The Puerta de Hierro hospital near Madrid closed on 24 February 2006 as Spain's first-ever PFI hospital deal. As the first such project to close in the whole of Spain, the hospital in Majadahonda serves not only as a template for the seven remaining projects in Madrid's healthcare PFI scheme but for all the host of regions with projects in the pipeline

The largest hospital of Madrid's well-known PPP scheme - known as Madrid Nuevas Infraestructuras Sanitarias 2004-2007 - Puerta del Hierro is being developed by a consortium comprising ACS, Sacyr Vallehermoso (Sacyr) and Bovis Lend Lease.

At €250 million (US$300m), the replacement hospital project is several times larger than the seven others and served as the catalyst for their award - and will continue to serve as template as they close.

The deal also stands out because it has effectively opened the Spanish market to healthcare PFIs, having had to accommodate the UK model to the country for the first time. Bovis Lend Lease's John Claderney says: 'Considering it was the first time such deal was tested in Spain it must have been good, as all the later projects have been awarded with almost no noticeable changes.'

The decisive point to mark its success came as the €222.6m (US$267.5m) financing deal was inked with three mandated lead arrangers: Dexia Sabadell Banco Local (Dexia), ING Bank and Ahorro Corporacion - Spain's association of savings banks.

Background

Madrid's regional authority, the Comunidad de Madrid (CAM), launched an OJEU tender for the project in mid-2004. It decided to try the UK PFI model in healthcare for the first time, building on its experience with PP road concessions and under the newly-passed 'Ley de Concessiones (13/03)' - the first PPP-inclusive public concessions law.

The Comunidad justified its decision to launch the eight-strong PFI hospital scheme based mainly on the need to accelerate the delivery of health infrastructure, the higher efficiency brought in by the private sector, the advantages of risk transfer to the private and, naturally, the off-balance sheet accounting.

The first of the 30-year PFI concessions to be launched, the Majadahonda project attracted huge interest and a long time was needed to answer the myriad of queries by the private parties. Final bids were due in by 21 December 2004, and a shortlist was eventually drawn with five bidders - each putting forward a figure for annual payment as key element.
 
Teresa Burgos, project manager for Bovis Lend Lease, says: 'The main difference with PFI procurement in the UK was speed and the fairly well developed project tender documentation. The project was launched as a well developed scheme and bidders were not required to design.'

'While there were initial delays due to the large number of questions - logical for such a pathfinder project - the awarding was very fast - just over three months compared to the usual one to two years in the UK.' she says. 'The procurement process is much simpler and cheaper than in the UK, but financial close takes longer as the complete due diligence work is left for the preferred bidder stage.'

The consortia in the running included the Bovis Lendlease/Dragados-led consortium, a group led by Constructoras San Jose, a consortium led by Sacyr, a Ferrovial/Acciona JV and a FCC/OHL-led group. Bids ranged from Bovis Lendlease/Dragados' €44.5m (US$60m) - the lowest - to Sacyr's €66m (US$88m), giving Bovis and Dragados a clear edge over the rest of the field.

The Comunidad de Madrid (CAM) awarded the concession contract for the new hospital on 18 March 2005 to the ACS-Dragados, Bovis Lend Lease and Sufi consortium - only ten weeks after they submitted their proposal. The contract, which was much shorter than the UK versions, was signed exactly a month after.

ACS has a 55 per cent stake in the project company - Hospital Majadahonda, S.A - while Bovis has a 25 per cent and Sufi has a remaining 20 per cent stake. Shortly after the award, Sufi was bought by Sacyr, which now holds the 20 per cent stake under its Testa unit.

The project

Spain's first healthcare PFI project involves the financing, design, construction and hard and soft facilities management of an 800-bed hospital to replace Majadahonda's existing Puerta de Hierro Hospital. Under the 30-year concession agreement, the concessionaire will operate and maintain the new hospital covering 520,000 people  in the fast-growing municipality of Majadahonda in the northern outskirts of Madrid.

The hospital will cover a 162,000 square metre site and will incorporate around 800 beds. The public sector will be responsible for clinical medical services, while the concessionaire will cover all ancillary medical services and all non-medical services.

The Puerta del Hierro facility will also have a conference room with 400 capacity, medical research area and lecture rooms, library, nursery and heliport, plus a subterranean parking area for 3,000 vehicles and a exterior one for 1,000 vehicles.

While ICT and medical equipment are not part of the concession, the project company will manage a large number of non-medical services and commercial areas. Complementary and commercial areas include parkings, in-room phones and tvs, snack bar, vending machines, phone booths and shops.

Construction works started in July 2005, just a few weeks after the concession agreement was signed on 18 April 2005. In true Spanish PPP style, they started before financing was secured, in this case though an equity bridge put forward by the consortium partners.

Project manager Teresa Burgos says: 'A major challenge was to stay within very tight deadlines. For example, we had to sign the contract within 30 days of the award, start construction within 45 days and complete the project in less than 28 months.'

Works are advancing fast and inauguration is expected before the end of 2007, well within the maximum permitted construction period of 28 months.

Financing

ACS, Sacyr and Bovis Lend Lease successfully closed the €250m (US$300m) Puerta del Hierro hospital in Madrid with their original backers Dexia Sabadell, ING and ACF.

Financial close was reached on 24 February 2006, after just over ten months after the award - a relatively short time for the Spanish market.  The total financing amounted to €222.6m (US$267.5m) in senior debt, in three equal tranches for the three mandated lead arrangers:

• Dexia
• ING Bank
• Ahorro Corporacion - Spain's association of savings banks - with 19 of its members

Equity for the project amounted to €28m (US$33.6m), with equity stakes equivalent to the consortium's composition: 55 per cent for ACS-Dragados, 25 per cent for Bovis and the remaining 20 per cent for Sacyr's subsidiary.

The debt/equity ratio stands at 89:11, while the term loan is for a 27.5-year period. Base-case average debt service cover ratio (DSCR) is equivalent to 1.25x, with a 1.20x minimum.

Pricing was pitched around EURIBOR plus 90 basis points, which is a debut but also the usual pricing for PPP deals in Spain. During construction pricing will be slightly lower - around 80bp - while post-construction it will increase to around 90bp. A small syndication is expected by June 2006.

The yearly payments from the procuring authority will amount to €44.5m (US$60m) - the rate based on 2004 and adjusted for inflation thereafter. Payments during the 30-year concession period were initially proposed as both a fixed and a variable amount, but the consortia negotiated an exclusively variable payment system. Payments are subject to usage - with a minimal demand risk of around 5 per cent - and penalisations are similar to those in UK PFI.

Project manager Teresa Burgos says: 'Most aspects are almost the same as a typical UK PFI, with soft and hard services provision, a penalisations model and construction risk. This risk, though, was initially higher as construction started without financing secured - through an equity bridge loan.

'The European Investment Bank (EIB) was appraising the project to provide a 50 per cent financing, but it hasn't stepped in yet and we don't expect it to step in the near future.'

On the legal side, Teresa comments: 'We found the Spanish legislation very clear and accommodating. Even with the added  complexity of an operation and maintenance aspect - which is absent from the predominantly transport PPP deals seen in Spain up to now - the contract was quite easy to draw, and much shorter than in the UK.'

She rounds-up: 'The Major challenge was to assure that the financial markets would have confidence in the model.'

Conclusion

Considering Madrid's Majadahonda project is Spain's first hospital PPP, the smoothness of the deal can be quite striking. Neither the importing of the UK's PFI model, the project's large size nor a Spanish legislation which has been always accused of Napoleonic vagueness have stopped the project advancing as planned - something that Portugal's scheme proves is not so simple.

A main reason for the ground-breaking project's success is, most of all, market appetite and experience. After all, Spain has half of the world's top ten concessionaires - the likes of ACS, Ferrovial/Cintra, FCC, Abertis plus Sacyr, Acciona and OHL - and the expertise was there to tap into. Also, with a road PPP market with very tight margins something new was welcomed in the Iberian market.

The Puerta del Hierro PFI hospital was sought-after because of its pathfinder status and size. For Alberto de Frutos, managing director of Bovis Lend Lease Spain it was clear: 'Securing this project will position us as a key player in the PFI healthcare sector in Spain.'

The project has opened the door to the remaining seven smaller projects in Madrid and also schemes in Burgos - Castille-Leon - and Mallorca in the Balearic Islands. Now the market will just hope it also brings some light into the quagmire most Portuguese hospital PPPs are in. But then again, they include clinical services and that's a different story.

The project at a glance