The Government of Malta refers to the article published on the front page of today’s edition of The Sunday Times of Malta under the title “‘No-risk’ investment for Vitals”.
The article contains a disingenuous interpretation of the terms of the VGH concession agreement. The statement that the government “effectively guaranteed Vitals Global Healthcare a no-risk investment in the operation of three State hospitals” grossly misrepresents the facts. The article further misrepresents the contract where it states that government will pay €100M and assume lenders’ debt in case the company defaults (paragraph 2). This is blatantly untrue.
In the first instance, it must be stated that the Concession Agreement has been structured in the form of a Project Finance Initiative which is subject to limited recourse financing. This is the normal financing structure of any large-scale project undertaken through a Public Private Partnership (PPP) entered into between the Government and the private sector. This formed the basis on which Projects Malta had issued a request for proposals, and which was therefore a condition that was made available to all bidders. Within this context, the Government would like to clarify a number of issues that have been misrepresented in the article:
- Fact 1: Unlike other forms of PPP, the Operator is facing a real market risk. Whilst the Operator is contractually committed to carry out a continuous investment in all of the three facilities, it needs to generate income beyond what is derived from government to obtain an adequate rate of return to the investment. At the same time, the operator is required to raise standards which need to be equivalent to health care standards at Mater Dei, or international best practice, whichever is the higher. The only way in which the operator can generate an acceptable internal rate of return is through health tourism activities.
- Fact 2: Standard PPP contracts contemplate the repayment of lenders’ debt in order to take over the facilities. The operator is subject to onerous demands in both the Concession Agreement and the Health Services Delivery Agreement which could lead to termination by operator default. A significant proportion of the investment is typically financed by the banks, which would not accept a situation where the main asset is confiscated without the settlement of amounts outstanding on the loan. The repayment of lenders’ debt upon an eventual termination is a standard clause item in PPP agreements, and is in line with market practice. Furthermore, Government must ensure that the facilities are returned to it in case of a major default. This notwithstanding, the operator still carries a major risk in a default situation since it would essentially lose its equity investment. Government is required to consent to primary lenders’ terms, and in giving such consent it would always insist on a substantial equity injection by the concessionaire itself. Lenders would also, typically, insist on concessionaire equity being put at risk.
- Fact 3: Fair Compensation upon the expiry of the term is required to incentivise the Operator to continue to invest in the facility even towards the outer years of the Concession Agreement. The article makes reference to a value of €80M which is due by government to the operator upon the expiry of the concession term. What it fails to mention is the fact that the Concessionaire is required to continue to invest heavily in the facilities right up until the end of the concession term. The payment of the €80M at the end of the term represents the expected net book value of property, plant and equipment upon the expiry of the concession on investment made.
- Fact 4: Fair compensation to the Concessionaire is required upon a termination of the Contract by Government: Typical PPP terms require compensation to the Concessionaire for lost profits discounted to net present value at the point of termination if such termination is due to a default of Government. The contracted compensation represents a fair amount for loss of profits by the Concessionaire as a result of such Termination.
Essentially, the Concessionaire is taking upon itself the market risk for generating additional revenue streams from health tourism. Upon termination, Government would not only be taking over three pristine facilities with better service delivery but also a more efficient and cost effective operating structure than that which was previously operated prior to entering into such an agreement.
The selection of the PPP model for carrying out this investment ties in with Government’s vision to develop Malta as a leading health care platform on a global scale for both Maltese citizens and foreign nationals as a whole. Given the pressing health care investment needed on all fronts, Government identified a financing mechanism appropriate to fund this large scale project. This allows government to retain enough liquidity to manage and handle other urgent needs in the health care sector.
This included out of stock medicines (now resolved), reduction in waiting time for elective surgeries (which have been cut down drastically across the board) and resolution of bed shortages. Given the significant investment required to be effected in the three hospital facilities, private financing for the project ensured that Government could address multiple priorities in parallel.