Background Dexia is the world’s largest provider of financial services to the public sector. We provide finance for public healthcare throughout the developed world. We have been financing PPP schemes since the inception of the Private Finance Initiative in the United Kingdom. We have financed nine PPP hospital projects in the UK and are involved in bidding for similar projects in Italy, Canada & Australia. We have been present in Portugal for a number of years and have financed various projects including SCUTs and the second Tagus Crossing as well as numerous municipalities.
Key Issues for Lenders Government / stakeholder commitment to the projects. Clear legislative framework with all parties having relevant powers. Strength and capability of consortium members. Pass-through of project risks to the party best able to manage each. Financial risks - inflation and interest rates - managed through appropriate indexation and hedging. Acceptable arrangements to apply in the event of (potential) termination of the concession. The fact that InfraCo - which is likely to be the borrowing conduit - looks like a UK PFI hospital project is a positive feature.
InfraCo - Design & Construction Public sector needs to be absolutely clear about its design & construction requirements. Clinical services company will clearly have a major input given its role and exposure to volume risk. Land / permitting positions must be clear before finance is committed. Construction cost and timing risk managed through the InfraCo entering into a fixed price, date certain construction sub-contract with appropriate provisions for liquidated damages. Ongoing requirement to rectify defects & reimburse deductions arising therefrom.
InfraCo - Facilities Management Fact that all support services are included in the contract reduces the interface risk to a certain extent compared with other comparable schemes. Responsibility for equipment / interface with ClinCo needs to be clear. Pricing risk managed through fixed price sub-contracts with provisions to benchmark relevant costs, particularly those involving significant staff-related costs. Indexation formula needs accurately to reflect relevant project costs. Payment mechanism needs to be objective, clear and fair with appropriate opportunities / incentives to remedy shortcomings.
ClinCo - The Healthcare Economy If ClinCo is expected to be exposed to / manage volume risk, it must be able to do so in a fully-functioning local healthcare economy where the roles and resources of bodies providing primary and elderly care as well as those of other hospitals are clear. It must be recognised in the payment mechanism that ClinCo does not have control over other parts of the healthcare “chain” that directly impact on its performance (e.g. providers of elderly care services). One cannot divorce the performance / success of ClinCo from InfraCo and so lenders will need to be convinced that the clinical services business model is sustainable.
ClinCo - Key Risk Issues Important for the payment mechanism / indexation formula to reflect the nature of the costs to which ClinCo is exposed; e.g. staff, pharmaceuticals, equipment, etc. Importance of isolation from (i.e.only penalised once as a result of the) failures of InfraCo. Need for contractual provisions to manage the risks associated with change in legislation, technology and the surrounding healthcare economy. Ongoing availability and price of relevant insurance requirements.
The Two SPV Structure Projects involving two SPVs undertaking parallel functions have been closed before and this in itself is not a barrier to raising finance. The fact that InfraCo looks like a UK PFI hospital project is a positive feature and confirms that these schemes are clearly financeable in principle. The inclusion of clinical services is a new concept and the ability of ClinCo to support a material level of financing is unclear. The ring-fencing of deductions within the relevant SPV is important to maintain clear allocations of risk and responsibility. Nevertheless, the financing community will have to understand and get comfortable with new / significantly altered interfaces / risks.
Conclusion Commitment of the Government and other stakeholders vital. Fully functioning, integrated healthcare economy important given the inclusion of clinical services involving volume risk. In principle the projects are financeable, particularly as the senior debt is likely to be injected via InfraCo, which looks very similar to a UK PFI hospital project. Critical to ensure that the risks being passed to the consortium are capable of being assessed, quantified and priced. It will be particularly important to understand and assess risks at the interfaces both “within” the two SPVs and “without” into the broader healthcare “market”. We are committed to being fully involved in these schemes and to working in partnership with the Portuguese Government.
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