BERMUDA'S new hospital will have a half-billion-dollar price tag ? but where will the money come from?

Two options were mentioned at this week's press conference to announce the plan to replace King Edward VII Memorial Hospital ? either Government borrowing the money or a contractor footing the bill and then leasing the building back to the Bermuda Hospitals Board (BHB).

The financing decision will impact on the taxpayers' burden for years to come.

Former Finance Minister and Opposition MP Grant Gibbons yesterday called for the Government to appoint a board of independent financial experts to ensure the public were not ripped off, if the hospital were to be built through a partnership with the private sector.

The alternative of borrowing the necessary money would leave Government paying out the equivalent of the running costs of a new, medium-sized ministry just to service a massively increased public debt, he added.

But other countries' experiences had shown taxpayers could well end up forking out even more if the Government chose the public-private partnership (PPP) option.

Yesterday we invited Finance Minister Paula Cox to comment on the financing options, but we received no response by press time.

In this year's Budget statement, the Government estimated that its total borrowing by the end of this financial year would amount to $285 million and the estimated annual cost of servicing that debt would be $11.7 million.

Should the Government borrow the $500 million necessary for the hospital on top of that, then it would virtually triple the public debt and would have to blast through the statutory ceiling on public borrowing of $375 million.

Dr. Gibbons estimated that adding the hospital cost to the current debt would leave Government forking out at least $35 million annually to service the debt.

"To put that number in context, $35 million per year is more than they're currently spending on either the Ministry of Community Affairs & Sport or the Ministry of the Environment which both come in at around $25 million annually," Dr. Gibbons said.

"It will be like adding another medium-sized Government Ministry that they will have to find additional tax revenue to pay for.

"This, of course, does not take into account the fact that their current loan facility does not have sufficient capacity to cover an extra $500 million.

"And they will have to obtain new financing in a rising interest rate environment and one where rates are considerably higher than they were able to get a couple of years ago at historically low levels. In other words, $35 million is probably quite conservative."

Governments can borrow large amounts to finance public capital projects at lower interest rates than can members of the public to purchase their homes.

The 2005 financial statements showed that some $80 million of Bermuda Government's debt is borrowed at the LIBOR (London Inter-bank Offered Rate), which yesterday stood at 5.45 per cent, considerably less favourable than the rate at which Government has been borrowing during the recent period of low lending rates.

Dr. Gibbons also warned of the potential pitfalls of entering into a deal with the private sector to build the hospital, leaving the Government to lease the property back.

"This has been used quite a bit in the UK, where it has been very unpopular with the country's biggest trade union, UNISON, which represents public sector workers," Dr. Gibbons said.

"What often happens that an inexperienced group negotiates on behalf of the public with a very experienced group of financiers, who end up doing very well out of the deal.

"If we enter into a PFI (Private Financing Initiative), we need to do it very carefully. That is why the United Bermuda Party believes we need a non-partisan, independent board to review all PFI schemes to ensure that the negotiated terms truly serve the public interest and protect the taxpayer."

The UK National Audit Office and the UK Public Accounts Committee had both criticised the windfall profits made by contractors and financial partners on certain PFIs in Britain, he said.

PFIs raise complex issues. The private partner makes money by charging the Government a fee for its services, which, depending on the terms of the contract, could include financing, designing and operating the facility. Generally the company owns the assets.

A board of independent experts could help to ensure the public did not get a rough deal that would impact on generations to come, Dr. Gibbons argued.

"The board should include people who have significant financial experience, from both here and overseas," he added. "I'm sure we could find some of those people in our insurance, reinsurance and financial services sectors."

He added: "The other terrifying consideration is whether $500 million is the correct number. After all, Berkeley started at $71.2 million and will likely come in at double that figure and three years late."