Government delay borrowing for new Hospital

Thursday 17 March 2022

The Government has now pushed back issuing a bond to pay for the £804m hospital until later this year.

Under its original ‘debt framework’, presented to the States last year, the next bond to be issued as part of a £1.2 billion borrowing plan was the first of two £378m bonds for the new hospital, to be paid off over the next 30-40 years.

In total, the £756m of borrowing will pay the lion’s share of the £804.5m cost of constructing and equipping a ‘health campus’ at Overdale, which includes a large main building together with a separate mental health unit, training centre and multi-storey car park.

Then, another bond, of around £450m, was due to be issued next year to re-finance current liabilities in the public employees’ and teachers’ pension funds.

However, in a change of plan, the Government has now said that the first bond, likely to be issued next month, will instead pay off this liability - further bonds, including for the Hospital, will then be made later this year, “subject to market conditions."

The ‘Our Hospital’ project will reach a pivotal moment next month when a planning application to build it will be assessed by an independent inspector, who will make a recommendation to the Environment Minister as to whether it should be passed or refused.

When it comes to funding the project, the Government say that if it secures a low fixed-interest rate – or ‘coupon’, in the terminology of bonds – and the investment performance of its Strategic Reserve [the ‘rainy-day fund’] is maintained, this growth will pay for the hospital – in essence, they say we will be getting a hospital ‘for free.'

Pictured: The Government plan to borrow £756m to pay for the £804.5m hospital.

Adjusting for inflation over the next 40 years at 2.6% per annum, the Government estimate that on a £756m loan, it will pay back £460m in interest but the projected investment return on £756m will be £1.4m.

In real terms, the debt repayment over 40 years will be £297m (£756m if £1 today is worth £1 in 2061) resulting in a net gain of £635m.

This equates to a £1.4m gain through debt funding, compared to if the Government wrote a cheque for £756m now, depleting its reserves by 75% in the process.

Critics have argued that there are too many ‘what ifs’ in the Government’s plans. What if the world goes into a deep recession and the investment performance turns south? The Government say that, worst-case scenario, it retains the option to write that £756m cheque and ‘pay off the mortgage’ in one go.

As well as the hospital and pension debt the Government plan to take it out, it is already paying off a £250m bond taken out in 2014, which it gave to Andium to expand and improve its housing stock.

The Government also plans to borrow up to £385m to repay a ‘revolving credit facility’ – in essence, an overdraft – that it took out to pay for the island’s covid response. 

Under its ‘debt framework’, this bond will be taken out next year.

Today, the Bank of England is expected to raise the UK interest rate from its current 0.5% base back to pre-pandemic levels as it endeavours to dampen a surge in inflation, which is expected to rise to over 7% next month.

A rise in oil and commodity prices following Russia’s invasion of Ukraine has added to the inflationary pressure. 

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