Kč 217 million for nothing. Long live Czech PPPs!

Transparency International estimates the Czech state has spent Kč 240 mln on consultations on PPPs; not one has been implemented

Politics & Policy|Economy
Kateřina Menzelová | 20.09.2011

A project to build a hostel, hotel and car park at the Central Military Hospital (ÚVN) in Prague 6 was supposed to serve as a shining example as the first successful public-private partnership (PPP) involving a national ministry. In the end, the project was scrapped after the Czech state had spent Kč 217 million on consultation fees.

On August 17, the Czech government passed a resolution enabling the cancellation of the PPP project at the Central Military Hospital in Prague (ÚVN) and on Monday (Sept. 19), the Supreme Audit Office (NKÚ) published a report listing dubious details about the doomed project.   

Swimming pool, hotel and hostel….  

The plans for a hostel to house 240 nurses and a parking lot with 200 places were first put forward by the Ministry of Defense back in 2004. The government approved the project estimated to cost Kč 440 million and the facilities were to be built between 2006 and 2008.

The ÚVN first opened in 1938 and originally treated only military personnel and their families. The hospital was opened to the general public in 1994. In 2006, the hospital commissioned an evaluation of the initial project plans, but then decided to enlarge its scope to include a hotel with 260 beds, a swimming pool and additional parking space. The NKÚ report shows the estimated cost of the expanded project was Kč 749 million and building works were to commence in late 2008 or early 2009.

In September, 2007, then-minister of defense in Mirek Topolánek’s (Civic Democrats, ODS) government, Vlasta Parkanová (now TOP 09), approved the project without enquiring with the ÚVN about the enlargement of the project’s scope. “Submit the project for reapproval in the event that there have been fundamental changes to the content and scope of the project that would lead to higher costs for the state budget of the Czech Republic, upon which the project depends,” Parkanová said at the time.

Sorry, we over did it   

The contract which was for more than Kč 6.4 billion, whereas following the second revision the project cost was estimated at under Kč 1.3 billion The next twist came in 2010, when the hospital discovered its revised plans were beyond its financial means and therefore revised the plans again. This time, instead of the hostel for nurses and other staff the hospital proposed building a clinic for the long-term ill. The projected swimming pool was scrapped while the plans for the hotel were suspended.

“The project was oversized and didn’t correspond to the hospital’s plans for further development, and in its current form would have resulted in ineffective spending of public funds,” the ÚVN is cited as stating in the NKÚ report.  

The contract to implement the PPP project at the ÚVN was awarded to the Prague Military Hospital Concession (PMHC) consortium, whose offer was judged to be the only one. The contract, which was to be valid for 25 years, was for more than Kč 6.4 billion, whereas originally the project following the second revision was estimated at under Kč 1.3 billion.  

The project was put to the government by Parkanová’s successor and former deputy, Martin Barták (ODS), and was approved by caretaker prime minister Jan Fischer (unaffiliated) on May 24, 2010, just several days before parliamentary elections.

Finally a reasonable decision

The extravagant PPP project for the Central Military Hospital was finally buried by Petr Nečas’ (ODS) government on August 17 this year.

“In the current economic situation the implementation of such a project would be an unreasonable financial burden. Additionally, it was not possible to find a suitable adaptation of the project that would meet the conditions of the Ministry of Finance for a resolution of long-term rental agreements on the grounds of the ÚVN and at the same time, the demands of the Ministry of Defense and access to the project for the ÚVN,” the ministry said in a statement announcing the cancellation of the project.

So what was the outcome of seven years of planning the PPP project at the ÚVN? According to the NKÚ’s report, the defense ministry and ÚVN spent Kč 42 million for consultation services. The ÚVN also committed to pay a private partner Kč 130 million in compensation for cancelling cooperation and a further Kč 45 million in expenses arising from scrapping the project. Therefore, the planning of the unrealized PPP project came to around Kč 217 million (i.e., almost half of the originally estimated total cost of the original project put forward in 2004).

The auditors point out that the financial compensation for withdrawal from the contract was only added as an amendment at the end of 2010. “Having checked and assessed all the circumstances, the NKÚ has not identified any relevant reasons for undertaking to pay the specified level of compensation,” the NKÚ report states.

In the documentation submitted to the government explaining the amendment to the contract setting the level of compensation for cancellation of the project, the defense ministry says such a measure was necessary in order to avoid the risk of expensive arbitration proceedings against the Czech state. “Our prime aim was to make savings through terminating the project without risk of arbitration. PPP projects undoubtedly have a future, but there must be better selection of where they can be realized,” Defense Minister Alexandr Vondra (ODS) stated.

Vondra also claims that the Finance Ministry advised him to take measures to insure against an arbitration suit. “Ask in the Ministry of Finance. There they specifically warned us about [potential] arbitration,” Vindra told the server aktualne.cz September 19.

State pays, consultants profit  

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