Essen university hospital's proton therapy centre in north western Germany closed in early summer as the country's first health sector PPP

The Westdeutsche Protonentherapiezentrum Essen (WPE) project - which closed on 29 June - combined the construction of an innovative high tech facility and a groundbreaking financing structure.

The €136m (US$173.5m) facility was awarded in late December 2005 by Universitätsklinikum Essen to STRIBA - a JV of construction group Strabag and medical technology specialist Ion Beam Applications (IBA).

The consortium closed the deal just half a year after, with Deutsche Bank and Fortis Bank as mandated lead arrangers.

The transaction comprises the design, construction, financing and maintenance of a proton therapy centre for cancer mediation at the hospital, under a 15-year PPP concession. Its overall size of €300m (US$386m) includes an initial investment and funding requirement of €136m (US$173.5m).

Thomas Rüschen, Deustche Bank's (DB) global head for Asset Finance Leasing, says:  'The transaction marks a milestone in German PPP. Due to its high international visibility the project has an important catalyst function for the establishment of PPP as an asset class of its own.'

Michael Volkermann, vice-president at DB's projects and capital advisory (PCA) group, adds: 'The deal also stands out as the first PPP in Germany to be bond-financed.'

The project is also the first PPP in the world to include a proton therapy system - a high tech system to treat cancer with radiation - and one of Germany's pioneering such facilities.

The centre is expected to treat around 2,000 patients every year with the therapy, which is the most advanced clinical modality for the treatment of cancer with radiation.

The project

The management of Essen's university hospital saw PPP as a opportunity to escape from the restrictions enforced by empty public coffers by seeking alternative avenues for financing.

The hospital wanted to complete its cancer treatment facilities with the latest technology - the notably expensive photon therapy - which offered just in a few hospitals world-wide. With the help of the Nordrhein-Westfalen state's PPP task force, it put together the project for one of Germany's first proton therapy centres and the first in a research-led university hospital.

The EU tender was published on 29 January 2005 and was awarded on 29 December to a STRABAG and IBA consortium - STRIBA. The other finalist bidder was a consortium involving Hochtief and Hitachi.

STRABAG Projektentwicklung Germany is in charge of project development and building construction, while IBA is providing the proton therapy system and related medical technology.

A unique feature of the deal consists in that there are two SPVs for the project.

• The STRIBA consortium SPV, which holds the PPP contract with public sector
• An orphan company in Luxembourg - not consolidated -for financing purposes

The WPE facility has a capital value of €136m  (US$173.5m) and a total construction cost estimated at €115m (US$148m), of which about €50m (US$m) will be for the equipment provided by IBA. 

The overall transaction size amounts to €300m (US$64.3m) once the fifteen-year contract for the full non-clinical operation and maintenance of the centre by STRIBA is accounted for.

The facility, located in the grounds of Essen's Uniklinik, will comprise four treatment rooms:

• 3 gantries - isocentric rotational frames
• one fixed-beam room with two nozzles, of which one designed specifically for treatment of the eyes)

Construction started this summer and is scheduled to take around four years, with the first patients expected to be treated in 2009 and full operation reached by 2011.

At full capacity, the centre will treat over 2,000 patients - at an estimated cost of €20,000-23,000 each. It will employ around 100 qualified workers.

The project stands out because of its sizeable technology element, which increases the complexity and risks involved.

However, risk is 100 per cent availability-based - maintenance and availability to the public sector - and demand risk is inexistent. Michael Volkermann, vice-president at DB's projects and capital advisory group, says: There is no exposure to the German health market. If there was, such a project would not have been possible.'

He says: 'The major hurdle is this project was to understand the underlying risks in terms of technology and find an appropriate risk allocation to mitigate these risks.'

Dr. Volker Wendel, director of operations of WPE, adds: 'The commitment of IBA and STRABAG for their technology within a totally performance-based contract showed us that they are the right partners.'

Financing

The proton therapy centre project closed with an innovative approach, as a PPP including the financing of high tech.

Bernd Fislage, Deutsche Bank's PCA director, says: 'The project combines a challenging and new technology with an innovative financing structure for German PPP projects.'

Deutsche Bank and Fortis Bank acted as joint MLAs. Both had worked with the consortium since the bidding stages and due diligence started immediately after the award in late December 2005.

In effect, the transaction is considered as Germany's first PPP financed through bonds - and all three classes of them. They consist in:

• €122m (US$157m) Senior debt  tranche , with 14.5-year plus construction tenor
• €7m (US$9m) Mezzanine tranche -- construction  plus 10 years
• €7m (US$9m) Junior notes

The construction period is four years, plus a bond-side tail of an additional six months.

The mezzanine debt was provided by Deutsche Bank, while the senior debt was provided jointly by Deutsche Bank and Fortis Bank. Both mezzanine and senior debt were provided in the form of unwrapped notes.

Equity and subdebt was provided on equal terms by industrial sponsors STRABAG - one of the biggest German-Austrian construction companies - and IBA of Belgium. Pin-point equity amounted to €25,000 for the STRIBA SPV and an additional €25,000 for the Luxembourg-based SPV.

The mezzanine element is also a first in Germany. Freshfield's partner Daniel Reichert-Facilides, which advised the banks, comments: 'This is the first German PPP which contains both a senior and mezzanine tranche - a sign that the German market is maturing.'

Deustche Bank chose to issue mezzanine debt after some preliminary market sounding made them confident of interest between institutional investors. Michael Volkermann says: 'So far it seemed not possible. This transaction proved it is, and mezzanine funding is expected to be used in next projects.'

The first drawdown for the bonds was on 30 June 2006, with pricing not yet disclosed because the sale is currently going on. Syndication on the fixed-rate bonds will continue until Autumn 2006.

Pricing was defined as along PFI standards, but taking into account the bigger technology part - and the associated risk.

DB's Michael Volkermann says: 'It was challenging to implant a new financial and legal structure, which includes two layers of financing. There is a forfeiting element and the issue of notes to refinance it.

The forfaiting element, though, is usual in Germany. It provides tax benefits to the project company as the Luxembourg -based SPV purchases construction receivables from it.

Conclusion

The WPE transaction indeed marks a milestone for the German PPP market. Due to its technical, structural and contractual complexity the project will serve as pilot - and bellwether - for the German health sector.

The project is significant for several reasons, not least because it is one of Germany's few true PPPs.

In a country in which many of the legal and practical obstacles for PPPs arise from its complex federal structure - as responsibility for the provision of public services is generally split between the Federal State, the Länder and the municipalities - most projects to date have been small and launched by municipalities.

And municipal projects are usually structured as long-term lease and facility management contracts, financed by way of forfaiting - with lack of substantial risk transfer and so on balance for Eurostat.

The Essen cancer treatment centre project is so significant because it did not follow this forfaiting structure used by deals including 2004's landmark Ostkreis school's deal.

And another similar particle therapy project could follow suit soon in Kiel, northern Germany. In April, the Schleswig-Holstein university hospital launched the tender for the €80-140m (US$97-170m) scheme (IJ News, 12 April 2006) and a consortium could be appointed as early as late November.

It is another example of a German health PPP sector that has expanded notably of late, with more sizeable projects coming to market - the latest just last week to renew the Bremen-Mitte hospital under a 30-year concession worth €771m (US$991.2m) (IJ News, 8 August 2006)

In addition, the country's Minister of Finance recently announced his intention to raise the share of PPPs in public sector investment from the current 4 per cent to about 15 per cent and the Federal Government has announced a 'Growth Programme' that amounts to € 25.2bn (US$bn) over the next four years.

And the second PPP Acceleration Act currently being drawn up by the Federal Government - which will focus on tax law issues such as enabling VAT returns - should further help boost the market as a whole.

Foreign banks and sponsors who have been taking a keen interest in the development of the German market hope that Essen's WPE PPP signals the start of a more dynamic market.

And although the legal and political framework has caused difficulties in the past, the removal of legal obstacles, a more coordinated approach, greater political consensus and the ever-present budgetary considerations should unlock the potential of the German PPP market.

The project at a glance