreements are entered into by a public authority and a private entity for the provision of services to a public hospital. Service agreements are similar to management and operation agreements and may involve a public service concession or the construction and financing of the hospital (article 35/2 of the SNS Public/Private Partnerships Law).

Under service agreements, the private company will operate the public hospital, providing services to the SNS and may, if specifically provided, be required to refurbish the hospital or procure and acquire hospital equipment but will not own the facility.

(3) Collaboration agreements

Through collaboration agreements, hospitals that are owned by private operators will provide services to the SNS under a government concession. The private operators will build, finance and operate the hospital, bearing the financing risks associated with the operation of the hospital. Under collaboration agreements, such private hospitals will also treat beneficiaries of the SNS, under SNS rates for medical treatments provided by other SNS hospitals, thus compensating shortfalls of the SNS without involving any government investment in increasing the capacity of other hospitals or building new hospitals unless absolutely necessary. For the private operators this will create an additional revenue source, which was previously unavailable.

B. The tender process

(1) Selection of the entity that will be building and operating the hospital

The Portuguese Code of Administrative Procedure, approved by Decree-Law 422/91 of 15 November 1991 as amended from time to time (Código de Procedimento Administrativo), sets out four different ways of selecting the entity or entities that will build and operate the hospital:

  1. Public tender;
  2. Limited tender by invitation;
  3. Limited tender by pre-qualification; and
  4. Direct negotiation.

Under the SNS Public/Private Partnerships Law, the SNS may select a private entity without issuing a public tender. However, the government will need to comply with Directive 92/50/CEE as amended by Directives 93/37/CEE and 97/52/CE, which requires a competitive tender subject to public procurement rules. This means that the SNS must comply with the requirements set out in Decree-Law 16B/99 of 2 March 1999, as amended by Decree-Law 159/2000 of 27 July 2000 (Lei das Empreitadas de Obras Públicas – the "Public Works Law"), applicable to the construction of hospitals as well as to the concession of public medical services as envisaged by the SNS public/private partnerships.

Under its powers to award the concession by direct negotiation, the government will probably choose the private operator to design, build, finance and operate the hospital (i) by way of a pre-qualification method, or (ii) by way of a limited tender by invitation of bidders based on certain financial and technical requirements to be set out by the relevant decree that will be governing each project.

(2) Negotiation of the project contract

Depending on whether the entity that will be building and operating the facility was selected by way of direct negotiation or public tender, this phase will be more or less complex, as the project contract and concession terms will be pre-defined or directly agreed between the parties.

SNS Public/Private Partnerships

Future SNS public/private partnerships will be governed by management and operation agreements (contratos de gestão), which, as described above, have a wider scope than that for the management and operation of hospital facilities. Under the SNS Public/Private Partnerships Law, these contracts are intended to be used as DBFO contracts, whereby the project company will undertake to build, finance and operate the hospital. The management and operation agreement (hereinafter referred as the "project agreement") is the contract entered upon between the project company, or the winning consortium, and a government entity or another public body, such as a local authority.

Under the SNS Public/Private Partnerships Law, the project agreement may cover a variety of matters governing the relationship between the government or the contracting authority and the project company, including the concession of the public service, which is the main purpose of the agreement.

Conslusion

The public/private partnerships for the construction of 10 new hospitals as well as the SNS new regulatory framework allowing private investors to provide services to the SNS will create new opportunities in the Portuguese health sector.

Although there are no risk free opportunities in private initiative projects, two main factors give comfort to investors in pursuing these opportunities. On the one hand, Portugal has an extensive experience in developing projects under design, build, finance and operate schemes, such as the second Tagus crossing, the Pego and Tapada do Outeiro power plants, and the DBFO road programme. On the other hand, the success of the Amadora-Sintra Hospital, though not without fault, serves as a good example both to the government and to private investors as to the costs and benefits associated with public/private partnerships in the health sector, and provides a valuable experience in developing the government’s ambitious plan for the health sector.

© Macedo Vitorino e Associados - October 2002

The content of this article does not constitute legal advice and should not be relied on in that way. Specific advice should be sought about your specific circumstances.

 
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