The Greater Manchester Strategic Health Authority (GMSHA) in conjunction with Balfour Beatty's specialist concession company Consort Healthcare has reached financial close on the long-delayed £178 million PFI project to redevelop Hope Hospital in Salford

The project is part of the 'Northern Batch' scheme which comprises both Salford Royal and a hospital in Tameside for the Tameside and Glossop Acute NHS Trust.

Since its launch in 2003, the batched scheme has seen the Bradford Teaching Hospitals scheme pull out of the group and around £30m (US$34.5m) cut off the value of the Salford and Tameside hospital schemes after a review by the GMSHA.

These issues serve testament to the complexity of batched schemes which involve more than one major hospital development - much like the Three Shires scheme which batched smaller mental health schemes.

Batching is a DoH/PFU pathfinder initiative and is being developed through two different teams

•  the Northern Batch
• Shire3 in the East Midlands

By 'batching' together two hospital PFI schemes, the overall contract is deemed a more attractive opportunity for a larger number of companies. The Northern Batch PFI, for instance, received 25 expressions of interest.

The close of the Salford hospital PFI falls in line with a number of hospitals and health centres that have closed this summer and despite an unstable period of rising PFI bid costs, the international credit squeeze and uncertainty over pricing - a number of hospital projects are still set to close before the end of this year.

Background

In August 2002, the Primary Care Trust (PCT) approved the project's outline business case. The project is part of the SHIFT Programme - Salford's Health Investment for Tomorrow.

SHIFT is a programme of five projects that aims to change the face of health services in Salford over the coming six years, bringing healthcare closer to the local community, providing investment in new healthcare facilities and revolutionising NHS information systems.

The five SHIFT projects are:

• redevelopment and modernisation of Hope Hospital
• construction of six new health and social care - LIFT - centres located across the city
• redesign of health services to provide integrated patient care
• NHS Connection for Health in Salford
• an integrated NHS Workforce in Salford

The Salford hospital project was launched in early 2003 with three shortlisted firms and then ground to a halt in September that year, following the shelving of the Kent three-PFI hospital batch.

The project was stopped by GMSHA due to 'affordability problems'.

GMSHA said a review prompted by concerns over the balance of funding between the acute and primary care sectors in the region and were 'reconfirming the scope of the scheme'.

After a review in January 2004 and £30 million slashed from the project value, it was allowed to progress with its shortlisted bidders:

• Balfour Beatty's Consort Healthcare - Haden Young and Haden BML
• Equion - a division of John Laing
• Catalyst consortium - Bovis Lend Lease, Sodexho and BLL FM

The deal originally included hospitals in Bradford, but in 2004 the Bradford Teaching Hospitals NHS Trust pulled out of the project having had the original £227 million scheme slashed back to just £50 million.

In June 2005, the Catalyst consortium quit the process - without citing reasons - leaving Balfour Beatty and Equion to battle it out.

Consort Healthcare was selected as preferred bidder in November 2005.

The Project

The project comprises two hospital development schemes in Salford and Tameside. In Salford, Consort will redevelop and provide new buildings for Hope Hospital under a 35-year PFI concession with a capital value of £178 million.

In Tameside, Consort will design and build a new acute and mental health facility at Tameside General Hospital under a concession contract worth around £60 million. Although the mental health facility at Tameside was procured together with Hope Hospital, it will reach financial close alone - later this month.

Consort Healthcare will DBFOM the new acute hospital building, as well as a medical education building and an associated multi-storey car park.

The facilities will include:

• education centre
• emergency assessment unit
• critical care unit
• high dependency unit
• intestinal failure unit
• new renal
• urology units
• wards
• diagnostic units
• mortuary
• other facilities

Construction on the hospital has started with completion slated for June 2012.

Financing

This was the first health PFI scheme in the UK where the teams went through the bidding process without senior debt funders. Once Salford Council awarded the contract - a separate financing competition was launched for the scheme.

The total project value - including the £40 million variation bond - was £178.4 million, with HSBC and RBC Capital Markets fixing the bond pricing on 31 August 2007.

HSBC and RBC acted as joint MLAs providing a £118.9 million Ambac wrapped bonds, with a debt:equity ratio of 89:11

 It was rated AAA and Aaa by Standard & Poor's and Moody's respectively.

The bond pricing was set at Gilt +80bp (a high pricing for such a project which takes into account the current credit squeeze) with benchmark Gilt at four and one-eighth per cent of the 2030 index link, with an all-in coupon of 2.0677 per cent.

The sponsors - Balfour Beatty and HSBC - each contributed 50 per cent of the £19.5 million equity (both investing £9.75 million).

Ashurst provided legal advice for the sponsor and RBC Capital Markets acted as financial adviser. Allen & Overy was the legal adviser to the banks, and technical advice was provided by Gleeds.

Dickinson Dees was legal adviser to the NHS Trust and Deloitte provided it with financial advice. The insurance adviser on the project was Willis.

Conclusion

Despite having been running for a few years, batching is still in its infancy in the UK. Although they are in the course of being procured in a variety of sectors, most batched projects are yet to become operational and most are still being evaluated.

However, initial indicators are that the market will see more such batched projects. The key drivers for batching appear to be the need to increase economies of scale and decrease bid costs.

Batching has proved particularly successful in LIFT schemes - many of which ares mall projects and would struggle to attract bidders without the volume making it more worthwhile - and BSF programmes which combine these elements using a centralised and regular use of standard form documents to implement a substantive investment programme. 

PFI deals are facing mounting public controversy with concerns being raised over the financial burden placed on NHS Trusts - however - the hospital market remains lively with the need for new hospitals still going strong.

The project at a glance