PIP becomes sole investor in Scottish PFI-style hospital

The UK’s Pension Infrastructure Platform has acquired a further 50 percent in a hospital in Scotland, becoming the sole owner of the Dumfries and Galloway Royal Infirmary.

The pension fund collaboration scheme initially became an investor in the hospital in November last year as one of 10 projects acquired from the Aberdeen UK Infrastructure Partners fund. Seven pension funds committed to the deal through the PIP’s Multi-Strategy Infrastructure Fund, including Strathclyde, British Airways Pensions, Railpen and the West Midlands Pension Fund.

Dumfries and Galloway was the final investment made by the 2012-vintage vehicle. The fund closed on £189.5 million ($241.9 million; €213.4 million) and had a net target of a 12 percent internal rate of return.

The hospital reached a £220 million financial close in March 2015 following debt commitments from the European Investment Bank and Aviva. It operates under Scotland’s Non-Profit Distributing model, devised by the Scottish government in response to criticism of the UK’s Private Finance Initiative and which aims to limit uncapped equity investor returns.

“The major difference is there is no equity upside in ownership of these projects,” Mike Weston, chief executive of PIP, told Infrastructure Investor. “The equity investment part from a normal PFI is replaced by subordinated debt which receives a fixed return. There’s no equity upside but we are in the firing line before the banks. It is a long-term fixed return without the inflation linkage.”

The UK’s Chancellor Philip Hammond this week promised to never sign a PFI contract, declaring that “the days of the public sector being a pushover must end”. He did, however, maintain that half of the UK’s £600 billion infrastructure pipeline will be financed by the private sector.

“In a way, NPD is a bit of an extension to what was PF2,” Weston added. “Rather than the government maintaining a 10 percent equity stake, in NPD the government retains the entire ‘equity’ stake, so it is a model that could be looked at. The private sector is still going to be expected to fund half of the capital investment in infrastructure. What that implies is some other mechanism for the private sector to be involved in and the issue is we don’t quite know what that will be. We will wait and see to see what the government comes up with next to make it interesting for the private sector to participate.”

Dumfries and Galloway was one of three hospitals bought in the November transaction with Aberdeen last year. Another, the Royal Liverpool Hospital, saw its PFI contract officially terminated this week after constructor Carillion became insolvent. The PIP’s investment in the site was believed to have been written off as worthless earlier this year.