Construction Cost of New Hospital Comes in at $13 million Less Than Original Estimate

Bermuda Hospitals Board (BHB) is pleased to report today that the design and construction related cost of the new facility being built by Paget Health Services (PHS) is $247 million. This is about $13 million less than the original estimate of approximately $260 million in the 2008 Johns Hopkins Medicine International Report.

BHB has chosen to deliver the new facility through a public private partnership (PPP) that transfers many of the project’s risks, such as cost overruns and on time completion, to the private partner. The PPP model also allows for cost certainty, and frees funds to be used by BHB now to improve patient care and facilities because the first payment on the new building will not be made until 2014.

A fair and competitive bidding process between the three bid teams shortlisted by BHB helped keep the project costs down.

Chairman of Bermuda Hospitals Board, Herman Tucker, says, “As Chairman, it gives me great satisfaction to see us come in under estimate. We have entered into a project we know we can afford, and our private partner has financial incentives to build, on time, a high quality hospital building. Paget Health Services will also maintain the building for the length of the contract, giving Bermuda an assurance that we will have a high quality, modern healthcare facility for the next 30 years.”

He continues, “As this is Bermuda’s biggest construction project, any delays and cost over-runs could be very damaging to us, especially as we face one of the most challenging economic times in living memory. A key benefit of the way we are delivering this new facility is that Paget Health Services take on the risks of delays and cost over-runs. This is very good news for us and Bermuda as we seek to control healthcare costs for the community.”

Chief Executive Officer, David Hill, comments, “BHB implemented a financial strategy two years ago to build a fund to meet our entire financial commitment of redeveloping KEMH. This includes meeting the annual payment obligations to PHS for the new facility, purchasing required equipment and furnishings, as well as revitalising our existing KEMH building. Coming in under budget for the costs of the new facility means we are confident that BHB is well positioned to meet its 30 year payment schedule.”

Deputy Chief Executive Officer, Venetta Symonds, adds: “At the heart of this project is the provision of high quality healthcare. We have met best international practices with regards to the competitive public private partnership procurement process and this ensures that we got the best value we could for Bermuda. We would like to thank the many people involved in this project, from staff to government employees, community groups, neighbours and advisors. It should give all of us great pride that we have managed to come in under budget and that work has already started. We are really looking forward to treating our first patients in the new building in 2014”.

Notes to editors

Anyone wishing to view a hardcopy version of the Project Agreement between BHB and PHS (with commercially sensitive information removed), is welcome to visit BHB’s health sciences library on the ground floor of King Edward VII Memorial Hospital between 8am and 5pm on weekdays. KPMG’s opinion as Fairness Monitor is available below.

Below are further details about the project costs:
• Project Costs Repayment Schedule
Total project costs (including the costs for design, construction, financing, maintenance and major building system replacements for the building) will be paid over a 30-year operating period through annual service payments. The repayment period begins only once construction has been completed. The new facility must meet BHB’s design and construction specifications contained within the Project Agreement between BHB and PHS for payments to start.

• Transfer of Risk Gives Cost Certainty to BHB
The 30-year payment costs were set when the contract was signed. They take into account the transfer of key project risks to the private partner, such as construction risks (e.g. construction schedule delays and site conditions), and design risks (e.g. errors, omissions and inconsistencies among the architectural and engineering drawings) and all of which can significantly impact project costs. Should these risks result in cost overruns, the additional cost would be borne by PHS alone. BHB’s payments as agreed in the contract would not change. This transfer of risk is a key benefit of the Public Private Partnership procurement model. It results in much greater certainty about the costs, making it possible for BHB to plan for its future payments.

• Competitive Process Supported by KPMG Fairness Opinion
BHB is confident that the project costs are appropriate given the competitive procurement process which included three strong bid teams. KPMG has issued a fairness opinion which specifies that the Request for Proposals (RFP) process was fair to all bid teams. The evaluation and scoring of the bids by BHB and its expert advisors considered cost as a significant factor in the overall evaluation framework.

• BHB’s Financial Obligations
BHB’s financial obligations are set out below. Some of the detailed cost breakdown cannot be provided because it would contain PHS’ commercially confidential information. However, BHB is responsible for paying PHS:
o a one-time initial payment of $40 million after the new hospital building has been completed in accordance with design and construction obligations contained within the Project Agreement.
o in addition to this one-time payment, BHB will make annual service repayments.
o the first year’s total annual payment obligation is $26.7 million. Like the capital costs of the construction phase, this annual payment amount is less than BHB had budgeted for in its capital financial planning process. All annual service payments will be disclosed via BHB’s regular financial reports.

Total Project Costs
Since a portion (approximately 30%) of BHB’s annual service payments throughout the 30 year payment schedule will be adjusted annually due to inflation, the exact final cost of the project cannot be determined. However, since BHB’s fees rise almost 100% directly in line with inflation, the payment obligation becomes relatively less expensive for BHB over time. That is to say, when you account for inflation adjustments, BHB’s revenues will increase at a faster rate than the annual service payments. Another potential impact on total project costs over the 30 years is performance penalties. These penalties are applied through payment deductions if BHB’s specifications are not met. Essentially, payments will be adjusted if the building is not operating in accordance with the performance specifications in the contract. This transfer of ‘building performance risk’ is another key benefit of the PPP contract – one that benefits BHB for the full 30-year maintenance period.

Attachment 1: KPMG Fairness letter

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