Two out of three bidders involved in an innovative scheme to use pension fund capital to finance a major hospital development have dropped out, HSJ has learned.
HSJ revealed in August North Tees and Hartlepool Hospitals Foundation Trust’s plans to source the capital for a new hospital from pension funds. It was an approach which Chancellor George Osborne encouraged the public sector to be adopted for infrastructure projects in 2011.
However, two of three construction bidders which were previously interested in the scheme have now dropped out.
A source close to the process told HSJ doubts had surfaced over who would bear the cost of delays or problems with the project.
HSJ was told construction company Laing O’Rourke and Spanish firm Iridium Concesiones de Infraestructuras had pulled out of the bidding process to build the hospital, leaving just Brookfield Multiplex.
HSJ understands problems emerged in relation to doubt about would bear the risk if the £298m project was delayed in the construction phase.
In a standard private financial initiative project a “special project vehicle”, which typically provides 10 per cent of required equity, is liable for any such delays.
HSJ understands there was disagreement over who would bear the risk in the absence of the same arrangement with the pension fund, and this uncertainty dissuaded developers from undertaking a costly bid process.
First stage bids on this type of project typically cost around £1.5m with the second competitive design stage thought to cost between £3m and £4m.
The chief executive of North Tees Alan Foster said it was “not unusual for schemes to be working with one bidder at this stage, especially in the current climate”.
In a statement he said: “Brookfield Multiplex is as committed as we are to providing a world class facility at an affordable price that will be a lasting legacy for future generations.
“As well as satisfying ourselves that the scheme is right for this area and affordable, we are also providing as much information as we can to our regulator, the Department of Health and the Treasury so they can be satisfied at this stage that the scheme is deliverable.”
Brookfield’s commercial director Paul Serkis said the company was “totally committed to building a superb hospital.”
North Tees and Hartlepool said, under its proposed arrangement, pension funds would provide funding from 2014. It would have expected to start making unitary payments – covering the repayment of the loan and the operating costs of the outsourced maintenance contracts – from the facility’s opening in March 2017.
The lifetime of the contract is expected to be 30-50 years, with the loan secured on the land and buildings. The trust would sell the land to the fund and lease it back over this period.
Conditions would stipulate the estate could only be used for the purposes of healthcare, and by the trust or a successor organisation.
The organisation would then buy the hospital and grounds back for £1 at the end of the contract.
In October HSJ reported that Monitor had “significant concerns over the affordability of the scheme”. At the time the regulator’s assessment director Miranda Carter said: “We believe there is considerable work to do to mitigate the risks identified by our affordability review”.
Monitor is due to assess the scheme in more detail closer to the appointment business case stage, estimated to take place in August.
In 2010 Mr Osborne’s 2010 comprehensive spending review cancelled the previous government’s commitment to fund an earlier £460m scheme planned by North Tees and Hartlepool.