Updated 3.16pm with government reaction below - The government has effectively guaranteed Vitals Global Healthcare a no-risk investment in the operation of three State hospitals.

It bound itself and any future government to pay Vitals €100 million and assume its lender’s debts if it decides to take back the hospitals, and the latter in case the company defaults. This could amount to hundreds of millions of euros – footed by the taxpayer.

In 2015, the government signed a 30-year concession agreement with Vitals for the redevelopment, maintenance and operation of St Luke’s, Karen Grech and the Gozo General hospitals. The contract was laid on the table of Parliament in a heavily redacted version but this newspaper has managed to obtain information about a number of its clauses over the months.

READ: €1: The price Vitals paid for three hospitals' contents

The latest to be revealed had financial practitioners expressing “shock” yesterday at the “gratuitous conditions” given to the private concessionaire in the contract.

“In our 30 years of practice we have never seen such a one-sided agreement where a party – in this case the government – gave the other party – VGH – a practically free ride for all no-risk deal,” a member of a seasoned group of accountants told The Sunday Times of Malta after examining the clauses in question.

“In our view, the contract is not only scandalous when considering that all payments will have to be forked out by taxpayers but verges on the absurd.

“There is something very wrong in this contract,” he said, adding that it merited a massive investigation by independent auditors and possibly by the police.

“The concessionaire got a deal which no one could refuse. Not even the most naive of negotiators would come out with the termination clauses contained in this contract. Now we understand more why most of the contract was kept secret.”

We have never seen such a one-sided agreement

The termination payment clauses are contained in a specific schedule of the contract and would also apply to Steward Healthcare, the US company which is taking over the concession following the government’s written consent.

If the government decided to take over the concession (see box) it would have to pay out €100 million and cover all the lender’s debts incurred by the company.

If the concessionaire defaults or decides to pull out unilaterally, while the government would not have to fork out the €100 million, it would still have to guarantee all VGH’s (or Steward’s) investment as well as cover all its lender’s debts.

The clauses exclude other payments which the government has obliged itself to pay for the transfer of land in a separate part of the same contract.

The Sunday Times of Malta has already revealed that in other unrevealed clauses of the contract, the government agreed to make a separate €80 million payment to VGH (or Steward) if it took back the title of land of Karen Grech and Gozo’s General hospital at the expiry of the 30-year concession period.

On the other hand, the government dropped the option of reclaiming back the title on St Luke’s Hospital, the largest of the conceded sites, giving VGH (Steward) the right to retain the hospital and its surrounding land for up to 99 years.

The controversial deal struck between the government and VGH – a completely unknown company in the healthcare industry – was the cause of controversy from the beginning.

After signing a memorandum of understanding with VGH prior to the issue of the tender, which the company subsequently won, the government had resisted the publication of the deal negotiated by then health minister Konrad Mizzi.

However, in a series of revelations made by this newspaper, it was discovered that while according to the government VGH would be investing some €200 million to upgrade the three hospitals, they would be getting back a total of €2.1 billion in payments from the government for the hire of hospital beds and facilities from the concessionaire.

Despite strict concession milestones included in the contract by which VGH was obliged to deliver, none of them were reached and work on most of the projects stipulated in the contract has not even started.

However, instead of enforcing the provisions of the contract, giving it the right to dispute and eventually call off the concession, the government last December announced a sudden decision that VGH was now selling its concession of the three Maltese public hospitals to another private company – Steward from the US.

Steward’s new president Armin Ernst was until last September VGH’s chief executive officer with direct knowledge of the details of the contract signed with the Maltese government.

It also emerged that contrary to the provisions of the same concession agreement, the Maltese government only gave its consent to the deal transfer after the VGH-Steward agreement was done and not prior to the agreement as the original agreement stipulates.

Originally, the deal between VGH and the government was negotiated by Konrad Mizzi. It was only later that details of his secret Panama company – formed soon after Labour’s 2013 electoral win together with another one for Keith Schembri – the Prime Minister’s chief of staff – emerged through the Panama Papers leaks.

Deputy Prime Minister and Health Minister Chris Fearne had originally distanced himself from the deal stating that it was Dr Mizzi’s responsibility. However, he is now fronting all the criticism on the deal negotiated by his predecessor.

Also, despite the fact that all payments to VGH – tens of millions a year – are coming out of the Health Ministry – it is still Dr Mizzi who has retained responsibility for the concession through a new government entity called Projects Malta.

Asked for a copy of the written consent given by the government to make the VGH-Steward deal possible, Mr Fearne referred this newspaper to Dr Mizzi.

Dr Mizzi has yet to provide the document.

The VGH contract: clauses on termination payments hidden by the government:

“The Termination payments as described below outline the Government of Malta’s (GOM) responsibility towards Concessionaire (VGH). GOM undertakes and agrees to pay the compensation to the Concessionaire as follows:

For the purpose of this schedule ‘Equity’ shall be defined as the sum total of the company’s paid up share capital, shareholder loans and any and all shareholder advances to the Concessionaire, including any share premium, and its distributable reserves. Equity shall exclude any unrealised revaluation gains or losses that may have been accounted for, including, but not necessarily limited to, gains or losses arising on the revaluation of property, plant and equipment, investment property, financial instruments, and/or intangible assets.

1 – In the case of discretionary termination and termination due to a GOM event of default: All lender’s debt + €100 million.

2 – In the case of termination due to Concessionaire (VGH) event of default: All lender’s debt – GOM will assume in its own name the Lender’s debt in full and extinguish the lender’s debt with or without the benefit of time.

3 – In case of termination due to force majeure or National emergency: Lender’s debt – GOM will assume in its own name the lender’s debt in full and extinguish the lender’s debt with or without the benefit of time – and 50 per cent of Equity – If insurance proceeds equal equity and lender’s debt then GOM has no obligation to pay. Any shortfall in insurance proceeds GOM undertakes to pay lender’s debt and 50 per cent of the equity invested by the concessionaire. GOM will directly pay the balance of debt to the lender from the payments to the concessionaire.

4 – In case of termination due to change of law (government decision): All lender’s debt + €100 million.”

GOVERNMENT'S REACTION

In a reaction on Sunday afternoon, the government said the concession agreement has been structured in the form of a Project Finance Initiative which was 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."

It said that unlike other forms of PPP, the Operator was facing 'a real market risk'.

Whilst the operator was contractually committed to carry out a continuous investment in all of the three facilities, it needed to generate income beyond what was derived from government to obtain an adequate rate of return to the investment. At the same time, the operator was required to raise standards which need to be equivalent to health care standards at Mater Dei, or international best practice, whichever was the higher. The only way in which the operator could generate an acceptable internal rate of return was through health tourism activities.

The government also explained that 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."

The government said 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.

On the €80m due by government to the operator upon the expiry of the concession term, the government said 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."

Fair compensation to the concessionaire is required upon a termination of the contract by the 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, the government argued.

Upon termination, the 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.