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© 2014 Deloitte LLP. All rights reserved. PPP Seminar : Health Royal Liverpool Hospital Case study Gavin Quantock Deloitte Corporate Finance 23 July 2014

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Deloitte UK screen 4:3 (19.05 cm x 25.40 cm)

© 2014 Deloitte LLP. All rights reserved.

PPP Seminar : Health Royal Liverpool Hospital Case study

Gavin Quantock

Deloitte Corporate Finance

23 July 2014

Deloitte UK screen 4:3 (19.05 cm x 25.40 cm)

© 2014 Deloitte LLP. All rights reserved.

Case study Royal Liverpool hospital

• PPP and Health

• Background

• Deloitte involvement

• Structure

• Key challenges

– Services

– Funding competition

– Communication

– Delay

• Outcomes

2 Royal Liverpool Hospital Case Study

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© 2014 Deloitte LLP. All rights reserved.

PPP and Health UK Government investment programme

Overview

• Public Private Partnership (“PPP”) involves a contract between the public and private

sector whereby the private party assumes substantial financial, technical and operational

risk

• British Government PPP investment programme (the Private Finance Initiative (“PFI”)) was

designed to facilitate private sector investment in Health

• PPPs have been the main delivery mechanism by which much UK infrastructure has been

procured in the last 15 years

• UK has delivered over 600 PPP projects with a total capital value in excess of $80 billion

Health

• Over 80 new or refurbished health projects completed

• Over $17billion of capital has been spent on new hospitals in the UK

• First hospital reached financial close in 1997

• Typical operational period 22-30 years

3 Royal Liverpool Hospital Case Study

Source : HMT

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© 2014 Deloitte LLP. All rights reserved.

Background A large University Hospital that was in need of a new facility

The Hospital

• The hospital is one of the main providers of acute care in

the region and is home to a number of specialist trusts

(cancer, children's, women's)

• The hospital has historical links to the University of

Liverpool and has a dental hospital on site.

• The hospital treats 172,000 patients (inpatients/ day cases)

and 490,000 outpatients per annum

• $400m+ capital construction costs

The need for change

• Outdated electrical infrastructure

• Wall casing crumbling with elements of the building falling

to the ground

• Wards were failing to provide the privacy and dignity

expected in modern health care

• Hospital layout was inefficient and inappropriate for

effective service delivery. 4 Royal Liverpool Hospital Case Study

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Background continued

Bidders were asked :-

To provide a building that had :

• 646 Beds and 23 wards

• 18 operating theatres

• Underground car parking

And operational services :

• Hard Facilities Management (“FM”)

maintenance

• Lifecycle services

• Utilities management (risk reward on

energy cost/usage)

• Soft FM services such as window

cleaning, pest control and grounds and

gardens maintenance

5

What the hospital was looking for from the market

Design

Fund

Build Insure

Operate

Royal Liverpool Hospital Case Study

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Deloitte involvement We acted as the financial and commercial advisor to the Trust over 8 years

6

Area of work Role

Outline

business case

• Assist with economic and financial business case (of 5 case model)

• Facilitate workshops on option appraisal of development options

• Facilitate workshop on economic benefits of the investment

• Develop “shadow” financial model to estimate unitary charge

• Advise on accounting implications of the project

Documentation

• Support development of key documents:

• Pre-Qualification Questionnaire (“PQQ”) and PQQ evaluation

methodology (suggest financial tests/bidder requirements)

• Invitation To Participate in Dialogue (“ITPD”) (prepare payment

mechanism, funding competition section, deliverables and evaluation

methodology)

Pre

Qualification

Questionnaire

• Undertake PQQ evaluation of financial hurdles and ratio tests

Competitive

Dialogue

• Plan and participate in discussions to support the Trust in

negotiations with bidders – particularly on funding assumptions and

payment mechanism

Royal Liverpool Hospital Case Study

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Deloitte role Financial and commercial advisor to the Trust. Project management

involvement was significant throughout the project

7

Area of work Role

Evaluation

• Evaluate bidder submissions at bidder down-selection stages

the PQQ, ITPD and Preferred Bidder stages. Prepared reports

and presented results to the Trust’s Board

Preferred bidder

appointment (“PB”)

• Involvement in drafting and negotiating the PB letter (set the

agenda for remaining weeks)

Funding competition

• Agree roles and responsibilities and protocol in dialogue, review

Information Memorandum (“IM”) and terms issues, participate in

meetings with funders, review evaluation report from PB, and

present to the Trust on key issues

Financial close

• Agree financial close protocol, review model audit report,

financial close dry runs, agree final terms and model

optimisation, confirm figures for contract and review final

contract schedules

Royal Liverpool Hospital Case Study

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© 2014 Deloitte LLP. All rights reserved.

Key features of the structure

• Special Purpose Vehicle (SPV)

• SPV was created for the sole purpose of the

project and as such is reliant on cash generated

by the project to service operational costs and

debt repayments

• Project risk is flowed down to the parties best

placed to manage them via sub-contracts

• Long-term, non-recourse loans are secured on

the project assets, often including key project

contracts

• Established contractual framework used

8

SPV

Carillion

Carillion/

Uberior

EQUITY

EIB/Legal and

General

DEBT

Carillion

O&M

Contract

Equity and

sub debt

Dividends and sub

debt service

Long-term

debt

Debt coupon

and principal

Insurers

Insurance

contracts

Construction

Contract

RLBUH NHS

Trust

Unitary charge

Structure Traditional PPP structure used for the delivery of the Project

8 Royal Liverpool Hospital Case Study

Integrated offering

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Challenges faced A lengthy and complex procurement which had different challenges at

each stage

9 Royal Liverpool Hospital Case Study

Service issues Funding

competition

Communication Delay

Carillion

Plc

selected

as

winning

bidder

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Service issues Multiple interface issues identified throughout the project

Hard and Soft FM service

• Hard FM relates to the maintenance of the building (capital asset)

• Soft FM relates to catering, cleaning, portering etc.

• Value for money “VfM” and risk allocation needs to be understood

Demolition

• Old hospital and the transfer to the new hospital

Design

• Bidder needed to design any space required for the hard FM but the Trust dictated the soft

FM requirements e.g. the design of the kitchen area.

Energy

• Energy provision – the Trust had an on site energy provider

10 Royal Liverpool Hospital Case Study

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Discussion topic Considerations of the facilities management provision

– How can you manage the interface issues between hard and soft FM services if soft

FM is being delivered by the public sector?

11 Royal Liverpool Hospital Case Study

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Funding competition Closing dialogue and choosing your bidder without a funder….

12 Royal Liverpool Hospital Case Study

During dialogue Soft market test appetite Issues?

Once PB is chosen Stage 1 : DD advisors review

documents on behalf of funders

Stage 2 : DD review specific

elements of bidders’ submissions

as identified by the Trust;

Stage 3 : DD advisors novated to PB

and full bid reviewed

Stage 4 :DD advisors meet with

funders

Stage 4 :DD advisors assigned to

funders

Issues?

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Funding competition continued Selecting a funder once the deal has been agreed

13 Royal Liverpool Hospital Case Study

Shortlist prepared

Outside of

dialogue

Bank v Bond v

Private

Placement

Evaluation

Price, deliverability, Flexibility, Issues

Cap

ital co

ntr

ibu

tio

n o

f c. 40%

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Communication How the Trust interfaced with the bidders

On most PPP health projects there is a high level dialogue between the Trust’s chief

executive and the bidding organisation, and the Trust’s and bidder’s Project Directors

Key issue: Inconsistent messages relayed to bidders due to one-to-one discussions between

the bidder and Trust Project Directors

Solution: Involve another party, communicate meeting with others, record key message for

consistency

The overall project team consisted of the following:

• Design team

• Technical construction team

• Facilities management team

• Commercial team (finance and legal).

14 Royal Liverpool Hospital Case Study

Open communication and transparency at all levels is a fundamental to

success. Working through a third party can help this

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Delay There were several factors that were in and out of the Trusts control

15 Royal Liverpool Hospital Case Study

Central

Government

Dialogue

sessions Local resident

12 months 6 months Hard to

quantify

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Discussion topic Considerations of the impact of delay

– Consider the means by which you might try and mitigate potential delays to the project;

– For potential delays that are not within your control, how might you keep bidders

motivated?

16 Royal Liverpool Hospital Case Study

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The outcome A project that will deliver one of the largest hospitals in the UK

• Hospital reached financial close in 2014

• Construction will take place next to the existing hospital with services transferred once

completed to minimise the impact on service delivery

• Landmark project and building

• One of the largest hospitals in the UK

• One of the largest emergency departments in the North West of England

• One of the most sustainable 'greenest' in the country, with renewable energy systems, low

carbon technology, water meters and leak detection systems

• The Trust’s team are now thinking about wider issues/positioning on site to allow for further

regeneration in the future

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Discussion and Questions?

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Contact details

Gavin Quantock

Deloitte LLP

Tel : +(44) 11 3292 1458

Mob : +(44) 78 2573 5188

[email protected]

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