Turks & Caicos Hospital: Clinical elation

Combining clinical and infrastructure provision on health PPP deals has been difficult for the project finance market, or concession awarders, to stomach. The UK's Independent Sector Treatment Centre (ISTC) and Portugal's Clinico template have both had troubled births. The Turks & Caicos Island, virgin territory for PPP, may have come up with a neat – and replicable – solution.

The Turks & Caicos Islands (TCI), a British Overseas Territory with strong cultural links to Canada, currently possesses two 40-year-old hospitals and sends large numbers of its citizens overseas for medical treatment. Since the majority of them end up in the US healthcare system, the cost of these treatments has risen astronomically. During the period 2006-7 its estimated expenditure on overseas treatment reached roughly $50 million.

The Islands' government looked to replace the two aging hospitals with new facilities capable of offering primary and secondary care, and sought advice from Ken Anderson, former commercial director general at the UK's Department of Health. Anderson, who led the introduction of ISTC, suggested a procurement process that combined clinical service and infrastructure provision.

The government, advised by PwC and Eversheds, issued a tender in 2006, and selected InterHealth Canada as preferred bidder in August 2006, in front of US and European private hospital bidders. InterHealth had lined up Barclays Bank as senior debt provider and Jordan International Bank as mezzanine debt provider.

The concession, which runs for 25 years, involves a single contract between the government and two separate counterparties – the infrastructure company (infraco) and clinical services company (clinico). The infraco agreement runs along similar lines to any design-build-finance-maintain hospital PFI or PPP concession, while the clinico agreement has echoes of the short-term ISTC contracts in the UK.

However, the interplay of the clinical and infrastructure elements proved to be too much for Jordan International, which withdrew backing from the project. Barclays had funded InterHealth's UK projects, and owned a subsidiary in the region, First Caribbean International Bank, through which the financing might be provided. Shortly before financial close, in the fourth quarter of 2007, CIBC acquired control of First Caribbean.

InterHealth, which had bid on the basis of a 75/25 debt equity split, met the withdrawal of its subdebt provider by turning to HSBC Infrastructure, which took a 50% share of the project's equity, and agreed to provide a subordinated debt facility. Export Development Canada joined FCIB as lead arranger, alongside a third unnamed bank, which left the group in late 2007 as the credit crunch gathered pace.

HSBC Infrastructure again stepped up to replace the lost senior debt, which the two leads could not make up, with a mezzanine loan that ranks above the subordinated debt but below the senior debt. The final capital structure of the borrower, InterHealth Canada TCI Ltd, is $5 million equity, $26 million subordinated debt, $31 million mezzanine debt and $62 million senior debt. All the debt has a maturity of 22 years, with a repayment period of 19 years after completion. The financing, in dollars and priced over Libor because the Islands' economy is dollarised, benefits from an interest rate swap, and an inflation swap (indexed to US City Average CPI) on 75% of the debt.

The financing ultimately just covers the infraco, and senior, mezzanine and subordinated debt is not exposed to clinical performance risk. InterHealth will provide clinical services to the two hospitals, on Grand Turk, which houses the islands' capital, and Providenciales, the most populous island, for two years on a cost-plus basis. These costs will then form the basis of payments to the clinico for the rest of the concession. The performance standards for the contract are based on the UK's ISTC template, and expanded for the TCI government's purposes.

InterHealth, which runs UK public-private facilities and both public and private facilities in the Middle East, will use the project as a way of advertising its capabilities to other governments. Both this hope, as well as a budget that lays down guidelines for the costs of various services, will encourage the operator to keep costs down. InterHealth is also responsible for the design-build aspects of the construction contract, and is providing a corporate guarantee and 25% performance bond, though local contractor Johnston International is building the two hospitals.

While the Turks & Caicos Islands are small, and have limited experience of privately-run infrastructure procurement, the launch of the hospital projects accompanied the introduction of a system of national insurance, with a small percentage of residents' income used towards paying for treatment on the island. This revenue is not dedicated towards the hospital or ringfenced, but the presence of both a local bank and a Canadian crown corporation like EDC provides some kind of certainty that the government will honour its obligations.

The debt has features, including a step up in pricing, that would encourage a refinancing as soon as possible, and the payment structure should ultimately support a larger amount of senior debt than was available during the winter months of 2007-8. A refinancing, however, is for now a distant possibility.

But there are ample opportunities for follow-ons in the region. Most Caribbean islands, with the possible exception of the Cayman Islands, and the definite exception of Cuba, which exports its doctors, send patients to the US and elsewhere for treatment, and most of them are chafing under the burden of US healthcare costs. Netherlands Antilles is understood to be looking at replicating the structure, and Bermuda, with financial advice from KPMG, is looking to launch a health PPP imminently.

InterHealth Canada TCI Ltd
Status: Closed 11 January 2008
Size: $124 million
Location: Providenciales and Grand Turk, Turks & Caicos Islands
Description: PPP contract for delivery of two hospitals with full clinical services provision
Concession awarder: Government of the Turks & Caicos Islands
Equity: $5 million
Sponsors: InterHealth Canada and HSBC Infrastructure Fund Management
Mezzanine debt: $31 million
Subordinated debt: $26 million
Mezzanine and subdebt provider: HSBC Infrastructure
Senior debt: $62 million
Mandated lead arranger and syndication agent:
First Caribbean International Bank
Lead arranger: Export Development Canada
Structuring adviser to the senior lenders: Barclays
Financial adviser to the sponsors: Elgar Byrne
Financial adviser to the government: PwC
Legal adviser to the government: Eversheds
Legal adviser to the sponsors: Berwin Leighton Paisner
Legal advisers to the senior lenders:
Lovells; Miller Simons O'Sullivan (local)
Technical adviser to the lenders: WSP
Independent engineer: White Young Green
EPC contractor: InterHealth Canada Construction & Services
Construction subcontractor: Johnston International