Northern Beaches Hospital: future directions for private sector role in public service delivery

Specialist health infrastructure is costly to build and operate. New South Wales is facing escalating demand for acute care services driven by a growing and ageing population. Significant investment in infrastructure and workforce is needed, all within a fiscally constrained environment.

The Northern Beaches Hospital (NBH) project was a Public Private Partnership (PPP) which provided one possible solution to this problem. The unwinding of the project provides an opportunity to reflect on some key issues in the engagement of the private sector in front line public service delivery.

Background

The NBH project was initiated in 2013 to replace ageing hospitals in Manly and Mona Vale. In 2014, Healthscope was chosen as the preferred tenderer to design, build, operate and maintain the hospital on a greenfield site, the first such project in Sydney in two decades.[1] The model was championed as a means of delivering significant infrastructure upgrades and long-term cost savings for public acute care, while ensuring that clinical services met the same standards as public hospitals in NSW.[2] 

Healthscope was contracted to build and operate the public hospital until at least 2038. Delivery of the project involved the construction of a new hospital with 488 beds, 14 operating theatres, and expanded emergency and mental health facilities.[3] The NBH PPP structure was relatively innovative in two ways:

• Healthscope operated the hospital, providing public acute clinical services which would typically be delivered by NSW Health staff.
• Healthscope provided both private and public hospital services from the same campus, with private hospital services contracted until 2058.

There are some precedents for this model, notably Port Macquarie Base Hospital, which was built and operated by Mayne Health and provided public acute services before being brought into public ownership in 2005. Furthermore, public acute services in NSW are provided by Affiliated Health Organisations[4] including at St Vincent’s Public Hospital in Darlinghurst and Calvary Mater Hospital in Newcastle.

PPP model

The NBH PPP was governed by a project deed (the Deed) between Healthscope, the Northern Sydney Local Health District (NSLHD) and Health Administration Corporation (HAC), a statutory body responsible for various administrative and property-related functions within NSW Health.

Under the Deed, operational risk – including demand management, operational costs, workforce and industrial relations, and performance outcomes – were allocated to Healthscope. NSLHD meanwhile retained oversight of Healthscope’s delivery of public hospital services to ensure compliance with public health standards as part of its broader stewardship of hospital services within the district.

A key efficiency mechanism underpinning the PPP was a pricing model under which Healthscope agreed to deliver public hospital services at a discounted rate compared to the standard NSW Health cost, referred to as the State Price.[5] This reflected the expectation that private sector efficiencies would lead to cost savings, with financial incentives structured to promote service quality and efficiency.

Operational performance of NBH

Healthscope assumed demand risk through an annual cap on payments to Healthscope stipulated in the Deed, regardless of patient volumes.  If patient activity exceeded the reference level that year, Healthscope effectively provided the additional services for free, which was a point of ongoing tensions.[6] The Auditor General found that NBH delivered public hospital services at a lower cost than would usually have been the case under a public model, with cost efficiencies attributed to NSW Health’s contract management.[7]

The hospital maintained national accreditation and was found to be compliant in key clinical areas. The Auditor General also identified areas where NBH performed well, including elective surgery management, where it exceeded NSW public hospital averages.[8]

In 2023, Healthscope offered to withdraw from the PPP 14 years early while retaining the private facility. This decision was in response to claimed structural, financial, and operational difficulties, including:

• challenging administrative integration
• insufficient funding
• poor integration into the wider health network, and
• strained stakeholder relations.[9]

In March 2024, the Ministry of Health declined the offer from Healthscope, reaffirming the Deed.[10]  The Government’s reluctance to terminate the Deed at the time may have been motivated in part by community concerns that doing so would constitute a voluntary termination, triggering a financial ’windfall’ to Healthscope under the Deed.[11]

Joe’s Law – an outright ban on acute care PPPs

The tragic death of two-year old Joe Massa, which occurred following treatment in the emergency department of NBH in September 2024, attracted intense public interest. The NSW Health Clinical Excellence Commission (CEC) conducted a review of the incident, highlighting operational complexity in how NBH operated, including:[12]

• limited access to critical clinical support systems which are available in public hospitals
• fragmentation and duplication of digital systems in isolation from the NSW Health network
• insufficient resourcing of clinical governance and incident management structures
• complicated dual reporting requirements to both NSW Health and Healthscope corporate requirements, which were considered time consuming and created administrative complexity and uncertainty regarding roles, responsibilities and priorities, and
• an inherent tension between clinical priorities and operational efficiency, with heightened awareness of financial drivers and performance abatement triggers promoting efficiency but risking a misalignment of clinical practice (e.g. lean rostering practices to avoid financial penalties).

The CEC observed that NBH did not benefit from economies of scale offered by NSW Health.[13]

In response to Joe Massa’s death and increased public scrutiny, the NSW Parliament passed the Health Services Amendment (PPP Prohibition) Act 2025 (NSW) in June 2025, known as 'Joe’s Law', which inserted s 133E into the Health Services Act 1997 (NSW) (the Act) prohibiting the State, a Local Health District or Statutory Health Corporation from entering into an arrangement with a ‘private person’ for both the construction and operation of an acute hospital service if those individuals will hold an interest or liability in relation to the hospital, and if construction involves any level of private sector financing, ownership, or control.

The prohibition is limited in several respects:

• It specifically applies to transactions that involve both construction and operation of an acute hospital, so it should not impact construction-only PPPs.
• It only applies to a ‘private person’, which is defined to exclude a ‘public health organisation’ (which includes an Affiliated Health Organisation) so not-for-profit entities scheduled under the Act could still enter into a comprehensive PPP arrangement.[14]

Joe’s Law is unusual in a legal sense, in that the prohibition purports to bind future governments, although the law received bipartisan support in Parliament and so the point is probably moot.

Termination of the Deed

In May 2025 Healthscope’s parent company entered receivership.[15] The NSW Government viewed this as constituting a change in control under the Deed, which required the consent of the NSW Government.[16] As consent was not granted, the Government contended that the operator default termination provisions had been triggered, entitling it to terminate the Deed on more favourable terms than if it had to terminate the Deed for convenience.[17]

Negotiations are currently underway between the NSW Government and Healthscope to determine an appropriate termination procedure. However, if these negotiations fail, a legislative pathway has been prepared, with Parliament recently passing the Health Services Amendment (Northern Beaches Hospital Deed Termination) Act 2025 (NSW) (Termination Act). The Termination Act inserts Schedule 9 into the Act, empowering the Minister to terminate the Deed by statutory notice, characterising the termination as an operator default termination event, which comes with the corresponding limitation on the amount payable to the Receivers and establishes a statutory dispute resolution process.

Future directions for engagement of the private sector in public service delivery

The resolution of the ownership of NBH is ongoing, however there are some initial lessons that we can draw from its unwinding for future engagement between the private sector in public service delivery, either as a PPP or another model.

1. First, effective system integration is critical. The delivery of public services increasingly relies on integrated, multi-layered systems driven by data, to meet heightened community expectations for service quality and timeliness.  Prioritising the effective integration of private sector infrastructure into this matrix of public systems and relationships at the project design phase and in operational implementation is essential, and this responsibility falls to both project proponents and the public sector.
2. Second, there must be sufficient social licence for non-government involvement. The absence of this can detract from service quality and add inefficiency, for example duplication of systems and fragmented purchasing. This can also have a corrosive effect on the workforce engaged to deliver services. The passing of Joe’s Law restricts for-profit providers from delivering acute health services in NSW, although there remains scope for the not-for-profit bodies to do so and private sector participation in construction (only) projects, both of which have stronger public support.
3. Third, long term arrangements must be durable. The drive for efficiency can result in contracts based on unrealistic commercial assumptions and risk allocation that cannot be sustained over the duration of the agreement.  To address this, it is essentially to rigorously assess anticipated costs during the design phase to assess whether and how private sector involvement could work.  Additionally, proposals submitted should be reviewed with an emphasis on their durability. Similarly, contractual arrangements need to be fit for purpose, covering both traditional cost and quality factors, as well as public interest requirements, particularly the maintenance and enhancement of public health outcomes. Comprehensive transition provisions for entering and exiting contracts should also be included.
4. Fourth, counterparty risks are significant and must be managed. The experience, motivations, and contract management approach of a corporate counterparty is often different to that of a financial counterparty. The ownership of a counterparty can change over the course of a long-term agreement like the NBH project and so careful administration of change-of-control rights to ensure a change of ownership is still consistent with the reasons for a selection decision is important. Similarly, it is possible for a counterparty to enter external administration and the termination provisions need to cater for this and ensure a prompt and orderly resolution of the contract, with a fair compensation regime which avoids windfall or punitive outcomes for the parties. 
5. Finally, once a contract is in place, effective contract management must be maintained throughout the project lifecycle. Officials should implement an effective system to ensure that performance is continuously monitored and measured, contract variations are controlled and value for money is sustained over a long contract period, all while recognising the need to ensure financial sustainability for private sector proponents.

The initial challenge of delivering complex infrastructure in a fiscally constrained environment remains and will likely intensify over time. The non-government sector can bring innovation, efficiency and capital and has a role to play in solving the problem. However, the challenge for policymakers is to find opportunities to harness these benefits to complement the leadership role of the public sector.

[1] Jillian Skinner MP, Minister for Health and Minister and Medical Research, Press Release: Transforming NSW: operator chosen to build and run new Northern Beaches Hospital, October 2014 [Link]

[2] Inquiry into the Operation and Management of the Northern Beaches Hospital: NSW Government Response – Legislative Council Portfolio Committee No. 2, Health [Link].

[3] Northern Beaches Hospital – Performance Audit (Audit Office of New South Wales: 17 April 2025) [Link], p 5.

[4] An ‘Affiliated Health Organisation’ is a non-profit, religious, charitable or other non-government institution recognised under section 62 of the Health Services Act 1997 (NSW).

[5] Note 3, p 7.

[6] Note 3, p 28.

[7] Note 3, p 28.

[8] Note 3, p 9.

[9] Note 3, p 19.

[10] Note 3, p 19.

[11] New South Wales, Parliamentary Debates, Legislative Assembly, Wednesday 25 June 2025, 47 (Michael Regan, Member for Wakehurst)

[12] Independent Inquiry Northern Beaches Hospital (NSW Government Clinical Excellence Commission: July 2025) [Link], p 3-5.

[13] Note 12, p 4.

[14] See note 4 for the meaning of an Affiliated Health Organisation.

[15] Media Release – Receivers appointed to Healthscope parent companies (Healthscope Ltd: 26 May 2025) [Link].

[16] Statement of Public Interest – Health Services Amendment (Northern Beaches Hospital Deed Termination) Bill 2025 (NSW Legislative Council: June 2025) [Link].

[17] Ibid.