Public-Private Partnership Policy Casebook/New Karolinska Solna University Hospital

This case study reviews the New Karolinska Solna University Hospital project as a collaborative work of Katherine Wilson and Muhammet Mustafa Sever. The casebook is a product of the George Mason University graduate program, as an assignment for the Public-Private Partnership Policy course under the leadership of Dr. Jonathan Gifford. It explores case elements such as key actors, event timeline, risks, financial and institutional structures, policy issues, and takeaways.

New Karolinska Solna University Hospital, Source: Skanska AB

Summary

The New Karolinska Hospital Project was a complex undertaking involving the construction of a state-of-the-art healthcare facility in Sweden. The scope included the creation of a high-standard architectural marvel with 12 floors, covering an extensive area and boasting approximately 8000 rooms for various healthcare functions. The project also adhered to sustainable construction practices and aimed for LEED Gold certification. While it was marked by controversies, such as tax evasion allegations and a lack of competition in the procurement stage, it successfully reached completion, setting a benchmark for modern healthcare infrastructure.

The project's key actors comprised a blend of public and private entities, each playing a crucial role in its realization. The collaboration between Region Stockholm, Karolinska Institutet, and private stakeholders like Swedish Hospital Partners AB, Skanska, and Innisfree was instrumental in delivering this significant healthcare infrastructure. Despite financial and operational challenges, the project was handed over on schedule, underscoring the ability to navigate complex transformations in healthcare infrastructure and construction within a public-private partnership framework. With an overall investment of $3.0 billion and a contract extending until 2040, it is considered the world's largest hospital public-private partnership (P3), showcasing a remarkable commitment to advancing healthcare infrastructure and services.

Project Scope

Project scope included the construction of buildings with 12 floors, covering a total area of 320,000 square meters, including a 2-level underground parking facility. These buildings had approximately 8000 rooms, comprising patient rooms, 36 operating theaters, 8 radiation units, 168 doctor's surgeries, laboratories, and lecture halls.The scope of the New Karolinska Hospital Project also encompassed several key objectives, including:

• Creation of a building of high architectural standards, both internally and externally, in the immediate vicinity of the structure.
• Implementing construction solutions that support effective and efficient resource utilization.
• Incorporating sustainable construction practices and the principles of the smart building concept.
• Achieving LEED Gold certification, which involves adhering to strict environmental guidelines, using environmentally friendly materials and technology solutions throughout the construction process.

Aerial View of the NKS Project Construction Site, Source: Skanska AB

The construction of New Karolinska Solna represented Skanska's largest project to date, evident in various aspects such as the workforce, material consumption, construction facilities, and contract value. Here are some statistics that illustrated the project's scale:

• A total of 7,174,500 meters of iron reinforcing bars were utilized in constructing New Karolinska Solna, which roughly equated to the distance between Stockholm and Chicago.
• Approximately 444,000 square meters of earth and rock were excavated, akin to 1,480,000 bathtubs.
• The installation of 8,000 doors was a part of the new hospital's construction.
• The on-site construction trailers had a capacity for 1,800 people, setting a record for Sweden.
• The underpass system featured a combined length of 1,300 meters.
• Throughout the project, around 1,400 individuals were involved in the New Karolinska Solna construction.
• About 300 computers were employed for the project's various aspects.
• The construction trailers accommodated 200 microwave ovens.
• The geothermal heating facility included drilling holes with a combined length of 30 kilometers.
• Employees from 32 different nationalities collaborated on the project.
• The project's contract value stood at SEK 14.5 billion (~$1.3 bn).
• The volume of construction cement used could fill approximately 8.5 Olympic-sized swimming pools.

Annotated List of Actors

Public  

• Region Stockholm: Formerly known as Stockholm County Council, Region Stockholm is responsible for all publicly financed healthcare and public transport in Stockholm County and act as the owner of the New Karolinska Solna University Hospital.
• Karolinska Institutet: As one of the world’s foremost medical universities, The Karolinska Institutet's role in the New Karolinska Hospital Project primarily involves providing expertise in medical research, education, and clinical collaboration to enhance patient care and drive medical advancements.

  

  Description of the Project Parties, Source: Skanska AB

Private

Project Company/Special Purpose Vehicle:

• Swedish Hospital Partners AB (SHP) : Company was formed in April 2010. 50% of SHP is owned by Skanska, the remaining 50% by Innisfree Ltd. SHP is responsible for financing the project, which includes life cycle costs throughout the contract period.
  • Skanska NKS Invest AB (50% Equity Partner)
  • Innisfree Ltd (50% Equity Partner)
  • Skanska Healthcare AB (Builder)
  • White Tengbom Team (Architect & Design)
  • Skanska Teknik & Ramböll (Structural Engineering)
  • Sweco & AFRY AB (Mechanical, Electrical & Plumbing)
  • Coor Service Management AB (Operation and Maintenance)
• Lenders
  • EIB
  • NIB,
  • BBVA,
  • Crédit Agricole,
  • DnB NOR,
  • KfW IPEX,
  • Lloyds TSB,
  • Mizuho,
  • Natixis,
  • Nordea,
  • Skandinaviska Enskilda Banken
  • Svenska Handelsbanken

Technical and Financial Advisors:  

• PricewaterhouseCoopers (PwC) (Legal & Financial Advisors of the Region Stockholm)
• Ernst & Young (Pre-procurement Legal Advisors to the Region Stockholm)
• Gullers Grupp AB (Pre-procurement Legal Advisors to the Region Stockholm)
• JKL AB (Pre-procurement Legal Advisors to the Region Stockholm)
• Operis (Financial Model Auditor of the Swedish Hospital Partners and the Lenders)
• RBC (Financial Advisors of the Swedish Hospital Partners)

Community Stakeholders:

Key community stakeholders for the New Karolinska Hospital Project include local residents, doctors, nurses, patient and family groups, local businesses and environmental organizations.

Risk Matrix

Risk type	Public	Private	Shared
Scope changes (owner requested)	X
Corrections of non-conforming work		X
Permits and Approvals		X
Design (errors & omissions)		X
Changes in law			X
Laying of foundations		X
Inclement weather		X
Site availability	X
Construction cost/schedule overruns		X
Labor disputes		X
Quality assurance/control		X
Equipment warranties		X
Unavailability events/performance failures (maintenance phase)		X
Wear and tear (maintenance phase)		X
Financing			X
Force Majeure Risk	X
Early Termination Risk	X
Demand Risk	X

Timeline of the New Karolinska Hospital Project

Timeline of the New Karolinska Hospital Project

2000-2002

In the early 2000s, Region Stockholm, formerly known as Stockholm County Council, conducted a series of comprehensive investigations to assess how the county council could address the future healthcare demands.

Towards the end of 2001, the SNUS investigation (Stockholm’s New University Hospital) was initiated to explore the necessity and opportunities for establishing a new university hospital. The report, published in November 2002, emphasized the role of a university hospital in providing specialized care and conducting high-quality research and education. In the context of the 3S (Stockholm Health Care Structure) investigation, Locum AB, the county estate agency, was tasked with conducting various preliminary studies related to the construction of the new hospital.

2008-2010

These investigations also involved cost comparisons between renovating existing structures and constructing new ones, with the conclusion favoring the construction of a completely new hospital on April 2008.

The procurement of New Karolinska Solna was pursued as a P3 solution following a decision by Region Stockholm, the former Stockholm County Council, on June 10, 2008. This procurement approach aimed to minimize the risks of delays and cost overruns by transferring them to the P3 contractor responsible for the project.

A comittee under the Region Stockholm started the tendering process with publishing the Request for Pre-Qualifications (RFPQ) and then Request for Tender (RFT) in 2009.

The P3 contract was awarded on May 4, 2010 (majority decision), and later, on June 8 (all parties), following a new political agreement within Region Stockholm, the former Stockholm County Council. The project was ultimately awarded to a consortium consisting of Swedish Skanska and British Innisfree, tasked with constructing the NKS.

The P3 Agreement reached financial close on June 30, 2010 and construction works started in the same year on September 3 with Crown Princess Victoria breaking ground at a ceremony on the construction site.

Timeframe for completion of the hospital

Building	Completion
1. Garage Car Park	December 2012
2. Technological Building	May 2014
3. Hospital Part 1	Start of Operations 2016
4. Garage	July 2017
5. Research Laboratory	September 2017
6. Hospital Part 2	October 2017
7. Treatment building	December 2017

2011

Construction was in full swing, and the foundation for the new hospital buildings had been established. Sweden's largest construction trailer site was officially opened.

2012

In January, a public exhibition was inaugurated at the Karolinska Hospital, presenting the future university hospital. The parking garage became the first completed building in the area.

2014

The technological building's construction was finished.

2016

The hospital building, hotel, and research building were completed, and the first patients arrived at New Karolinska Solna.

2017-2040

The completion date for the NKS project, which was agreed in June 2010, between Swedish Hospital Partners (SHP) and Stockholm County Council (SCC), was March 2018. All seven phases have been handed over on schedule, and the final building was handed over in December 2017, three months ahead of the planned handover date. The Operations and Maintenance stage commenced upon the completion of Hospital Part 1's construction and is slated to persist until the conclusion of the concession period in 2040. As per the contractual agreement, Region Stockholm will be making annual availability payments to SHP throughout the entire concession period.

Contract Type

The New Karolinska Hospital Project was procured through a P3 arrangement. Procured as a Design-Build-Finance-Operate-Maintain (DBFOM) contract, the project involved not only the construction of the hospital but also its long-term financing and maintenance. Region Stockholm, as the procuring authority, entered into this P3 contract with Swedish Hospital Partners (SHP), a consortium jointly owned by Swedish construction giant Skanska and British investment company Innisfree. The P3 model was chosen to ensure private sector expertise and funding were leveraged to deliver and maintain a state-of-the-art medical facility. Under this contract, a fixed price was agreed upon for the construction, operation, and maintenance of the hospital, with an indexation adjustment. This innovative contract structure aimed to combine the efficiency of private sector involvement with long-term public ownership and oversight, allowing the hospital to benefit from the latest advancements in medical care while maintaining cost predictability.

P3s are characterized by the allocation of a significant portion of project execution risk to the contractor, as stipulated by the Region Stockholm. Under this model, the customer, in this case, the Region Stockholm, does not make upfront payments for the project. Instead, they make annual payments and milestone-based payments as each project phase is completed and becomes operational, a feature unique to the P3 framework. Notably, for the New Karolinska Solna project, the Region Stockholm has opted to co-finance the construction. They do so through ongoing monthly payments and milestone-based payments, aiming to reduce financing costs. Approximately half of the construction expenses are covered by the Region Stockholm, while private sector financing, comprising equity capital and bank loans, covers the rest. Following the final phase's completion, the Region Stockholm will continue making predetermined monthly payments until 2040 when they will assume direct operations although, there is an option to extend the agreement up to 2055. This extended contract duration offers substantial predictability, a unique aspect in the Swedish context.

The Region Stockholm has established extensive functional and environmental criteria and delegated SHP with the responsibilities of designing, constructing, co-financing, and managing the hospital in accordance with these requirements. This encompasses all aspects, from technical operations to various services such as reception, caretaking, cleaning, and laundry. Consequently, SHP acts as the project manager, with Skanska handling project planning and construction, and Coor Service Management taking charge of property operations and services. This framework offers a unique opportunity for all stakeholders to actively contribute to the design and planning phase, facilitating the optimization of logistical processes and the early development of innovative solutions.

In the P3 model, the Stockholm County Council maintains ownership of the property but entrusts the operation and maintenance to SHP for the duration of the contract. This arrangement grants the County Council full cost control until 2040, ensuring that the property remains in pristine condition with no need for repairs or extensive maintenance. The long-term operating agreement places a strong emphasis on top-tier quality, with a focus on selecting systems and materials that prioritize long-term sustainability and cost-effectiveness throughout the project's entire lifecycle. Importantly, any unexpected expenses resulting from construction delays are the responsibility of SHP, relieving the County Council of such financial burdens.

Cost & Financial Structure

Capital Stack of New Karolinska Hospital's Construction Costs

The project carries a construction cost of SEK 14.5 billion (~$1.3 bn). Stockholm County Council, the procuring authority, will directly cover 50% of these costs, while the remaining 50% will be financed through a combination of debt and equity. Specifically, a total of SEK 1.18 billion (~$108.4 mn) in equity will be invested, split equally between project sponsors Skanska and Innisfree. The project will also receive SEK 8.76 billion (~$804.4 mn) in debt financing, with a 28.5-year tenor.

Original and Additional Costs of the New Karolinska Hospital Project

Agreed construction costs	SEK 14.5 billion (~$1.3 bn)
Additional orders	SEK 1.7 billion (~$156.2 mn)
SCC’s other building investments not part of the P3 agreement	SEK 2.3 billion (~$211.3 mn)
Total cost of building New Karolinska	SEK 18.5 billion (~$1.7 bn)
Additional cost of medical equipment and other technical equipment outside of the P3 agreement	SEK 4.3 billion (~$395.1 mn)
Total cost of construction and equipment	SEK 22.8 billion (~$2.1 bn)
Total cost of building, equipping, operating and maintaining the hospital until 2040	approx. SEK 61 billion (~$5.6 bn)

Crucially, the cost of constructing, operating, and maintaining the NKS project until 2040 remains fixed with an indexation adjustment. The original construction contract, signed at SEK 14.5 billion (~$1.3 bn) in 2010, remained unchanged.However, evolving healthcare service plans after the 2010 agreement have led to several additional orders initiated by the SCC. These include expanding the treatment building with eighty more hospital beds and introducing a production kitchen, incurring a total cost of SEK 1.7 billion (~$156.2 mn).

Furthermore, SCC had additional expenses totaling SEK 4.3 billion (~$395.1 mn) for items such as medical equipment, furniture, and IT, which were accounted for in the budget from the project's inception. Additionally, SCC is renovated existing hospital buildings at a cost of SEK 2.3 billion (~$211.3 mn), which were separate from the SHP agreement.

Total cost of building, equipping, operating and maintaining the hospital until 2040 is estimated to reach SEK 61 billion (approx. $5.6 billion).

Refinancing

Swedish Hospital Partners successfully refinanced the debt associated with the New Karolinska Solna Hospital project in 2018. Originally project-financed in 2010, marking Sweden's first hospital P3, the remaining amount, SEK 5.1 billion (~$468.6 mn) of the original SEK 8.76 billion (~$804.4 mn) debt has been reduced to SEK 3 billion (~$275.6 mn), accompanied by a margin reduction from 215 basis points to 140 basis points. The lenders involved in the refinancing include the European Investment Bank (EIB), Nordic Investment Bank, SEB, Nordea, Svenska Handelsbanken, and KfW.

As part of the project agreement, Region Stockholm, the concession grantor, committed to a one-time payment of SEK 3 billion (~$275.6 mn) to SHP, which was applied to prepayments and clearing swaps on the debt. This refinancing initiative is expected to decrease the project's financing costs by SEK 2.1 billion (~$193 mn).

The advisory team overseeing the refinancing consisted of Newbridge Advisers representing the sponsor, with legal guidance from Hamilton; Mannheimer Swartling acting on behalf of Stockholm County Council, and Vinge providing counsel for the lenders.

Controversies

Tax Evasion

The New Karolinska Solna (NKS) project has been marred by allegations of tax evasion, as revealed by an investigation conducted by the Swedish TV program "Uppdrag granskning" (Mission: Investigation). A significant point of contention revolves around the tax structure that SHP established using Luxembourg subsidiaries. This arrangement ultimately led to substantially reduced tax liabilities in Sweden. Multinational auditing and consulting firm PwC was hired by Innisfree to create this tax structure in Luxembourg a few months after SHP was awarded the 52 billion Swedish Crown NKS contract. The confidential agreement between Innisfree and the Luxembourg government has been revealed as part of a cache of more than 500 leaked tax rulings and financial documents published by the International Consortium of Investigative Journalists (ICIJ).

In response to these allegations, it's worth noting that SHP has defended its position, asserting that no tax evasion or aggressive tax planning occurred concerning the NKS project. According to SHP, no hybrid loans were involved in the project, and no tax revenues have disappeared from Sweden due to the presence of its partner being registered in Luxembourg. Skanska, being a Swedish investor in the NKS project, pays taxes in Sweden. Innisfree, on the other hand, serves as a coordinator for foreign investment funds, and these funds pay taxes in the countries where they are registered for tax purposes. While these claims offer a counter-narrative, the tax structure and the overall tax implications of the NKS project remain subjects of investigation and debate.

Lack of Competition

A noteworthy and contentious aspect of the NKS P3 project is that ultimately, there was only a single proposal submitted, specifically by the SHP. The initial plan by Stockholm County, based on assessments by PwC and Ernst & Young, called for a minimum of three bidders. Both PwC and Ernst & Young emphasized the importance of competition in achieving reduced investment and maintenance costs and fostering innovation. They recommended that this be ensured through the participation of three to five bidders.

When it became evident that there was only a single proposal, the responsible officials in Region Stockholm sought advice from another consulting firm, Gullers, based in Stockholm. Gullers responded that if Skanska/Innisfree were aware they were the sole bidders, the competitive dynamics would not be effective and recommended a new, traditional procurement process. Subsequently, the officials turned to yet another Swedish-based consulting firm, JKL, which argued that the competitive dynamics of the private sector could still function even with only one bid. Another legal consulting firm also confirmed that the decision to proceed with the Skanska/Innisfree bid was in compliance with public procurement regulations. However, the fact that there was just one bid sparked a heated debate among the Stockholm County officials. Left-wing parties in Stockholm County contended that, in order for competitive forces to function, there should have been three bids and called for abandoning the P3 project when it failed to attract more than one bid. On the other hand, the right-wing parties, which held the majority in the county, asserted that even with just one bid, the entities behind it were still subject to the competitive dynamics of the private sector. In the vote on May 4, 2010, the decision to proceed with the Skanska/Innisfree bid was made. The failure to achieve the goal of securing three bids also became a central point of criticism in the media, particularly as concerns regarding escalating operational costs swirled around the NKS P3 project.

Increased Costs

According to some sources The New Karolinska Hospital project was initially estimated at 5.3 billion SEK (approximately US$ 600 million) and then saw a significant cost increase to 14.1 billion SEK (approximately US$ 1.6 billion) at the time of the agreement signing. Moreover, same sources report shortly thereafter, the project manager admitted that the actual cost would soar to 22 billion SEK (approximately US$ 2.5 billion). This amount did not encompass maintenance costs or interest on loans. While the ruling political party in the Region Stockholm claimed the construction and maintenance cost until 2040 would be 52 billion SEK (approximately US$ 6 billion), a former member projected it could reach 69 billion SEK (approximately US$ 8 billion) due to high interest rates and undisclosed expenses.

However, SHP claims despite these financial and operational challenges, all seven phases were handed over as scheduled, with the final building being delivered in December 2017, three months ahead of the planned handover date. The project was procured at a fixed price, with the construction contract of SEK 14.5 billion signed in 2010 remaining unchanged, arguing that Skanska successfully delivered one of the world's most modern and sustainable hospitals within the agreed budget and schedule.

Key Takeaways

This case study shows that public organisations undertook a complex endeavor that involved two simultaneous, intricate changes, as highlighted by Jonas Wohlin, the founder of Ivbar, a Swedish health technology advisory and product company. This endeavor encompassed the construction of a new hospital through the P3 model and a transformation in the structure of healthcare delivery. The aim of the latter was to shift from the traditional care model to one organized around themes and patient groups which is called "Value-based healthcare". One could argue that implementing both changes concurrently allowed hospital managers to tailor the hospital's design to their operational vision. However, this dual transformation has proven to be quite challenging. The reorganization compelled clinicians who had previously worked in different clinics to seek new positions, generating more resistance from doctors than nurses, and leading major newspapers to join the opposition against the reformers.

The privatization of the healthcare services emerged as the central term in the debate, with all the changes at Karolinska, including challenges with reorganization, value-based patient care, and discussions about tax avoidance practices, being grouped into the P3 discussion. We believe that private stakeholders made efforts to address these issues, but the public side failed to engage in proactive and frequent communication. This overall situation contributed to a negative perception of the P3 model among Swedish citizens, especially when influenced by anti-privitization politicians.

Another key lesson underscores the significance of competition during the procurement stage. While it is challenging to assert that the project would have been more cost-effective with increased competition at the procurement stage, it's clear that Region Stockholm could have leveraged its public construction and facility management organization, Locum. Locum possessed extensive experience in engaging with construction suppliers, healthcare professionals, and medical technology equipment providers. This experience could have been utilized to facilitate a bid for the project with a traditional delivery model, providing a basis for comparison with SPH's bid. Such a comparative approach would have rendered the decision to opt for the P3 model more justifiable, especially in the face of public criticism.

Questions for Discussion

• Given that no evidence of a Value for Money (VfM) study conducted by the project owners was found, what implications might this absence have on the project's evaluation and outcomes?
• Could project owners have prevented the extra costs resulting from Scope Creep in this project? If so, how?
• Would the additional costs have arisen in a traditional procurement model?
• What actions should Region Stockholm (the project owners) have taken when faced with only one bid in the tender process?