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Future Hospital funding: What's going on?

Future Hospital funding: What's going on?

Wednesday 03 May 2017

Future Hospital funding: What's going on?


The long-awaited debate into how to finance the build of the £466million new hospital has been put off for another fortnight, following a last-minute U-turn from the Treasury on how much should be borrowed to fund the build.

Treasury Minister Senator Alan Maclean announced on Tuesday his intention to shelve his former proposal to finance the site with a borrowed £400 million ‘topped up’ by the States’ ‘rainy day fund’, and instead set a borrowing limit to a maximum of £275 million.

The decision came following months of States speculation – including a Scrutiny review – over whether the plan was water-tight, and a gust of third-party commentary warning against borrowing so much and paying it off with the rainy day fund’s investment returns given that they could so easily be affected by unexpected economic shocks like Brexit.

With the Minister now apparently heeding expert advice with his latest amendment, the Treasury’s funding proposal could finally get the go-ahead in two weeks’ time – five months later than originally planned. But what led up to this point?

‘Illegal loan claim derails January debate

Treasury Minister Alan Maclean had hoped to fund the new build through a £400 million bond, supplemented by the States’ rainy day fund – known officially as the Strategic Reserve – to cover the rest of the £466 million project and the costs of servicing the bond. But under his proposals, the States might have to keep their hands off the reserves, which are intended to help the Island in a major crisis such as the collapse of the finance industry, for up to 15 years.

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"I understand that the forecast income for last year was £620 million and we are already borrowing £250 million so, if we are being asked to borrow up to £400 million, does that mean we are being asked to break the law?" Deputy Tracey Vallois asked.

But with the States already having borrowed £250 million to fund social housing, Deputy Tracey Vallois revealed that his plans would breach Jersey’s Public Finances Law, which stops the States from borrowing more than they earn in taxation for the financial year.

The only way to get around this would be to change the law, or change proposals. Back to square one.

Scrutiny snubbed… and then allowed to review

Deputy John Le Fondré, Chairman of the Corporate Services Scrutiny Panel, spoke out in January after being denied the opportunity to investigate alternative funding methods for the multi-million hospital and potentially save the Island hundreds of thousands.

“This is the largest amount of debt the States of Jersey has ever taken on, and a delay to the debate of four weeks seemed entirely reasonable given the circumstances. We had advisors line up who could have reported by 14 February, however, the minister has refused scrutiny the time to do its job. I will be making a statement in the States Assembly on this matter next week,” he said.

Scrutiny reviewed everything from the Future Hospital's (walkthrough above) value for money factor to the quantity of new beds to be added.

The Minister was forced to yield, however, when the Assembly agreed by 29 votes to 13 to ask Scrutiny to double check the proposals, and their review got underway.

Scrutiny find fault with funding plans…

The Corporate Services Scrutiny Panel then stepped in to dissect the proposal. They concluded in April that too much borrowing was risky, as it would leave no headroom for future borrowing – taking a potential student loan system off the cards.

Instead, the Panel argued that the hospital should come entirely from the rainy day fund.

…And Minister finds fault with Scrutiny

Scrutiny’s suggestions were in turn criticised by the Treasury Minister for removing the Island’s “safety net”, which is supposed to protect the Island in the event of a ‘catastrophe’ such as a natural disaster or collapse of the finance industry and which must remain at a certain level according to the 2015 Budget Statement.

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“In 2022, if the Panel’s amendment is adopted, the Strategic Reserve balance is forecast to be £577.7 million, when its protected balance should be £828.5 million. The Panel’s logic is difficult to fathom and the Minister cannot, in all good conscience, endorse a proposal that risks the Island’s stability to this extent,” Treasury Minister Senator Alan Maclean wrote. 

But with their review published just days before the next funding debate, the Minister said that the debate would have to be put off even longer so that the Assembly would have time to examine Scrutiny’s counter-proposition.

Experts voice their fears

With so much time taken over getting the debate off the ground alone, outside experts turned the magnifying glass on the financing project.

A finance expert and Connect Magazine columnist warned this month that the Minister may have committed to paying off borrowing bills from predicted returns on the rainy day fund higher than what may actually be achievable.

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"Bottom line, we appear to be committing to meeting our long-term bills from returns that are 2% above what the experts we employ to achieve those returns believe we will achieve," the article concluded.

Meanwhile, an Independent report from the Chartered Institute of Public Finance and Accountants (CIPFA) found fault with both approaches, stating that the best of both worlds – a “blended approach” of £200 million borrowing (half the Treasury Minister’s present proposal) and the rest via the States’ safety net – might be the best way forward.

In the meantime, CIPFA suggests deferring all borrowing decisions for another two years, arguing that, “…The States would be in a much stronger position to borrow, what would be considered to be an ‘optimal’ amount as project costs and risks become clearer.”

U-turn at the eleventh hour

However, in an unusual turn of events, the Treasury Minister then lodged an amendment last week that would pave the way for more money to be taken from the reserves and less borrowed before lodging another amendment on the same day the States readied themselves for what they thought would be the final funding debate.

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This latest proposal would cap borrowing at £275 million and see the States dip further into the reserves for the rest of the £466 million – a move much closer to the “blended approach” advocated by CIPFA.

A debate in two weeks? 

States members have now penned Tuesday 23 May into their diaries as the time of the next – and possibly final – Future Hospital funding debate. 

 

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