Funding for the Government's co-located hospital plan is proving complicated, writes Simon Carswell, Finance Correspondent.
THE IDEA behind the Government's co-located hospital plan is relatively simple - build private hospitals next to public hospitals and move private patients to free up beds for public patients.
However, the financing of these projects is proving to be far from straightforward.
Banks are concerned that loans totalling more than €1.5 billion on these six new private hospitals are properly secured so that in the event of the Health Service Executive (HSE) terminating one of the six agreements, they have sufficient security to recover their loans.
They also want some clarity over future revenue - the prices at which the private beds will be filled and guarantees that the hospitals will be covered by health insurers.
Senior bankers say co-located hospitals are unique in that they are not standalone private hospitals, because the hospitals will be built on State land with the HSE as their landlords.
Neither are these projects public-private partnerships (PPPs), where the private company's revenues are clearly outlined for the fixed term of their investment and it has a defined exit strategy.
"Funding packages for these kinds of projects just don't fall off the shelf," said one senior banker.
Some of the project agreements between the HSE and the private hospital operators have been signed. However, a stumbling block has been the performance bond of €20 million sought by the HSE, under the agreements, for each site. Beacon Medical Court, which is building three of the six hospitals, has paid the bond on each of its sites, but other developers have yet to pay.
The banks are reluctant to commit until they have some State guarantees on their investments. Financial institutions are poring over their loan contracts with the developers before signing off.
"They are coming to write the contracts now and banks are scrutinising every single part of each contract," said one source close to the process.
Unlike regular privately-funded projects where banks can assess the risks on their loans by assessing what percentage of the project's final value they cover, the co-located projects are harder to value.
Intensive discussions have taken place between the HSE, developers and banks over how the projects are funded. Banks want assurances from the State that it will support the hospitals if the operators prove unsuccessful or that they can sell the land and buildings to recover their money.
The Government is maintaining that the rules of the co-location scheme have been agreed and that it cannot amend them to provide a guarantee that, in the event of a default, the State will buy a hospital.
Neither will the department change the terms on which it is leasing the State land for the private hospitals - namely that a bank can take possession of the building on the back of its loans, if the project fails, and turn it to another use, such as a hotel or apartments, and sell it to recover its money.
Banks also want to ensure that the private hospitals can mirror the services provided next door in the public facilities and still have the flexibility to run their facility as a private hospital and turn a profit.
The department has maintained that it is not trying to frustrate the process or engineer a situation where it would expropriate a co-located hospital in the event of a collapse. Neither is it willing to alter the terms of the entire scheme in order to appease the banks.
The Government is thought to be concerned that if it changed the scheme's parameters at this stage, it would be left exposed to legal actions by the unsuccessful tenders on the six projects.
Negotiations are expected to continue for several months, right up until the first project, which is likely to be Beacon's facility in Cork, receives full planning permission and building is about to start.
Accountant Brian McEnery, of Limerick firm Horwath Bastow Charleton, said the economic downturn had also made it difficult to raise money from tax investors, particularly when they can only offset their investment against their rental income rather than all income. Mr McEnery said the developers would need "unbelievable access" to high-net worth investors to raise the kind of money needed.
Beacon has lobbied the Department of Finance to change the rules so investors can offset all income on the money invested in the co-located hospitals.
The credit crunch has added further complications as banks have become more cautious about their lending, given the pressures on the availability and cost of bank funding.
Michael Cullen, managing director of Beacon, said that it originally had a syndicate of six banks backing the group's €784 million investment in the three hospitals. That has since grown to 14.
Sources close to the process said talks between the HSE, the banks and developers were likely to continue until the lenders had clarity on the risks involved and guarantees covering those risks.
"The thing about healthcare is that it's not property. It is funding based on healthcare demands and the likely scenario for healthcare demands is that they are going to increase over coming years," said Mr Cullen.
Co-located hospitals: financial facts and figures
The co-located hospitals - where will they be located and who won the tenders to build them?
St James's Hospital, Dublin - 195 beds - Synchrony/Capio Health
Beaumont Hospital, Dublin - 170 beds - Beacon Medical Group
Cork University Hospital - 175 beds - Beacon Medical Group
Limerick Regional Hospital - 138 beds - Beacon Medical Group
Waterford Regional Hospital - 140 beds - Bon Secours Group
Sligo General Hospital - 96 beds - Mount Carmel Group
Tallaght Hospital, Dublin - still to be decided
How are they being financed?
The co-located hospitals - private hospitals which are being built on public hospital sites - are being financed by a mixture of bank debt and investor funds.
Tax allowances enable investors to offset the money they invest in the building of the private hospitals and in new medical equipment against taxes they pay on income earned from rents on other properties. They cannot offset the investment against any other income.
So let's say one hospital costs €250 million. Banks would only be willing to lend up to 75 per cent of the value of the hospital. This means the consortium behind the hospital will put forward €62.5 million in equity, which it will raise from investors, while the bank would provide the remaining €187.5 million in loans.
For their €62.5 million, investors will make a net saving of about €139 million, essentially a return on their investment, over the eight years that they can offset their initial investment against their taxes. So, for every €1 they invest in the project, they are earning or saving €2.22.
However, the investment period is 15 years, which is substantially longer than most investors would want. There is an added complication that if investors die during that 15-year period, their investment can only be passed on to their spouse rather than any other family member.
Given that the credit crunch has made funding difficult to source and driven up the cost of money to banks, the lead bank in a co-located project will want to have less of an exposure and will want to spread their risk. They do this by "syndicating" the debt so other banks provide more of the financing.