Treviso Hospital deal: Bringing social impact investing to PPPs

The Treviso hospital project financing charts new territory for social infrastructure PPP projects by adopting a financing structure under which a portion of the savings derived from the financing arrangements (and, in particular, the European Investment Bank (EIB) lending) is reinvested in social activities in the local community. As acknowledged by the European Commission and the European Parliament, this approach, which is entirely voluntary, i.e. not required by law, could act as a role model for other infrastructure projects, whether social or not, both in Italy and elsewhere. It could also be a "plus factor" for bidders in any future public tenders.¹

The Treviso hospital project is the largest greenfield hospital to be developed in Italy in recent years following a wave of increased interest from infrastructure funds, banks and debt funds/institutional investors in the M&A and project bond/project financing of Italian hospitals, as set out in Table 1 below.

Table 1: Italy's main healthcare PPP deals over the past two years

Treviso is a small wealthy town in the Veneto Region (in north-east Italy, near Venice) and an industrial hub for both a range of niche enterprises as well as international brands such as Benetton, Riello and Geox, many of which are leaders in their sectors, exporting a large proportion of their output to a global market. Investment in Treviso's social infrastructure is key to maintaining its competitive advantage internationally. The hospital serves the entire community in the province of Treviso, which has a population approaching one million. The existing hospital was no longer fit for purpose and a large part of it needed to be rebuilt; also, both routine and intensive healthcare services, including day surgery, needed to be upgraded. 

To renew and upgrade the hospital, known as the "Cittadella della Salute" (Hospital City), the Treviso Health Authority issued a tender for a 21-year PPP concession contract for a €250m 1,000-bed hospital, with the aim of creating a model hospital serving the healthcare needs of the entire region. The concession is a classic Build-Operate-Transfer (BOT) structure, whereby the private sector party builds, operates and – at the end of the concession – transfers the hospital back to the authority. The financing sources are a mix of public grants during the construction phase, in addition to availability payments (canone di disponibilità) and payments for the provision of non-medical services during the operation phase. The balance of the financing is provided by the private sector party through a mix of equity and project finance debt. 

As is standard for projects of this type, and as required by law, medical services are provided by the authority itself and not by the private sector party.

In December 2015, the concession contract was awarded to Ospedal Grando S.p.A., a special purpose vehicle (SPV) led by Lendlease – a leading Australian infrastructure developer – alongside other financial and industrial partners.² This is the first time in Italy that the leader and majority shareholder of a concessionaire has been a "pure" developer and investor, rather than a construction company. 

The construction contract has been awarded to a joint venture of two of the SPV shareholders, Carron (65 per cent) and Bilfinger (35 per cent). 

The contracts for the services to be provided during the operation phase have been awarded to a number of the SPV shareholders and other entities, and include:

• soft facilities management, i.e. cleaning (Manutencoop), laundry (Servizi Italia), catering (Serenissima) and hospitality (i.e. all commercial activities within the hospital premises such as bar, restaurant, shopping and car park);
•  hard facilities management, i.e. waste and energy (Bilfinger); and
• supplies and upgrade of medical equipment (Tecnologie Sanitarie). 

The Diagram below summarises the PPP structure for the project.

Following various upgrades to the design as a result of certain changes in law (e.g. compliance with new anti-earthquake legislation), works began in June 2017 with the construction of the emergency unit and helicopter pad. The main building is expected to be completed within four years, and the other facilities three years later. 

The hospital will include 160,000 m² of floor space dedicated to healthcare provision, of which 105,000 m² will be new-build and 55,000 m² will comprise upgrades to existing facilities, and will contain 200 day care surgeries. As tangible evidence of the upgrade, and most unusually for Italian hospitals, there will be a maximum of two beds per room, as opposed to the four – or eight – beds per ward which existed previously.

In July 2017, the SPV entered into a project finance loan agreement and related finance documents with the EIB as well as UniCredit, Intesa Sanpaolo (with Banca Prossima) as commercial lenders and Banca IMI. The debt package includes a term loan facility and a VAT facility (provided by commercial lenders) as well as a €29m loan from the EIB, which was granted under the framework of the European Commission's Investment Plan for Europe – known as the "Juncker Plan" – at a lower interest rate than that provided by the commercial lenders.  In a novel arrangement, 100 per cent of those interest savings are being committed, not – as would normally be the case – as a dividend to the SPV's shareholders, but to capitalise a new social impact vehicle entitled "Ospedal Grando Impact Investing", which has been established to invest in social entrepreneurial initiatives relating to public health in the Treviso area and the Veneto Region, such as new e-health services. The thinking behind this arrangement is that this investment will start a virtuous cycle of further investments in the social impact vehicle, which in turn will trigger better services for the community and further commitment from community stakeholders. In addition, it provides an opportunity for the SPV and its sponsors to test a new model for social infrastructure projects and to increase the attractiveness of their offering in a highly competitive infrastructure market.

On the one hand, this structure is similar to other local impact investment vehicles established elsewhere in Europe such as the Liverpool City Region Impact Fund and the Portugal Social Innovation Programme. On the other hand, this structure is a "market first" because it was conceived by the private sector and implemented through corporate venture capital. The EIB has acknowledged that the Treviso project is the first to be funded by the EIB where there has been an explicit commitment to use the financial benefits derived from the EIB funding for social impact investing.

A number of legal structures were considered in order to implement these arrangements. Initially, the social impact vehicle was intended to be a subsidiary of the SPV. However, this would not have allowed full separation of the social impact vehicle and the SPV and would have raised a risk of failure to comply with the concession requirements. In the end, the social impact vehicle was structured as a sister company to the SPV, owned by the main shareholder of the SPV (Finanza e Progetti), under which the SPV's savings derived from the EIB lending are transferred to the social impact vehicle as equity by means of a delegation by Finanza e Progetti (in its capacity as shareholder of both the SPV and the social impact vehicle) of the payment of special distributions deriving from the above-mentioned savings.  Under the financing documents, such special distributions are subject to specific distribution requirements compared to ordinary distributions.

Investments by the social impact vehicle must be made within a set period of time and must comply with certain social investment parameters agreed with the lenders. Compliance is checked by a firm appointed by the SPV or by the social impact vehicle with the consent of the lenders. In addition, the mission of the social impact vehicle is set out in its constitutional documents, which cannot be amended without the consent of the lenders.

The identites of the shareholders of the social impact vehicle and of the SPV are not required to continue to coincide but, if they cease to coincide, the social impact vehicle must be "kept whole" by the outgoing shareholder.

Diagram 2 below summarises the social impact investment structure for the project. 

Another challenge raised by the structure is that savings from the EIB financing are not accrued upfront but over the duration of the loan, and therefore social impact distributions are potentially delayed, which, in turn, could delay social impact investments. To mitigate this, the social impact vehicle may require its shareholders or external lenders to bridge this funding gap.

This factor, along with other features of the social impact provisions, makes the project structure quite unique in Italy in that social impact investments are achieved not through a not-for-profit organisation, a foundation, a philanthropic initiative or a corporate social responsibility programme, but through a for-profit vehicle.

This structure may prove a viable alternative option, or an upgrade option, for a number of PPP projects in Italy, particularly in the hospital sector, which has experienced significant growth in recent years. 

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