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Funding proposal for new hospital

30 November 2016

Jersey needs a new hospital that can provide the high quality care Islanders need as health costs rise and the population ages. The current building has developed piecemeal over many decades and its physical condition, as assessed in an independent survey, is rapidly becoming inadequate.

After extensive consideration of possible sites the Council of Ministers are proposing to build a new hospital on part of the existing site, plus adjoining properties in Kensington Place and Westaway Court. It is estimated that the capital cost will be £466 million, although more detailed work will be needed – on design, planning and procurement - to turn this indicative estimate into a final cost.

This figure includes buying the required land, all related relocation work, the new build, the refurbishment of Westaway Court, the re-purposing the granite block, and fees. It also includes the rental costs for key workers until 2020. It does not include any work needed to adapt or demolish redundant buildings.

Funding proposal

The original hospital funding proposal, outlined in Budget 2014 and agreed by the States Assembly, was for transfers from the Strategic Reserve to be used for the “planning and creation of hospital services”. That proposal is no longer realistic for the currently proposed site, however this proposal builds on it, by making use of the historically low cost of debt and of the reserves Jersey has accumulated over many years. It also maintains and increases the capital value of the Strategic Reserve.

The Council of Ministers is proposing to raise up to £400 million through a public rated sterling bond, with the balance to come from existing reserves. The proceeds of any future sales of property or other strategic assets would be used to repay withdrawals and to further strengthen reserves.

The benchmark interest rates on borrowing through a Public Rated Sterling Bond are at a historic low. Financial advisors have helped to assess the price of such a bond, which was estimated at 2.6% on 8 November 2016.

Strategic Reserve

The average return on Jersey’s Strategic Reserve since 1986 has exceeded RPI by 4%. From 2005–2015 the average return was 7%, which was 4.5% above RPI(Y). After consultation with independent investment advisors, Treasury has assumed a long term rate of return of RPI(Y) + 2% on the Strategic Reserve.  Using assumptions agreed by the Fiscal Policy Panel that equates to 5%.

The Treasury and Resources Minister, Senator Alan Maclean, said “By borrowing at historically low rates of interest, we can leave our existing reserves in place where they generate returns that are expected to exceed the cost of borrowing. We have calculated that the cost of our borrowing can be funded from the ‘excess returns’ on the Strategic Reserve – these are the returns that are over and above the capital amount the States Assembly has agreed to protect. The money raised through the bond would be placed in a specific fund set up for the hospital construction.

“Every funding proposal carries some risk, but this proposal makes the most of our considerable reserves and strong balance sheet, and it does this without requiring direct contributions from Islanders through additional charges or taxes.”

If excess reserves are needed for other purposes in the future, there may be a temporary need to use part of the Reserve’s capital. This would be repaid when income improves, when returns increase, by selling property or strategic assets or through revenue raising measures.

Senator Maclean added “This will increase our borrowing, but Jersey will still have very low rates of borrowing compared to elsewhere. It would take our debt to GDP ratio from its current level of 6% to no more than 16%. The UK has a ratio of 88%. We are confident we can service the debt while also balancing our budget by 2020. We are taking the logical step of matching a long term asset with a long term liability.”

Notes on the Strategic Reserve policy

The policy on the use of the Strategic Reserve was approved by the States Assembly in October 2006. This policy stated that the capital value of the Reserve should only be used in exceptional circumstances to insulate the Island from severe structural decline or major natural disaster.

This policy was amended in 2009 so the Reserve could be used to meet the costs, up to £100 million, of the Bank Depositors Compensation Scheme.

In Budget 2014 the States Assembly agreed to use transfers from the Strategic Reserve to plan and create new hospital services for the island.

In Budget 2015 it was agreed to maintain the £651 million capital value of the reserve as it was at the end of 2012, and to increase it each year by RPI.

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