THE planned £200m overhaul of two of the region's hospitals has moved a step closer.

Health chiefs have named the company Equion as the preferred bidder for the project to redevelop Newcastle's Royal Victoria Infirmary (RVI) and Freeman Hospital.

The scheme, which will also see the closure of Newcastle General Hospital, will be funded through the Government's controversial Private Finance Initiative (PFI).

It aims to increase the number of beds beyond the 1,800 capacity on the three sites and also increase the number of operating theatres.

Newcastle construction company Laing O'Rourke -the firm that built the Freeman Hospital 26 years ago -will build units making up a third of the hospitals' capacity, to open in 2007.

All the hospital buildings will be maintained on a 35-year contract by North Tyneside firm, M and W Zander.

Len Fenwick, chief executive of Newcastle Hospitals, said: "In the end, it came down to value for money. We wanted facilities which would last and we are confident this bid will exceed that."

The facilities will include a new accident and emergency department plus a children's wing, including the Bubble Baby Unit and other specialist paediatric services.

Dr Andrew Cant, clinical director of children's services, said: "The proposal helps us move children's services from outmoded accommodation at Newcastle General and the RVI into purpose-built and integrated accommodation."

There will also be a cancer centre and renal services development.

* Private Finance Initiative hospitals have been criticised by unions and some MPs over workers' rights and about whether the scheme offers value for money.

Research, published in the British Medical Journal, suggests further service cuts are possible because of this so-called "PFI effect".

Supporters insist bed closures are a result of clinical decision-making, and are independent of affordability problems connected to PFI.