Health minister Mary Harney: plan to build over 1,000 new hospital beds on the grounds of existing public hospitals

Four years ago, health minister Mary Harney effectively ceded the development of the state's hospital policy to builders through her plans to build a network of a dozen private hospitals on the grounds of existing public hospitals by 2010.

The plan was that the government would essentially create over 1,000 new public-hospital beds cheaply by shifting private patients out of public hospitals into the new premises built and operated by the developers.

The attraction for both sides was obvious: the developers would receive generous special tax breaks while Harney wouldn't face the expense of embarking on a major hospital-building programme.

But like so many schemes dreamt up at the height of the boom, it has all gone horribly wrong: none of the hospitals will be built by 2010, operators have only been confirmed for four of them and the developers involved are all feeling the financial heat. Industry sources are now speculating that only four of the 12 hospitals originally planned will ever be built, particularly as speculation mounts that the Mount Carmel Medical Group is seeking to exit the co-location process.

Consortia involving Mount Carmel, which is backed by developer Jerry Conlan, had been lined up by the HSE as developers for co-located hospitals in Sligo, Blanchardstown and Waterford.

While the co-location project may appear to be yet another victim of the credit crunch, industry insiders argue that the situation is far more complex and that organisational hubris within the HSE is a major factor behind the delays.

"The original project agreements issued by the HSE were unrealistic but the government refused to amend them despite warnings from the banks and the developers that they would be impossible to finance," said one source.

This issue arose well before the credit crunch emerged and concerned a clause in the agreements that would have given the state the freedom to seize ownership of the hospitals in the future at no cost to the taxpayer.

This clause is unprecedented in state contracts with the private sector, which usually state that while the state can take control of a property in the future, it can only do so after buying out the original investors. It is understood that the clause arose from a misunderstanding between the HSE and the Department of Health over the government's instruction that co-location should involve "no cost to the state".

Instead of correcting the error, however, the HSE plunged the co-location process into a contractual quagmire by insisting that the developers sign the flawed agreements and then renegotiate them.

During that time, some semblance of progress was maintained as two developers, Beacon Medical Group and Synchrony, signed their deals in order to get the HSE back to the negotiating table.

Others, including Mount Carmel, refused to do so, watching the process from the sidelines and growing frustrated as the chance to develop their projects ebbed away as the economic climate deteriorated.

"We will not commit our company to an agreement that is not in its final format or is not capable of being bank funded. We [have been] waiting two years for an agreement that is capable of being [financed] and this predates the current credit crisis," said Mount Carmel in a statement.

"We cannot wait indefinitely for a project to materialise and put all other plans on hold. For our proposed co-located hospitals, we need a functioning banking sector and a project agreement that is capable of being bank funded. Until there is clarity on these two issues, there is not much point in trying to proceed."

Despite these comments, the HSE told the Sunday Tribune that the co-location project was progressing rapidly and indicated that the current downturn lay behind any delays.

"There is no doubt that the current economic environment has required both the HSE and the preferred bidders to review certain aspects of the project agreement with respect to funding. This review is provided for within the project agreement and is usual in projects of this size and complexity," said a spokesman. Based on the HSE's comments, it appears that, regardless of the outstanding contractual wrangling, financial pressures on both Synchrony and Beacon may also be playing a role in the slower-than-expected progress of their co-located projects.

Synchrony, which won the deal to build a private facility at Dublin's St James's Hospital, has already lost one of its high-profile backers, developer Paddy Kelly, and the private-equity firm bankrolling it, Boundary Capital, is in a deteriorating financial position.

Boundary's debt arrangements with Anglo Irish Bank expired on 30 June and the company, which is chaired by financier Niall McFadden, has been locked in talks aimed at renewing its facilities with the state-owned bank since then.

Meanwhile, Beacon Medical Group (BMG), which won the other three co-location contracts, sold a sizeable chunk of its operations to US group University of Pittsburgh Medical Centre (UPMC) earlier this month.

The move came amid mounting losses for BMG, which is backed by developer Paddy Shovlin, at its existing operations in Sandyford, Co Dublin. Under the €68m deal, UPMC acquired two-thirds of the Sandyford business and a 40% stake in the co-location projects.

BMG chief executive Michael Cullen told the Sunday Tribune that although it was a strategic move for UPMC, financial factors related to co-location were among the drivers behind the deal.

"From my point of view, we would probably have been able to raise close to €1bn for the hospitals four years ago but that's impossible to do now in the current market conditions. So it made sense to bring in a bigger partner," he said. "With our agreement with UPMC though, I am more confident than I have ever been that our hospitals will be developed."