Vitals amassed €36 million in debts over two years

The company Vitals Global Healthcare amassed a total debt of €36 million, and with nothing to show for, its annual accounts – soon to be submitted to the company registry – are expected to show.

It will be the first of many shocks to expect on Malta’s controversial privatisation of state hospitals, say high-level government sources familiar with attempts by VGH’s successor Steward to renegotiate the PPP.

Senior ministers are now balking at the prospect of endorsing a new contract which was renegotiated over the last 12 months by, amongst others, former prime minister Joseph Muscat and former minister Konrad Mizzi.

It was for that reason that Muscat met Prime Minister Robert Abela and health minister Chris Fearne, together with Steward Malta CEO Armin Ernst: asking that the government favourably considers Steward’s demands in the contract he had renegotiated with them.

But government sources say they are still in the dark as to how Steward’s predecessors, VGH, amassed the €36 million  in debt and where this money was spent.

The American healthcare company, which stepped in to buy VGH in December 2017 when the unknown consortium of medical investors were unable to secure private finance, has long made demands for more money and wider berth on default clauses in negotiations with Muscat and Mizzi.

Chief among them are the penalties the Maltese taxpayer has to pay should the government default on the 30-year PPP. In such a case, the government will fork out €100 million in cash and has to cover any lenders’ debt incurred by Steward.

Should Steward default on the contract and not fulfil its obligations on the St Luke’s, Karin Grech, and Gozo hospitals, it would ‘only’ lose its equity – any investment it carried out during the PPP – but government would still have to pay the debt they incurred.

But Steward wants to extend the grounds on which a ‘force majeure’ or national emergency default might incur, that is, situations where civil strife or war would make the operation unworkable. In such case, government would be obliged to pay out 50% of what Steward invested, and also pay any debt the company incurred.

Steward wants to extend the grounds on which a ‘force majeure’ default might incur... controversially including: accidental loss or damage, strikes and work-to-rule situations, and even changes in laws

The healthcare company now wants to add a host of other such ‘force majeure’ conditions, controversially including: accidental loss or damage, strikes and work-to-rule situations, and even changes in laws such as those affected by EU regulations all situations that tend to affect the ordinary running of any business.

Land lease-back

Even more concerning to Civil Service officials is the fact that despite the Boston healthcare company’s acquisition of the VGH concession, the parent company did not underwrite any guarantee on Steward Malta’s commitments to deliver on its contract.

“Arguably, it is a situation that could put Steward Malta in default,” says one source with knowledge of the situation.

Instead, Steward Malta could propose to transfer its concession on the Barts campus at the Gozo hospital to Medical Properties Trust, one of the American shareholders in Steward Health Care in Boston. MPT, a real estate firm, would use the transfer to raise funds for Steward Malta, and then ‘rent back’ the lands concession to Steward.

Cash flow issues

It was clear during negotiations with Joseph Muscat at Castille that Steward Malta was in need of extra finance to be able to continue operations while in Malta.

The first major change here is that Steward wants to extend its transition period to 31 July 2023.

Former Prime Minister Joseph Muscat (left) and Health Minister Chris Fearne at the official opening of the Barts anatomy centre in December 2018

Until then Steward wants to be paid the same government budget needed to run St Luke’s, Karin Grech, and the Gozo hospitals – just over €70 million today – with an extra percentage on top: 9%.

During the transitionary period, the Maltese government was also paying all employees that passed under Steward, with the company then setting off that payment. Between 2016 and 2018, the government paid out €4.3 million in salaries.

But Steward incurred millions more in salaries by employing new personnel it required on salaries it determined and far higher than government scales: so now it wants to be paid a total of €8 million.

A source privy to these talks told MaltaToday government ministers have argued there is no basis with which to pay Steward more cash for staffing decisions of their own making. “But Muscat was one of the supporters of this renegotiation. Steward Malta needs this cash flow; should it be the taxpayer who provides it?”

In a nutshell

Vitals Global Healthcare expected to declare €36 million in debts when accounts are finally filed with the MFSA

Steward want to extend the transition period from when they fully assume control of the three hospitals to 2023

They want to be paid €4 million over and above for salaries they incurred when they employed their own personnel over and above government employees that work in the hospitals, at their private sector salary levels

They want a greater ‘no risk’ guarantee to be able to terminate the concession due to force majeure of national emergency, even in the case of debilitating strikes or changes in EU laws: in that case the government will assume in its own name the lender’s debt in full and extinguish the lender’s debt – and pay for 50% of equity

Steward’s US parent has not underwritten a guarantee for Steward Malta’s commitments in the hospitals’ concession. The company wants to transfer its leasehold to Medical Properties Trust in the United States so that it raises enough finance, to then rent the land back to Steward Malta.

Steward in Malta

Steward Health Care acquired the concession for the 30-year operation of three state hospitals from Vitals Global Healthcare in December 2017.

In Malta, the concessionaires are Steward Malta Limited, a holding company, Steward Malta Management Limited, the management company, Steward Malta Personnel Ltd, and Steward Malta Assets Limited. Armin Ernst, president of Steward Health Care International Ltd, is CEO and leads Steward Health Care’s first international presence in Malta.

Steward Health Care was founded in 2010 when the struggling Boston-based Caritas Christi Health Care system was sold to private equity firm Cerberus Capital Management. The hospital network was renamed Steward and converted into a private, for-profit company. In 2016, Steward sold its buildings to real estate firm Medical Properties Trust for $1.2 billion, and a 10% stake.