Paddington hospital deal faces 58% premium on site

The team behind the £800m PFI hospital planned for Paddington, central London, could be forced to pay 58% over the market rate for a key plot of land.

A confidential appendix attached to the new outline business case for the Paddington Health Campus (PHC) scheme, seen by Building, says that the 1.3 ha of land in the Paddington Basin would cost it £130.4m. The land is owned by a special purpose vehicle whose shareholders include Multiplex and the Reuben Brothers, and trades as the Paddington Development Corporation, or PDCL.

The price includes £20m in compensation for the drop in value of an adjoining site owned by the developers “plus a premium above the market price of about 58%”, according to the document.

The appendix says that PDCL is charging a premium because it “is aware that the trusts’ [St Mary’s and Brompton & Harefield] best option is to develop on land owned by PDCL”.

The document puts forward two options for the land acquisition. The options are:

• A straight cash deal of £130.4m in the spring of this year
• A joint-venture agreement with the landowner. This knocks the initial land price down to £99m, but would also include annual payments of £9.1m to PDCL until the scheme’s financial close in 2008 to compensate the landowner for not developing an office scheme designed by Richard Rogers. It also includes a deferred payment of up to £21.6m from the sale of surplus land owned by the two trusts, likely to be in 2013. This could potentially add up to a total of nearly £148m.

The document favours this option because of the lower initial price and “increased risk transfer compared with the cash purchase option”.

It admits that the deal, which needs to be concluded by March, is not ideal but claims that it would be to the long-term benefit of the scheme, which underwent a critical government review last summer.

The appendix says: “Although clearly not attractive, the premium payable to PDCL’s land represents only 4.5% of the total estimated economic benefit (put at £500m) that accrues if the PHC is completed under this option. While as an isolated element of the project it might be possible to conclude that the NHS is not achieving best value on the land transaction, it is difficult to conclude that by rejecting it […] the trusts will be reaching a sound value-based judgment.”

The document admits that the land deal is “complex and unorthodox, and, as such, could easily be misrepresented”.

A further statement from the PHC said: “The unique circumstances of this scheme, including the size of the plot being bought, the 10-year timescale involved and the realisation of land value over that period, mean that this deal represents good value for the NHS, and indeed that is confirmed by the independent opinion of the district valuer.”

The land deal and the handling of the scheme drew criticism from John Wilkinson, Conservative MP for Ruislip and Northwood. He said having to spend money on a land deal before putting the scheme out to the market was the “financial policy of the madhouse”.

Building has also seen a cost analysis published for the scheme’s team in November that put the total value of the campus, after the addition of VAT and inflation, at £1.1bn. As is required by the NHS for all schemes, the outline business case is built up on capital costs at current prices excluding VAT.