Substantial investment in modern primary healthcare premises is a key component in the NHS Plan and the modernisation of the NHS. The national programme for Local Improvement Finance Trusts (LIFT) is intended to bring about radical change and reform in the way that primary and community care is delivered.

The LIFT projects will initially inject up to £1 billion into the NHS primary care estate via 42 new PPP companies (LIFTCos). LIFTCos will be set up as limited companies with the local health stakeholders, Partnerships for Health and the private sector as shareholders. LIFTCos will build and refurbish primary care premises, retain ownership and rent them out to health and social care providers.

To implement the initiative, a national joint venture between the Department of Health and Partnerships UK (PUK) has been formed called Partnerships for Health (PfH). PfH will ensure that local investment is delivered efficiently, quickly and responsively to local needs and circumstances by developing standard documentation, providing central procurement expertise and by actively investing in local LIFTCos.

All 42 projects issued OJEC notices between March 2002 and March 2003. In May 2003, the first LIFTCo (East London) was established and financial close achieved, less than 15 months after the first OJEC was published. PfH remains confident that subsequent LIFTs will gain invaluable lessons from these pioneering procurements, which will help improve efficiency in the delivery of remaining LIFTCos.

The final Preferred Bidder announcements are expected on all LIFTs before the end of the year.

Why the new value proposition ?

From the public sector perspective, LIFT offers a number of significant improvements over a standard PFI structure. The LIFT model is able to deal effectively with changing and evolving service delivery needs in a way that satisfies the affordability and value for money requirements of the public sector, whilst minimising the procurement process for each newly defined scheme. The LIFT vehicle becomes a self-funding engine for realising a number of service-led facilities developments, and, in projects where the Local Authority is involved at the Strategic Partnering Board (SPB) level, LIFT is also a vehicle for delivering a number of coordinated ambitions between health and social services. The participation of the public sector as a minority shareholder in LIFT builds an ongoing relationship beyond financial close to partnership working, encourages transparency and trust, and incentivises the public sector to contribute to and share in the successful economic development of this new company ? that is more than a financing SPV.

From the private sector perspective, LIFT offers the benefits of a PFI structure but with three additional features: an equity investment opportunity in a business with real commercial potential and assets beyond a stream of counterparty payments; a 20 year exclusivity deal at the heart of primary care premises development with an exclusive development forum in the SPB; and an expedited public sector commissioning process for future schemes.

Why a public sector shareholding in LIFT ?

For the first time the public sector is taking a shareholding in its service provider. Around 20% of the company will be held by the local health economy, appointing one director, and 20% will be held by PfH, also appointing one director. The remaining 60% of the company and the majority of board directors will be appointed by the Private Sector Partner (PSP). This arrangement has a number of benefits for the private sector and lenders to LIFT. The public sector is hardwired to partnership working and this strengthens the ability of the SPB to be a real forum for joint development of new schemes, rather than adversarial commissioning negotiations. The public sector can share in the growth in equity value that is anticipated as LIFT develops business activities that flow from its service provision to the public sector, but which are separate from it; and finally in the event that changes need to be made to existing contracts or the parameters of LIFT, these can be anticipated and agreed in a collaborative rather than confrontational way with the local heath economy.

New asset class for lenders

Lenders to a LIFTCo will find a combination of project finance/PFI style features and property lending features.

Construction risk can be dealt with in a PFI style template. Some LIFT bidders, however, are taking a bolder approach and proposing LIFTCos which take and manage construction and other risks, often associated with supply chain agreements which feature risk/reward mechanisms. And with a 40% LIFTCo equity-stake, public sector authorities have demonstrated their appetite for this manifestation of the partnering principle underlying LIFT.

Revenue risk has been much discussed in the context of LIFT. Whilst the majority of early revenue to LIFT flows under modified lease agreements (Leaseplus) from PCTs or Local Authorities, governed essentially by satisfaction of relatively narrowly defined availability tests, there are circumstances under which a lease may be signed between LIFT and an individual GP practice. In these circumstances understanding the way in which GPs receive reimbursement for premises rental under the Red Book has been critical in allowing lenders to accurately assess the covenant of GP practices.

There have been initial concerns about the absence of PFI style termination protections, but these have been allayed in discussions with lenders as the nature of the LIFT company is better understood. A LIFT company has real assets and a real commercial life in addition to a stream of essentially availability dependent revenues contracted to the public sector.

PFI lenders will weigh up the absence of some of the PFI style public sector covenant support against a diversified income from a variety of tenants, real security and a growing equity business beneath them. Property lenders will evaluate the landlord position under the Leaseplus, with the potentially stronger tenant covenant implicit in the LIFT partnership.

Lenders to a LIFT company are developing a relationship with a company that offers significantly wider business opportunities than acting as a lender to a project finance SPV, and it is likely that the relationship will evolve over time to include the range of M&A, refinancing, and capital markets products and advice.

Procurement process

The procurement process for LIFT has been developed with two overriding complementary objectives: to deliver 42 LIFT companies active in primary care across England by 2004 ; and to minimise the procurement costs of both the public and private sector in meeting this ambitious target.

PfH worked through 2000/01 to develop the documentation with Bevan Asford and KPMG, which was then subject to wide ranging consultation. This documentation was then discussed and commented on by 1st wave bidders and their lenders and legal advisers throughout 2002, leading to revised standard documentation being issued in December 2002. This set of standard documents was further revised in April 2003 to take into account lender comments on the first LIFT scheme to close at East London in May 2003. The documentation is now market proven from a sponsor, public sector and lender perspective.

Each LIFT procurement is being rigorously monitored by DoH and PfH to ensure adherence to the 12 month procurement timetable. This fast track process is intended to achieve the twin aims of tangible delivery on the ground by 2004 as well as minimising procurement costs to both sides.

Pricing and covenants

At the beginning of June 2003, 15 LIFT schemes had received ITN responses, so some 45 financing proposals in support of bids have now been analysed by PfH and its advisers. Broadly speaking some PFI style pricing and leverage has been seen, with some element of property financing.

The defining characteristics of the LIFT financings to date have been more flexible drawdown structures to better fit the ongoing commissioning cycle in LIFT; lenders taking a view on residual values of property through bullet amortisation structures; and covenant packages that might be characterised as ?looser? than PFI and a mixture of cash flow and asset based, to reflect the economic reality of the LIFT company.

It is likely that future financings for established LIFT companies will become more akin to corporate financings or property deals, though potentially with leverage ratios closer to PFI templates in respect of pre-let or contracted lease rentals.

Security

The emerging security structures involve a security package which has been arranged and structured around a funding subsidiary of LIFT. The funding subsidiary owns the assets of LIFT and receives the flow of rentals from the Lease-plus agreements with tenants into a secured account. Lenders have a charge over the assets of this subsidiary, a charge over the shares of LIFT in this funding subsidiary, and step-in rights to this subsidiary. This structure affords the flexibility for LIFT to raise further funding for new tranches of schemes without disrupting lenders security arrangements. It affords lenders a tightly controlled asset pool with diversified rental income on a number of buildings.