The financial close of Legnano hospital on 27 March 2007 and a number of other prospective – increasingly certain – Italian health deals are the first strong signals that Italian healthcare PPP will pick up the pace of deal-flow. This is particularly true in the region of Lombardy where the regional authority responsible for infrastructure, Infrastrutture Lombarde (Ilspa), has earmarked a Eu1.6 billion investment in healthcare under its regional plan, with six new hospitals scheduled to be ready by 2010.

The Eu130 million ($176 million) Legnano hospital is the third PFI hospital to finance in Italy after the Mestre and Castelfranco and Montebelluna hospitals. Unlike Mestre (for more details search 'Mestre'), which must now be viewed as a one-off, Legnano hospital was banked under Italian law.

The financing is split between a Eu8.2 million equity tranche, Eu46.8 million term loan, and a public contribution provided by the Italian Ministry of Healthcare and the Lombardy Region for a total amount of around Eu75 million.

Dexia, sole underwriter and the original mandated lead arranger on the deal, brought in two other financial institutions – Mediocredito Centrale (Capitalia Group) and Banca di Legnano (Banca Popolare di Milano Group). Allen & Overy prepared the financial documentation.

The most recent benchmark for Legnano is the Eu120 million Castelfranco and Montebelluna hospital, in the Veneto region – the first hospital PPP to be structured solely under Italian law. Banca Mediocredito and Monte dei Paschi di Siena (MPS) joint lead arranged the Eu85 million project debt comprising a 19.5-year Eu70 million term loan, a Eu7.9 million VAT facility and a Eu5 million cost overrun facility. Pricing on the debt began at around 120bp over Euribor.

Although Legnano is the third PFI hospital to reach financial close in Italy, the banking and feasibility studies were undertaken by Ilspa – as well as the preliminary design – when there were no deals in the market in early 2005. The bidding phase took one year, it took six months for the project documentation to sign at which point construction started funded by the sponsors, and a further year to reach financial close.

Construction at the site began in March 2006 and completion is expected by April 2009. One year after the official ceremony for the laying of the first stone on 27 March 2006 the hospital is already "visible" and construction is on schedule.

Antonio Rognoni, Managing Director, Ilspa says, "We are hopeful that this project sets down a template for future deals so that negotiations regarding the contractual arrangements between banks and contractors can be undertaken more quickly."

The project company on Legnano Hospital, Genesi Uno, owned by a consortium headed up by Techint Spa, is responsible for the construction and operation of the hospital and under the concession will operate non-core FM services for a period of 24 years.

Now that a bankable template has been forged, the main obstacles to financing PPP hospitals in Italy are the cultural differences between Italian constructors (unused to committing to long term operation and FM agreements) and UK-style PPP concessions. Another major obstacle is the reliance on the creditworthiness of regional health trusts.

A heavyweight sponsor such as Techint and the role of Infrastrutture Lombarde helped to overcome these cultural differences and bring the project to a successful conclusion. Infrastrutture Lombarde advised the awarding regional health trust, Azienda Ospedaliera, on technical and financial aspects of the deal.

The Lombardy region is widely regarded by participants in the Italian project market as the most PPP-sophisticated of Italian regions – primarily because of Infrastrutture Lombarde and its acceptance of what does and does not make a project bankable. Infrastrutture Lombarde coordinates all PPP transactions in the region and, in light of the lack of a fully-firing centralised PPP taskforce, the team is a model for other regions to follow.

The other major obstacle facing the roll out of new PPP hospitals across Italy is the reliance on the regions' creditworthiness. This means that the deal flow is likely to be concentrated in the more affluent north of the country, where the regions' credit ratings are healthier: the Mestre and Castelfranco and Montebelluna hospitals are located in the Veneto region which is rated AA by S&P and the Lombardy region is rated AA-.

A precedent was set down in the first hospital financing, Mestre, where it was concluded by legal counsel that the lenders could rely on the regional government as a de facto guarantor of regional health authorities (ASLs) without an explicit contractual agreement. Legnano Hospital avoided these difficulties as PPP in Lombardy benefits from regional concession laws that provide explicit direct regional guarantees to the sponsor, which enables the security to be assigned to lenders.

Still, this will not help those regions with a poor credit rating and this situation could create a feast and famine scenario between the north and south. The creditworthiness of the region as a determining factor of PPP hospitals could be circumvented if Italy adopted legislation along the lines of the Residual Liability Act in the UK, where central government provides a backstop for its regional agencies, however there seems little political will in Italy for such changes in the law.

The new Legnano hospital will provide 550 beds plus 20 beds for dialysis and 12 beds for short-term stay. The 550 beds include also 21 beds for intensive care and 43 beds for day-surgery.

Ilspa began work on its PPP healthcare program in 2004. It has set itself the goal of having six new hospitals by 2009 – it has already delivered a traditionally procured hospital, the Eu110 million Varese Hospital which was finished in June 2006, now Legnano hospital is on its way.

Preferred bidders are scheduled to be named for four more hospitals in Autumn 2007, they are the Eu140 million Vimercate Hospital, the Eu170 million "Sant'Anna" Hospital in Como, the Eu246 million Niguarda Hospital "CàGranda" and the Eu319 million Bergamo Hospital.

Legnano Hospital
Status: Financial close 27 March 2007
Description: Eu55 million private funding of Eu130 million PFI hospital
Sponsors: Techint; Manutencoop; ISI-Italia Servizi Integrati; Impresa Vinco Renzo
Mandated lead arranger: Dexia Crediop
Lead arrangers: Mediocredito Centrale (Capitalia Group) and Banca di Legnano (Banca Popolare di Milano Group)
Legal counsel to lenders: Allen & Overy
Awarding authority: Azienda Ospedaliera "Ospedale Civile di Legnano"
Adviser to authority and Project & Construction Management: Infrastrutture Lombarde S.p.A.