Hospital funding debate delayed to make sure its legal

Thursday 19 January 2017

Whether the Island should borrow up to £400million for a new hospital is the question facing Jersey politicians again today - after their discussions yesterday were cut short when it emerged the Treasury's proposals might not be legal.

The debate over how to pay for the new hospital - which under the Treasury's proposals will potentially end up costing more than £820 million once loan interest payments are included - was adjourned yesterday after Deputy Tracey Vallois queried whether the Island could legally borrow another £400million, in addition to the £250million which it has already borrowed to pay for social housing.

Politicians are not allowed to put the Island into the 'red' and so it must generate more in tax receipts than it owes on these two bonds. Overnight Treasury officials were due to discuss the point with the law officers, before resuming the debate this morning. 

The cost of the new hospital is likely to be £466million, but Ministers are warning that is an "indicative estimate"only not a final cost, and more work needs to be done on "...design, planning and procurement." They also say it does not include any work needed to adapt or demolish redundant buildings.

Their plan to pay for it all is to issue another bond for up to £400million, which the Island would pay back over the next 40 years, in addition to the annual costs of around £10.5million (2.6%), making a total repayment over the full term of £820million not including the initial transaction cost of up to £2.5million - it follows the States' previous decision to issue a £250million bond to pay for social housing, which put the Island into debt for the first time. Once both bonds are taken into account, the Island's debt will be 16% of its GDP. 

The rest of the cost for the hospital will be made up from the Island's reserves.

Ministers also plan to use the annual interest on those reserves to pay for the bond, and they are assuming growth of around 5% a year. The average annual return from 2005 to 2015 was 7%. 

Speaking when the funding plans were unveiled, 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.

“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.”