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Government delay borrowing for new Hospital

Government delay borrowing for new Hospital

Thursday 17 March 2022

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.'

Hospital from east Overdale 850x500.jpeg

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. 

READ MORE ...

EXPLAINED: Who's going to lend Jersey £800m?

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Comments

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Posted by Philip Chambers on
Rather a lot of debt for an Island that currently runs a deficit! 2020 total income £883m vs Net revenue expenditure of £930m for a -£47m operating deficit! Where are we going to find the cash to pay for the interest commitments on these bonds or will the deficit just widen! Don’t worry we can just borrow more to pay that off! OR raise taxes! 20% GST anyone!
I understand the rationale for issuing debt to consolidate and finance liabilities over a long term and managed correctly it will benefit the island! I don’t believe we should be borrowing so much to finance a project that we don’t need and when suitable alternatives at a fraction of the cost are available! Why shoulder future generations with this problem.
Posted by Scott Mills on
does anyone have a figure on exactly how much has been spent so far regarding the hospital?
Posted by Richard Lock on
Scott, you have raised a cogent question which our dear politicians should e raising. The fact that they haven’t speaks volumes about their ability to act on the public’s behalf. My own estimate is £90 million on Overdale and the Parade.
Posted by Steve Liron on
Herewith my comments from August of last year when the proposed borrowing to plug a perceived Public Employees pension fund deficit was first muted:

“This is not essentially a Jersey taxpayer problem. My understanding of these scheme rules state there is no call on the taxpayer to fund any shortfall. Rather, if the actuarial financial condition of the pension scheme so deteriorates, member contributions and/or employer contributions may have to increase and/or members’ benefits may have to be reduced. Futures increases to pensions in payment may also have to be reduced or even cancelled.

Similar final salary schemes in the private sector closed to new members a generation ago because private sector employers knew they were unaffordable going forward and would cripple the future finances of even well-run businesses.

So how is it, our Treasury Minister is now looking to borrow funds to cover up this long known embarrassment and hide it under cover of all the other borrowing we are now being told we need.

Whilst many taxpayers may also be members of civil servant final salary schemes, the majority of Jersey taxpayers are not and so should resist this request for additional borrowing on the part of the Treasury Minister with their upmost vigour.”

Worst of all it seems borrowing for this pension fiasco is now taking priority over any other borrowing and is a scandal. Wake up people of Jersey!
Posted by Keith Marsh on
Yet again, there is no real plan for the future every month or so Minister' change their minds.
Borrowing has gone up by a further 0.25% today adding considerably to the overall cost of Jersey's proposed borrowing.
But STILL we have no hospital being built.
The world cost of materials is going up almost daily, and still we have not one brick built for our new hospital.
IS it time to reconsider the whole project, before we throw even more of the tax payers money down the drain.
Posted by Richard Milner of leeds on
Steve Liron this is also my understanding.
If it is deemed necessary to borrow to make up the shortfall in the pension funding then the amount borrowed should be limited. There should be equal pain for both the public and the future pensioners. Quite why we are still in the position of having a final,salary pension plan I don’t understand. Perhaps one of our ministers would explain why we are providing full funding? And perhaps they would also guarantee that no further contributions will be made.
Final salary pensions, or derivatives thereof, are ferociously expensive. And that is why no one has them anymore. Except Jersey.
In conclusion please can someone explain the decision making behind it.
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