Abbotsford: The P3 promoter

Canadian P3, say its proponents, needed a champion deal to drive forward the market and mute its critics. ABN Amro, which has both stumped up C$60 million ($49 million) of equity and is the sole arranger of C$329 million in debt for the Access Health Abbotsford hospital project, may have found the fastest way to do it.

For Abbotsford, underwritten and closed in December 2004, ABN Amro will imminently sell C$209 million in series A notes with a 33.25-year maturity, and plans to sell $120 million in series B notes with a 32.25-year maturity a year on from financial close, both in private placements. The staggered drawdown and issue are necessary because all of the proceeds are not required at the start of construction, and ABN Amro's structure allows it to avoid negative cash carry.

"Canada has had a bit of a mixed history with the P3 model," says John McCarthy, global head of structured capital, ABN Amro. "But the Abbotsford deal has gone through such a detailed due diligence at a bureaucratic and political level that it shouldn't run into the kinds of troubles witnessed by the 407 project. PartnershipsBC has gone to great lengths to negotiate a secure financial outcome for the Province and for the owner, operator and contractor. The transaction has established new benchmarks and it is a deal we are very comfortable with."

The bonds will be marketed in Canada, the US and Europe. They have been assigned an indicative A1 rating from Moody's, reflecting the client credit of the province of British Columbia, albeit with the fluctuation in service payments subject to availability and performance criteria. The notes are likely to be priced at under 100bp over Canadian Treasuries.

That ABN Amro was also the only equity player, and lead developer, undoubtedly sped up proceedings in a market that is often characterised by reversals and tender withdrawals. A fair portion of the risk is contained through fixed price-fixed engineering, procurement and construction contracts with PCL Constructors Westcoast, and contracts for facilities management (FM) with Johnson Controls and Sodexho.

Service payments will be made in thirteen instalments throughout each year, based on a contractual payment mechanism that takes into account facility availability and service quality. Payment deductions are based on the severity of the failure, the importance of the rooms affected and their degree of availability. For instance, for one day's unavailability the payment would be reduced by C$180 for a public washroom, and C$2,250 for an MRI facility. The concession also contains small equity sweeteners – AHA has rights to provide patient entertainment and two areas of retail space, and may in future propose other commercial opportunities.

British Columbia is one of the more P3-friendly provinces, and has the most technically adept P3 taskforce and procuring agency, PartnershipsBC. Still, such is the vehemence of opposition to P3 in some quarters, Abbotsford – one of the largest P3 healthcare deals yet and arguably the most complex P3 across any sector – has undergone public scrutiny in microscopic detail.

The project itself is a 300-bed regional hospital and cancer unit maintained over a 30-year concession to replace the ageing MSA hospital in Abbotsford. The facility will offer a number of enhancements including the cancer treatment centre, operated by BC Cancer Agency, and MRI services. The need for a new hospital was identified as far back as 1986, but while the preferred bidder was not awarded until 22 July 2004, close was reached expeditiously on 7 December 2004.

The hospital is due to be complete by the end of 2007, only then will the province fund the annual operating budget – for the first full year of operations the payment will be $41 million, excluding bonuses and deductions, and grow with inflation. The Fraser Valley Regional Hospital District will provide C$71.3 million toward the facility.

According to PartnershipsBC the net present value of the payments to AHA over the life of the 30-year contract, assuming no bonuses or deductions, is estimated to be $424 million – a saving of $39 million, compared to the analysis of costs for the notional same hospital built and maintained in the public sector. This is the key argument for P3 – and one that Abbotsford has made forcefully.

AHA Access Health Abbotsford Ltd.
Status: Closed 7 December 2004
Size: C$389 million
Location: Abbotsford, Fraser Valley, 80km east of Vancouver, BC
Description: Financing of 300-bed hospital with integrated cancer centre
Sponsor: ABN Amro
Concession awarder: Partnerships BC, as adviser to BC Ministry of Health Services, Provincial Health Services Authority, BC Cancer Agency, Fraser Health Authority, and Fraser Valley Regional Hospital District
Contractors: PCL Constructors; Johnson Controls; Sodexho
Equity: C$60 million
Debt: C$329 million
Arranger: ABN Amro
Consortium legal: Davies Ward Phillips Vineberg
Government financial advisers: Ernst & Young, Capital Works
Government legal: Fasken Martineau DuMoulin
Partnerships BC legal: Bevan Brittan