Our Hospital – Budget, Financing and Land Assembly

STATES OF JERSEY

OUR HOSPITAL – BUDGET, FINANCING AND LAND ASSEMBLY

Lodged au Greffe on 3rd August 2021 by the Council of Ministers

STATES GREFFE

2021  P.80 (re-issue)

PROPOSITION

THE STATES are asked to decide whether they are of opinion

to refer to their Act dated 23rd October 2012, which requested the Council of Ministers to bring forward proposals for a new hospital, their Act dated 17th November 2020, which approved Overdale as the preferred site for a new hospital for Jersey and which approved the use of Compulsory Purchase of property identified in Appendix 1 of P.129/2020, if required, and their Act dated 1st February 2021, which approved Westmount Road as a two-way roadway with areas for active modes of travel, such as walking and cycling, as the preferred primary access option for a new hospital at Overdale and to agree –

1. a maximum expenditure cap for Our Hospital, to project completion, of £804.5 million, that cannot be exceeded without further approval from the States Assembly;
2. that the remaining costs of Our Hospital, to project completion, should be funded  through  borrowing  (external  financing)  up  to  and  including  a maximum of £756 million allowing for the reimbursement of £12.7 million to those capital schemes that provided funding to Our Hospital in 2021;
3. that the Strategic Reserve Fund policy be amended so as to allow the Fund to be used to support the delivery of Our Hospital, and to further agree that –

1. the borrowing (external financing) obtained for Our Hospital, referred to in paragraph (b) above, will be paid into the Strategic Reserve Fund;
2. transfers  will  be  made  from  the  Strategic  Reserve  Fund  to  the Consolidated Fund, as and when required and permitted, up to and including £756 million to meet the cashflows required to deliver the Project, including reimbursement of funding to those capital schemes that provided funding in 2021; and
3. all costs related to the borrowing (external financing) to meet debt financing  costs,  issuance  costs,  debt  repayments,  management  and administration costs will be met from the Strategic Reserve Fund with a transfer made to the Consolidated Fund, as and when required and permitted (with the intent that sufficient returns are generated to meet the debt obligations and associated costs as they fall due).

4. in accordance with the terms of the Public Finances (Jersey) Law 2019 (the Law) to approve the following amendments to the Government Plan 2021- 2024 (the Government Plan) –

(i) to increase the overall cost of the Major Project defined as Our Hospital to £804.5 million and to agree to the amendment of the figure shown for this project in Table 4 – Major Projects of Appendix 2 of the Government Plan as set out in Appendix 2 of the Report accompanying the proposition;

(ii) to increase the 2021 head of expenditure, being the amount which may be spent on this project in 2021, to £70 million, included in Table 5(ii)

– Capital Heads of Expenditure of Appendix 2 of the Government Plan;

(iii) to increase the level of external borrowing (financing) required by £756 million for 2021, which may be obtained by the Minister for Treasury and Resources as and when required, to enable the delivery of  Our  Hospital  and  to  amend  Table  3  –  Proposed  borrowing  of Appendix 2 of the Government Plan;

(iv) to authorise the transfer of £21 million from the Strategic Reserve Fund into the Consolidated Fund in 2021, to meet the additional cash flow funding  requirements  of  Our  Hospital  over  and  above  amounts previously approved in the Government Plan for 2021 and transfers approved by the Minister for Treasury and Resources;

(v) to agree that up to a further £2 million be transferred from the Strategic Reserve Fund in 2021 and into the Consolidated Fund and a new Head of Expenditure – Debt Management be established for up to £2 million to cover costs relating to the issuance, management and administration of the borrowing required for Our Hospital;

5. in accordance with the Compulsory Purchase of Land (Procedure) (Jersey) Law 1961 –

1. to approve the acquisition by the Public of the land and properties required to deliver the Our Hospital project at Overdale, including, where  appropriate,  land  or  property  to  accommodate  the  hospital buildings and their reasonable curtilage and any other properties to facilitate access to the site as identified on Plan 4 in Appendix 1;
2. to negotiate with the owners for the purchase of the said land and properties at a fair and proper price to be agreed by the Minister for Infrastructure;
3. to empower the Minister for Environment, in exercise of the powers conferred by Article 119 of the Planning and Building (Jersey) Law 2002,  to  acquire  the  land  and  any  interest  therein,  including  the acquisition of a servitude or other right over land by the creation of a new servitude or right, or to extinguish or modify a servitude or other right over land, by compulsory purchase on behalf of the Public in accordance with the provisions of the Compulsory Purchase of Land (Procedure) (Jersey) Law 1961;
4. to provide funds to meet the expenses of up to a maximum of £36 million included within the budget sums included in paragraphs (a) and

(b) above for the acquisition of the land and properties and any interest therein as referred to in sub-paragraph (i) of paragraph (e) in accordance with Article 3(b) of the Compulsory Purchase of Land (Procedure) (Jersey) Law 1961, and, in accordance with the Public Finances (Jersey) Law 2019 ("the Public Finances Law"), to authorise the payment or discharge of the expenses incurred in connection with the acquisition of the land and any other interests therein referred to in sub-paragraph (i) of paragraph (e), and of the payment of all legal expenses;

5. to authorise H.M. Attorney General and the Greffier of the States on behalf of the Public to pass any necessary contracts in connection with the acquisition and subsequent sale of the site and adjoining land.

COUNCIL OF MINISTERS

REPORT

Introduction

1. The case for a new hospital for Jersey has been well made. The need has been accepted by the States Assembly going as far back as their adoption of P.82/2012 Health and Social Services: A New Way Forward. However, a hospital has not yet been delivered.
2. Our existing health estate is deteriorating and the longer we delay in delivering a hospital, the more this will begin to impact on running costs, standards of care and recruitment and retention of clinical and professional colleagues. Over time, the deteriorating estate could start to impact health outcomes and mean that our population's  health  also  deteriorates,  affecting  our  economically  active community and having detrimental effects on our wider economy.
3. We are at a point where the States Assembly support will enable the project to progress to detailed design and delivery, subject to the planning process, by approving:

• The total project budget and allocating that budget to the project through the Government Plan for specific years

• An upper cap for capital expenditure on the project that cannot be breached without returning to the States Assembly to request approval for any further expenditure

• Financing the hospital through borrowing – in the context of the Council of Ministers' policy on financing and the Minister for Treasury and Resources' wider Debt Strategy – and modifying the objectives of the Strategic Reserve to finance and manage the servicing and repayment of debt and the directly associated costs of doing so

• The use of property Compulsory Purchase, to acquire property as a last resort or to resolve rights or covenants which need to be newly put in place, cancelled or modified to serve the development.

• The budget for Compulsory Purchase, which is included in the total project

budget.

The Vision for Our Hospital

1. Our shared vision is of a modern, fit for purpose hospital which meets the current and future needs of patients, clinicians and healthcare staff and visitors. It is a vision of a hospital where clinical adjacencies have been thoroughly thought through, based on the experience and expertise of the clinicians and healthcare staff who will work in Our Hospital.

2. Our vision is of a hospital that is designed in a flexible way to enable clinical and non-clinical areas to be adaptable, with the ability to change in layout and use, where appropriate, to meet evolving models of health and care delivery, any future  pandemic  situation  and  the  needs  of  Islanders  as  treatments  and technologies continue to progress. Our Hospital is therefore informed by the Jersey Care Model but is not dependent on it as it will be able to accommodate evolving iterations of care models for Jersey, since healthcare is ever changing, as technologies and working practices change rapidly.
3. Our  vision  is  of  a  hospital  that  is  contemporary,  innovative  in  design  and complements the environment in which it is set and enables co-location and integration of physical and mental health care and services. A hospital that can attract and retain the very best clinicians and healthcare staff to work in Jersey, who can bring with them excellent ways of working to contribute to positive healthcare and wellbeing outcomes for generations of Islanders.

A Reminder of the Case for Change

1. In 2012, P.82/2012 Health and Social Services: A New Way Forward (P.82/2012) recognised the need for Jersey's health care model to evolve in order to meet the challenges  of  demand,  cost  and  quality.  The  States  Assembly  voted overwhelmingly to adopt P.82/2012 with 41 votes pour and just one vote contre. As part of this vote, the Assembly recognised the need for a new hospital to support modern ways of delivering healthcare.
2. The current Jersey General Hospital site comprises a number of buildings across a large site, with clinical accommodation dating generally from the 1960s but with the Granite Block dating back to 1765 (see section 3.3 of the Outline Business Case which forms Appendix 3 to this Report). This means that the current hospital estate consists of a disparate collection of buildings developed over  a  long  time  to  different  health  policies,  operational  practices  and construction standards. As a result, facilities are in poor condition with the worst areas of building and engineering infrastructure presenting daily operational difficulty (Appendix 3, section 3.4).
3. Some aspects of the current hospital are in a sufficiently poor condition that the risk of building failure is high and is increasing each year1. In these cases, the scale of such a failure would severely limit the hospital's ability to manage its

1 A Freedom of Information Request published in 2020 revealed the escalating costs of maintaining the existing hospital estate: https://www9.gov.je/government/freedomofinformation/pages/foi.aspx?ReportID=3654

way through any emerging crisis, such as a future pandemic situation, resulting in a significant risk of building closure and health service interruption.

4. Faced with this, the hospital's estates team identified the major areas of concern and implemented a tactical backlog investment plan to address the most serious and technically correctable issues. However, this recognised and relied upon the intention to develop a new hospital and therefore targeted investment to key areas of the poorest condition or of imminent failure only whilst implementing increased monitoring of the hospital's overall condition. Consequently, significant dilapidation remains and the risks to the quality of care provided become more significant as our health estate continues to deteriorate.
5. The substantial and extensive work undertaken by the Health and Community Services facilities management services team, to ensure that buildings remain operational isn't necessarily obvious to Islanders.
6. However, we have seen first-hand that the estate risks catastrophic failure:

• In 2019 the Jersey General Hospital roof was damaged after inclement weather[2].

• HCS is currently repairing six historical roof leaks that have impacted on services to Renal, Endoscopy, Isolation Rooms and Education.

• Jersey's Maternity Department was opened in 1984 and the infrastructure has not been upgraded since. HCS is due to start a 2-year improvement project. The infrastructure has deteriorated to an extent that it requires intervention, despite a new hospital being on the horizon.

7. Despite the constraints described above, the quality of care provided by the doctors, nursing staff, clinicians, auxiliary and support staff is of the highest standard.  It is a testament to their sheer professionalism that they manage to provide such a high standard of care within the environment in which they work. But it is the case, inevitably, that within the constraints of that environment, no matter how hard they may try, the ability to provide the care to which patients are entitled is compromised.
8. A new build hospital at Overdale represents an opportunity to address and resolve these issues and to provide a modern, fit-for-purpose health and care facility capable of caring for generations of Islanders.

Progress to Date

1. Following previous iterations of the project, R.54/2019 New Hospital Project: Next Steps represented a refreshed mandate for the hospital project which outlined the ambition to design and deliver a completed Hospital in a similar timescale to that of the previous scheme.
2. Following a comprehensive site evaluation process3, during which Islanders were invited to identify new potential sites that had not previously been considered, the States Assembly approved Overdale as the preferred site for Our Hospital on 17 November 2020 with 37 votes pour and 6 contre.
3. A comprehensive options appraisal of access options for Our Hospital at Overdale was undertaken, including one-way solutions.  Following this, the Assembly approved Westmount Road as the preferred primary access route on 01 February 2021 with 34 votes pour and 11 contre.
4. A concept design for a new hospital at Overdale and its primary access route has been developed following the Royal Institute of British Architects (RIBA) Plan

of Work to the end of Stage 2 and has been published online4. 4.5 This  concept  design  and  the  feedback  it  has  generated  has  informed  the development of an  Outline Business Case for the project, which has been

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forms Appendix 3 to this Report.

6. The key milestones outlined above have been realised  following extensive consultation with key stakeholder groups at each key stage, including but not limited to, clinicians and health professionals, residents groups at Overdale and Les Quennevais, community and patient groups, blue light services, and statutory consultees  such  as  Development  Control,  Infrastructure,  Housing  and Environment Operations and Transport, Parishes of St Helier and St Brelade.
7. Observers  of  previous  iterations  of  the  hospital  project  –  including  the Comptroller  and  Auditor  General6  -  noted  that  clinical  engagement  and

endorsement of hospital designs and project products could have been better. The Our Hospital project acknowledged that early and consistent clinical engagement

3 https://www.gov.je/Health/OurHospital/Pages/SiteSuggestion.aspx

4 https://ourhospital.je/news-and-updates/article/riba-stage-2-report-published

5 /assemblyreports/2021/r.124-2021.pdf 6https://www.jerseyauditoffice.je/wp-content/uploads/2017/11/Report-Decision-Making- Future-Hospital-Site- Selection-23.11.2017.pdf

would be crucial to the success of the project and established an extensive programme  of  clinical  input  at  individual  clinical  service  and  clinical management level from the outset.

8. The clinical engagement programme has, to date, consisted of over 250 clinical user groups in both the development of the Functional Brief, which communicates Health and Community Services' requirements for Our Hospital, with ongoing clinical input into the evolving design for the hospital.
9. There is overwhelming clinical support for the project:

• Clinicians are unanimous in endorsing the need for a new hospital

• Clinical groups are in support of the site selection process and preferred site

• Clinical input into the development of the Functional Brief and concept  designs  means  that  the  hospital  designs  and  clinical

adjacencies are fully informed by those who will be operating it.

10. The concept designs have been formally approved and endorsed by the Clinical and Operational Client Group, Health and Community Services Executive Committee, Medical Staffing Committee and all Clinical Service User Groups. Engagement will continue throughout the lifecycle of the project up to and including the commissioning of Our Hospital. Our Hospital is a truly clinically led hospital project.
11. In addition, the Future Hospital Review Panel and States Assembly Members have been briefed on many aspects of the project to keep them updated on decisions that have been made and the drivers behind those decisions. These include, but are not limited to:

• March 2020 – All States Members: project timeline and milestones briefing

• April 2020 – Future Hospital Review Panel: Design and

Delivery  Partner  (ROKFCC)  procurement  strategy

briefing

• June 2020 – All States Members: Design and Delivery Partner procurement outcome briefing

• July 2020 – Future Hospital Review Panel and all States Members: site selection and the five-site shortlist briefing

• August 2020 – Future Hospital Review Panel: site selection

and the reduced shortlist briefing

• September 2020 – Future Hospital Review Panel: final preferred site briefing

• December 2020 – Future Hospital Review Panel and all States Members: preferred access route briefing (response to amendment to P.123/2020)

• January 2021 – Future Hospital Review Panel: meetings with the Panel's Advisors to inform the review of the preferred access route proposal

• May 2021 – Future Hospital Review Panel and all States Members: concept design and launch of the public consultation briefing

• June 2021 – Future Hospital Review Panel: outline business case briefing

• PLANNED – Future Hospital Review Panel: August and September 2021 – meetings with Panel's Advisors to inform their review of the

OBC and funding Propositions.  The Our Hospital project fully commits to engaging with the Panel's planned review and welcomes

any  constructive  feedback  that  may  arise  from  that  review  to facilitate the delivery of the best possible hospital at Overdale for Jersey

• PLANNED – September 2021 – All States Members: detailed briefing on OBC, funding Propositions and implications of any

subsequent Amendments

12. Earlier in the project, the Our Hospital Political Oversight Group considered that the submission of a detailed planning application – as opposed to an outline application – would be more appropriate for infrastructure of the scale and scope of a new hospital. This is because significant detail needs to be developed to be able to determine and then mitigate through careful design the impact of any  proposals,  as  verified  during  the  planning  process.  The  design  will continue to evolve as it is informed by consultation in the run up to the submission of a detailed planning application.  By the time of the planning application, the design work undertaken will be more detailed than for previous iterations of the project.
13. Approval for the design of Our Hospital will be subject to the planning process, which is the statutory forum where the detailed designs will be assessed against Island  policies  for  their  suitability  predominantly  to  safeguard  against environmental and community harm
14. The next step in progressing the Our Hospital project is to ask the States

Assembly whether they are minded to approve the total budget for the Our Hospital project – which will also represent an upper cap on expenditure that cannot be breached without returning to the States Assembly – and that the project will be financed through borrowing.

15. These approvals will enable the project to progress through to detailed design and delivery.

Approval of this Proposition by the Assembly represents:

• Support for the Our Hospital shared vision

• Support to progress the project through to delivery, putting behind us the false starts of previous years

• Acknowledgement that a new build hospital at Overdale represents value for money

• Recognition of the benefits of a new build hospital for Islanders

• Recognition of the risks of not delivering the project such as rising and abortive costs and reputational damage.

The Our Hospital Outline Business Case

1. Business Cases are a recognised way to provide information to help inform decisions on projects. They provide a way of considering if the project is deliverable,  provides  value  for  money,  achieves  objectives,  and  delivers benefits and social value.  The Jersey Public Finances Manual requires an Outline Business Case be produced before implementation of a Major Project. The Our Hospital Outline Business Case – known as the OBC – has been produced and was approved by the Council of Ministers on 23 June 2021. The OBC forms Appendix 3 to this Report.
2. The OBC follows a best practice method that is referred to as The Green Book' (after the name of the guidance) or the 5-case model' which cover different  aspects  of  the  proposal.  Necessarily  a  thorough  and  lengthy document, the OBC reconfirms the case for a new build over all other options. It is divided into 5 cases' for change:

• Strategic Case – sets out the overall context for the project and makes the Case for Change.  It also sets out the project objectives

and critical success factors. •  Economic Case – sets out the long-listing process, assesses the

shortlisted options considering cost, benefit and risk and identifies a preferred option

• Financial Case – sets out the funding options available for delivery and the indicative financial position of the shortlisted options

• Commercial Case – sets out how the shortlisted options would be delivered and any other commercial considerations as part of the scheme

• Management Case – sets out the management and governance structure  and  processes  and  sets  out  the  required  project

management costs for the Our Hospital Project.

3. One of the purposes of a business case is to help consider options.  As part of the development  of the Business Case,  work took place to consider options for delivering the project, which confirmed that only one of these options, delivering a new hospital – agnostic of its location or whether on one or more sites – would deliver the objectives for the project.  The Green Book calls this option the Preferred Option' and this is the option that is being designed. However, in order to follow Green Book guidance, it is important at OBC stage to compare the Preferred Option with another option, since this demonstrates value for money. A longlist of options was identified and their appraisal can be found at Appendix 3 Section 4.3.
4. The Baseline Comparator' of refurbishing the current hospital described in the OBC does not meet the Critical Success Factors (set out in Appendix 3 Section

4.2) and in reality, represents the minimum activity and expenditure required to attempt to bring the current hospital estate (for those services provided at the new hospital)  merely  up to a  statutory and regulatory  acceptable standard.  The Baseline Comparator is a significant amount of work and investment that will not resolve the issues described earlier in this report – it would cost more, not be deliverable in line with the project mandate timetable, would not achieve the project objectives and it would not realise the benefits that a new build will deliver for Islanders.

What are the Benefits of Our Hospital?

1. The OBC describes the anticipated benefits of a new build hospital for Jersey. It also assesses the deliverability of these benefits and compares how the Baseline Comparator performs against the Preferred Option to deliver a new hospital for Jersey (Appendix 3 Section 4.10)
2. The OBC concludes that a new build hospital on the Overdale site can deliver

significant benefits for the Island, and in comparison, the Baseline Comparator Option cannot. It also concludes that the New Build Option represents a value for money option based upon the benefits it can deliver. The following paragraphs provide some of the benefits of Our Hospital.

3. Our Hospital is an investment into the lives and health of all Islanders.
4. Better for patients – by bringing clinical services together on a single location in a purpose- built hospital, patient and visitor experiences will be significantly improved.  The improved  clinical adjacencies, which were established with Clinicians, will ensure that patient flows will be easier, making the hospital a more efficient place for both patients and clinicians.  The building will comply with current regulatory standards to maintain patient safety and have capacity built in to adapt to change in the future.  Despite the best efforts of the Health and Community Services facilities management services team to ensure that buildings remain operational the deterioration of the current buildings is evident to patients and does not provide for an optimum healing environment – a new build is a far better option for patient experience and wellbeing.  The environment in which healthcare facilities are located has been proven to be a factor in supporting patient recovery. Investing in Our Hospital, which will be set in a sensitively landscaped, green environment will improve patient recovery rates in addition to providing a calm and more pleasant experience for patients, staff and visitors.
5. Better for staff – improved clinical adjacencies, developed with the very staff who will operate the hospital, will support the quality of care and reduce the need for staff to move around the hospital or indeed separate sites. The improvements to patient and then staff experience and wellbeing afforded by a new, purpose- built hospital will support recruitment and retention.  This will, in turn, lead to a more sustainable provision of health and care services in the Island and therefore more positive healthcare outcomes for Islanders.
6. A more efficient healthcare system – greater workplace efficiency, better staff retention, opportunities to provide on-Island staff training and the ability to offset operating costs with income from private patient care can all potentially lead to a more efficient health and care system for Jersey. Investing in a new build negates the need for a complex and costly backlog maintenance programme and risk of high running costs, as Our Hospital will be a modern, fit for purpose building that

is energy efficient. In addition, bringing together clinical services on a single site will release estate for other purposes in line with the wider Government of Jersey estates strategy. Comparatively, a multi-site hospital would be less efficient, as it would  require  duplicates  of  expensive  equipment  –  and  their  associated

maintenance  costs  –  such  as  imaging  (x-ray,  MRI,  etc)  and  services/staff (pharmacy, stores, etc) as well as requiring more complex logistics arrangements.

7. An economic stimulus – Our Hospital will be an investment in construction as we emerge  from the most difficult times of  the  Covid-19 global pandemic situation.  In addition to the immediate contribution to the Island's economy, the improved health benefits delivered by Our Hospital will benefit the economy long term.  More positive healthcare outcomes will enable more Islanders to return to work following periods of illness and remain healthy and economically active.
8. Social legacy – Our Hospital will leave a legacy of local expertise and skills acquired through working on and maintaining a large scale, complex project.  It will also provide a range of education opportunities including apprenticeships which will attract young people into relevant sectors, something that will benefit Jersey for the long term, as well as providing facilities that can be used by the whole community.
9. The world of health and care does not stand still as new treatments, equipment and medicines are continually developed.  In response to this innovation and the changing health and care landscape, new models of delivery will continue to evolve. Therefore, Our Hospital is being designed as a delivery space from which care can be provided.  It will be flexible  and continue  to evolve alongside predicted changes to the models of care and the demographic profile of Jersey.
10. To achieve this, clinical and non-clinical areas are being designed to be adaptable with the ability to change in layout and use, where appropriate.  This includes administrative areas that can be converted into clinical areas due to the building infrastructure. For example, gas supply and other bed head services will be built into walls and partitions that will enable changes in layout and use.  Clinical areas are also being designed to be repurposed quickly in response to potential future emerging public health crises.  This would ensure that in the future, Our Hospital can be quickly prepared to handle another pandemic situation.
11. The layout of Our Hospital, as seen in the concept designs, has been driven primarily by the effective co-location of some clinical services such as the Emergency Department on the ground floor adjacent to diagnostic services with ready access to theatres.  A much smaller element of design has been informed by the Jersey Care Model adopted by this Assembly on 03 November 2020, however, different delivery  model options could be  accommodated by the numerous layout options afforded by in-built flexibility of the space and the

opportunity to expand on the site.  Therefore, whilst the Jersey Care Model has informed the Functional Brief it neither dictates nor defines the clinical and non- clinical design requirements of Our Hospital.

12. In summary, a modern hospital for Jersey will provide a flexible, future-proofed delivery space for general, acute and ambulatory care, as well as investigations, therapeutic procedures and rapid access to more specialist in-patient treatment. The flexibility that will be built into the design combined with the opportunity to expand over time will allow Our Hospital to respond to any changes in service delivery models and the developing health and care needs of generations of Islanders.

Capital costs for Our Hospital

1. Part (a) of this Proposition asks the States Assembly to approve a maximum expenditure cap for Our Hospital, to project completion, of £804.5 million, that cannot be exceeded without further approval from the States Assembly.
2. That total expenditure cap is inclusive of the budgets for Our Hospital approved by the States Assembly for 2019, 2020 and 2021 and the additional sums agreed by the Minister for Treasury and Resources in 2021 through the (General) Reserve and from transfers from other projects
3. The anticipated capital expenditure set out in the OBC, provides for a total project budget of £804.5 million, which has not changed from the anticipated budget that was included in P.123/2020 Our Hospital Site Selection: Overdale (P123/2020), which was approved by this Assembly.
4. The capital budget has been derived from extensive engagement with clinicians and health professionals about services appropriate to be delivered from Our Hospital when it opens its doors in 2026 and what delivery space is predicted to future proof Our Hospital for at least the next 40 years.  It has been derived from concept designs developed by a Design and Delivery Partner with extensive experience of hospital design around the world that has listened to clinicians regarding the specific needs of Jersey.

Breakdown of Capital Costs

5. The table below presents a breakdown of the £804.5 million capital cost as set out in the OBC with a comparison to the P.123/2020 position.

Table 1: Capital costs

*P.123/2020 described £550 million of Design and Delivery Partner Costs – the small difference is due to the cost categories described on P.123/2020 vs the OBC and rounding

6. Section 4.7.3 of the OBC provides detailed breakdowns of what is included in each Cost  Category.  However,  these  are  summarised  below  for  quick  reference purposes:

• Main  works  comprises  main  hospital  and  associated  buildings, external  works such as drainage, roads and paths, external works to provide services such as water, electricity and gas connectivity and the demolition required to enable the delivery   of a new  hospital at Overdale.

• Preliminaries is a construction industry term for the general plant, site staff, facilities includes and other items not included in the main

works' category such as site cabins. •  Design & Professional Fees comprises design and professional fees such as architects, engineers, quantity surveyors, health and safety,

planning advisers, and management of project. •  Inflation,  informed  by  using  Building  Cost  Information  Service indices of the Royal Institution of Chartered Surveyors with a Jersey

factor applied.

• Equipment includes medical equipment for the new hospital.

• Contractor Contingency represents an allowance for the Design and Delivery Partner risk. The Government of Jersey's cost consultants

have reviewed the financial sums allocated to this cost category and consider this to be an appropriate allowance at this stage.

• Pre-Construction Services Agreement (PCSA) accounts for all Design and Delivery Partner costs up to the point of construction contract award.

• Overhead and Profit represents a fully tendered and market tested rate of 9.5% applicable to all Design and Delivery Partner costs.

• Re-provision of Services from Overdale accounts for the cost of providing facilities at the former Les Quennevais School

Site to enable the re-location of services from the Overdale Site in order for work to commence at Overdale. •  Decant and Migration represents an allowance to allow for moves that may need to take place during construction.

Table 2: Other budgeted costs

7. Section 7.4.3 of the OBC also provides detailed breakdowns of what is included in  each  Cost  Category.  However,  these  are  summarised  below  for  quick reference purposes:

• Optimism Bias is a Business Case term used to calculate the inherent optimism – using accepted accounting principles – which is often

applied to cost estimates at the early stages of the business case process,  when  the  amount  of  information  available  to  inform estimates is not as advanced. As information becomes available, and greater cost certainty is established, optimism bias is often reallocated to known cost categories to compensate for earlier optimism.  The P.123/2020 proposition included appropriate Optimism Bias for the stage of the project, and this has now been allocated to manage the cost variations resulting from more detailed design. A smaller amount

of Optimism Bias is still being held within the total cost to allow flexibility to the Government of Jersey as the project progresses and greater cost certainty is achieved.

• Client Contingency - it is good practice to account for a suitable level of contingency to cover risks that can be quantified.

• Government  of  Jersey  Team  Costs  accounts  for  the  costs  of resourcing the Government of Jersey project team for the lifetime of

the project. This includes External Advisor Costs, include the Project Management  Office  and  Contract  Administrators  (MACE), Commercial & Financial Advisor (EY), the Cost Consultant (T&T), the  NEC  Site  Supervisor  and  Design  Intelligent  Client  (Mott Macdonald) and other advisors such as legal and land assembly.

• Site acquisition/re-provision comprises costs to assemble the land to deliver a new hospital at Overdale.

8. As can be seen in the table above, there has been  no change in the total anticipated capital cost of the scheme between P123/2020 and the OBC, however there have been a number of key individual line movements of which are explained in more detail below:

• The sub-total for construction costs of £565 million set out in P.123/2020 was a calculation established prior to the design for the

selected site was progressed, as the Assembly had not approved Overdale as the preferred site for Our Hospital at the time of lodging P.123/2020. •  Following completion of the more detailed Concept (RIBA Stage

2) design process,  and the comments received on it, the costs estimate has been updated and is now forecast at £619.4 million. The  progression  of  the  design  provides  a  substantially  more accurate view on the cost of the scheme.

• This updated construction cost, however, has not resulted in an increase to the overall cost of the project due to the reallocation of

Optimism Bias.

• There has been an increase in the cost of land acquisition which is driven by the transactions agreed to date.

9. All of the cost information set out above has been reviewed and challenged by the  project's  Cost Consultant, Turner & Townsend Cost Management Ltd (T&T) to ensure the proposal represents value for money. T&T have significant experience on major UK healthcare new builds delivered in recent years and have benchmarked the net construction cost and consider it to be a reasonable value in the current market.

Costs of issuance and financing costs

10. Specifically excluded from the approved expenditure cap for Our Hospital Project of £804.5 million are the financing costs associated with the planned funding solution. These costs are split between the ongoing costs, primarily the annual coupon costs associated with planned debt and the initial issuance costs. These costs are further considered in Section 10 of this Report.

An illustration of how cost certainty affects Cost Categories

11. The figure below illustrates how, at different stage of the business case process, increasing  cost  certainty  results  in  costs  being  reallocated  between  cost categories.

Figure i: Project costs timeline

12. Notes for interpreting Figure i:

• The area shaded blue represents base costs', or known costs, which may increase over time, as better design and market testing results

in better cost certainty. •  The area shaded beige represents optimism bias adjustment, which diminishes as the business case develops better certainty on costs

and is replaced with either known costs or known risks with owners.

• The level of contingencies is shown by the area shaded in orange and remains static throughout the process. If required, it will be used for

unforeseen cost overruns as described above.

• The area shaded green is the quantified risks which relates to the monetary value of the quantified risks that is usually fully developed

by the final stage of business case development.

Baseline Comparator

13. Continuing to provide healthcare services to the standard expected by Islanders at the current HCS estate is not an option. The physical condition of the current healthcare estate alongside the poor functional suitability and lack of clinical

adjacencies will result in deliverability challenges in the near future if no action is taken.

7.14 As  part  of  the  business  case  process,  the  GoJ  has  considered  a  Baseline Comparator option which would result in a significant refurbishment of the existing HCS estate over a number of years to bring much of the facility up to modern standards. This would be a highly complex construction project due to the need to build a decant facility and continue to deliver clinical services on site whilst construction work is ongoing.

7.15 This Baseline Comparator option would:

• Be more expensive, outlined in Section 4.7.1.2 of the OBC [Appendix 3]

• Take longer and be more complex to deliver

• Not address issues with Clinical Adjacencies

• Not deliver the level of benefits which would be achieved in the new build option

• Would not deliver the anticipated consolidation of health and care estates, and its associated clinical, operational and logistical benefits. For example, the clinical benefits from the co-location of Mental Health services would not be delivered

• Carry significant risk from a construction perspective.

7.16 In summary, the Baseline Comparator is not a feasible option as it would not deliver the critical success factors that are requirements of the project.

7.17 A New Build at Overdale represents a deliverable option that can achieve the critical success factors required by the project, represents better value for money when compared with the Baseline Comparator option and is anticipated to realise more benefits for Jersey.

Why does this proposal represent Value for Money?

18. The Our Hospital Project offers an opportunity to modernise not just the healthcare facilities in Jersey, but to be a key enabler of change for the wider Jersey healthcare system. The new hospital will provide a facility which conforms to the highest standard of clinical care, both now and into the future and will be a focus of our community infrastructure that the Island can be proud of.
19. In contrast, the Baseline Comparator Option will not be able to achieve these benefits.  The  facilities  in  their  current  state,  and  even  following  significant refurbishment, will remain restricted by the functional layout and quality of the building structures. This prevents the current hospital buildings being able to

deliver any improvements to adjacencies or co-location of mental health services, thereby not meeting the expectations of patients, staff or the wider community.

20. Whilst a new hospital at a cost of £804.5 million represents a very substantial cost to  the  Island,  the  option  of  doing  nothing  does  not  exist  and  the  Baseline Comparator alternative is a more expensive option which delivers fewer benefits and carries significantly higher risk.
21. In addition, any deferral of a decision to invest in the hospital at this stage could potentially have a significant impact in the future. This is because of the expected pressure on the construction industry due to the pipeline of hospital developments in the UK and the high construction inflation rates in Jersey. The Our Hospital project is currently at a more advanced position than the UK programme of hospital developments, and any delay to the Jersey project could mean that timelines coincide, with the result that the construction market becomes more congested. Jersey has an opportunity to stay ahead of the curve.

Approval to use the Strategic Reserve Fund and Amending the Government Plan 2021-2024

1. Part (c) of the Proposition asks the States to amend the policy for the use of the Strategic Reserve Fund to enable it to receive the borrowing raised for Our Hospital, to not only provide the funding required to develop the project but also to ensure that the States are able to meet their obligations in relation to the issuance and repayment of the debt.
2. The Government Plan is the mechanism through which the States Assembly agrees funding  and  an  amendment  to  the  Government  Plan  2021-2024,  in  line  with requirements  set  in  the  Public  Finances  (Jersey)  Law  2019,  is  required  to accommodate the funding requirements for the Our Hospital project.
3. In line with the requirement of that Law, Part (d) of this Proposition asks the States Assembly to amend the maximum amount which may be allocated to the project until completion (£804.5 million), to allocate funding to cover the annual cash flow requirements of the project for 2021 and an amendment to the amount which the States  may  borrow.  This  section  of  the  Proposition  also  sets  procedures  for accessing monies held in the Strategic Reserve Fund.
4. The Government Plan 2021-2024 allocated sufficient funding to the Our Hospital project to run up until July 2021. It was made clear at the time that it would be necessary to come back to the Assembly once the total cost of the project had been clarified.
5. Entries were included in the Government Plan 2021-2024 on the basis that the OBC would be completed in Spring 2021 and would inform a financing Proposition that would be brought forward for debate by the States Assembly in Q2 2021.

6. It was anticipated that States Assembly approval following a funding debate in Q2 2021 would provide the remaining balance of the £804.5 million that was described in P.123/2020 for the project to continue to completion from July 2021. In line with the funding allocation process for those projects classed as Major Projects, which includes Our Hospital, further cash flow funding requirements to complete the Project (up to the maximum £804.5 million) will be included in future Government Plans. These cash flow requirements will be covered by transfers from the Strategic Reserve Fund.
7. Since the Government Plan 2021-2024 funding was agreed, additional work has been  required  as  a  result  of  Amendment  2  to  P.123/2020  to  complete  a comprehensive options appraisal of circa 70 access route options. The additional States debate that was required meant that the project team was unable to develop a concept design in the timelines originally anticipated in the Government Plan 2021- 2024. In turn, this delayed the development of the OBC, which supports a request for funding from the Assembly.
8. In 2021, therefore, two further funding allocations to this project were made, MD- TR-2021-0020 for £11.167 million and MD-TR-2021-0066 for £17.8 million, by the Minister for Treasury and Resources under articles 15 and 18 of the Public Finances Law respectfully.
9. This funding has enabled the project to progress to this point, and the OBC has now been completed and approved by the Council of Ministers. The OBC describes that the total funding requirement for the project continues to be £804.5 million.
10. To meet the requirements set in the Public Finances (Jersey) Law, Part (d)(i) of this Proposition asks the States Assembly to increase the original sum for the overall costs of the Our Hospital project, which is defined as a Major Project in the Government  Plan  2021-2024  to  the  £804.5  million.  Appendix  2  includes  an updated Table of Major Projects for the Government Plan 2021-2024.
11. As signalled in the Government Plan 2021-2024, the project would need further funding in 2021 in order to continue to progress, and at this time, the States Assembly is being asked to approve additional funding in 2021 of £21 million, bringing the total Head of Expenditure for 2021 to £70 million.
12. Part (d)(ii) of this Proposition asks the States Assembly to increase the Head of Expenditure for the Our Hospital project to £70 million and Part (d)(iv) asks the Assembly to allocate the £21 million for 2021 from the Strategic Reserve, to be reinstated by funds borrowed, as also requested by this Proposition. Appendix 2 includes an updated Table of Capital Heads of Expenditure of the Government Plan 2021-2024.

13. The table below also reflects the breakdown between the cost of the Hospital at £804.5 million and the borrowing increase being requested in Part (d)(iii) of this Proposition. It shows the funding already provided since 2019 and includes the sum  needed  to  repay  those  capital  schemes  that  provided  funding  in  2021. Appendix 2 includes an updated Table of Revised Borrowing of the Government Plan 2021-2024, which mirrors Table 3 below.

Table 3 – funding already allocated and funding required by Our Hospital

14. This Proposition asks the States Assembly to approve that the additional funding required be achieved by means of increasing the borrowing approval set out in the original Government Plan 2021-2024.
15. The table below shows the detail around the £12.7 million that will be repaid to existing Capital Programme schemes and these sums are reflected in the draft Government Plan 2022-2025.

Table 4 - Capital Heads of Expenditure that will be repaid from Our Hospital borrowing

How the Project will Control Costs

1. The Our Hospital Political Oversight Group and Council of Ministers remain committed to ensuring that Our Hospital is delivered and consider that £804.5m represents an investment into the health and lives of all Islanders.
2. If approved, the cap brought forward in Part (a) of the Proposition will provide both this Assembly and Islanders with assurance that should unforeseen circumstances occur that increase costs, then expenditure will not rise above £804.5 million, without the prior approval of the States Assembly.
3. In addition to the cap brought forward by this Proposition, the Our Hospital project has robust control mechanisms in place that will enable the management of the budget within £804.5 million. The OBC summarises the strategies that are being implemented to provide effective cost management that delivers value for money. The approaches and strategies employed by the Our Hospital project include:

• A robust change control process

• Regular review of budgets, cashflow and actual spend against forecast.

• Selecting the correct procurement route to secure the best route to market.

• A procurement approach with the objective to deliver best value for Jersey  by  promoting  a  high-performance,  collaborative  culture throughout  the  supply  chain,  which  underpins  resilient  delivery, mitigates risk and maximises the impact of the supply chain in legacy activities.

• Engaging  organisations  with  a  proven  track  record  of  delivery  of hospital  projects,  contributing  to  better  certainty  of  planning  and costing activities

• Driving value through the hospital design – constructively challenging requirements and emerging designs so that they are right-sized and appropriately-engineered

• A two-stage procurement approach which leads to the Design and Delivery Partner being responsible for tendering the works packages, with the Government of Jersey pre-approving the procurement of each package and also approving the appointment of the successful bidders following robust tender evaluations.

• Contract strategies that include use of a pain/gain mechanism to provide an additional incentive for suppliers to deliver on time and on budget where beneficial.

• Selection of a procurement approach for the main works that allows the client team to review all cost information and benchmark against other hospital projects.

• Robust management of contracts by teams with appropriate experience and skills in this area.

Financing Our Hospital

1. Part (b) of this Proposition asks the States Assembly to approve the financing the Our Hospital project through borrowing up to £756 million.
2. The £756 million represents the £743.3 million funding requirement for Our Hospital, plus the £12.7 million to be repaid to existing Capital Programme schemes, from which funding was reallocated to the Our Hospital project in 2021. These sums are described in Tables 3 and 4 in Section 8 of this Report.
3. Financing the Our Hospital Project through borrowing – as opposed to using existing reserves – will allow the States of Jersey7 to take advantage of historically low interest rates and maintain existing reserves, which are expected to yield a higher return than the interest than would be paid on debt.
4. In arriving at this assessment, two broad options have been identified to meet the anticipated capital expenditure set out in the OBC of £743.3 million, plus £12.7 million to repay funding to capital projects, from which funding was reallocated in 2021 to Our Hospital:

• Use of existing reserves

• Use of external financing such as the issuance of debt through Bonds or other instruments

7 For the purposes of this report, the legal entity name of States of Jersey (SoJ) is used – the name in which any debt will be issued.

10.5 This section of the Report first compares the opportunities and risks of using existing reserves with those of borrowing and concludes that borrowing is the preferred option

10.6 In considering options for funding, an optimal solution will have the following characteristics:

• The  solution  should  deliver  c.£756  million  of  funding  within  the required construction window planned for the Our Hospital project.

• The total cost of the solution should be minimised but consistent with a prudent degree of risk.

• The funding solution should seek to spread costs over an appropriate timescale, so that the financial burden is aligned with the lifespan of the asset

• Any funding strategy should ensure States of Jersey finances remain on a  sustainable  path  under  the  widest  range  of  potential  economic circumstances and avoid burdening future generations with significant debt without identifying a means of financing and repaying that debt.

10.7 A high-level comparison of opportunities and risks of the use of reserves against the use of external funding mechanisms, such as issuance of Bonds, is presented below:

Table 5 - Opportunities and Risks: Use of Reserves vs Use of External Funding

Reserves vs borrowing – comparing the cost:

8. In assessing the relative financial costs of the options available it is necessary to consider both direct costs and opportunity costs.
9. For example, direct costs include incurred costs such as the coupon interest (rate paid on a bond by its issuer for the term of the security) on any debt issuance. Contrastingly, if reserves were used to finance the project, the Government would need to consider the indirect (opportunity) cost of investment returns which would be forfeited if assets are liquidated and spent.
10. As well as the financial costs, an assessment of the various funding options on the ability of the States of Jersey to react to changing economic conditions, or unanticipated economic shocks must be considered.
11. Using  reserves  would  present  a  significantly  more  expensive  option  than borrowing and has therefore been discounted. The below paragraphs outline the considerations that have led to this assessment.
12. The States of Jersey has two Funds that would be large enough to serve as a potential source of funding: the Strategic Reserve Fund and the Social Security (Reserve) Fund.
13. The Strategic Reserve at its mid-year 2021 valuation held assets marginally in excess of £1 billion, sufficient to fully fund the Our Hospital project within the required construction window. However, utilising the Strategic Reserve for this purpose would exhaust most of the Fund value and is not aligned to the current objectives or purpose of the Fund and would leave the Island considerably more exposed to the financial risks that the Fund exists to address, should they arise in the future.
14. In assessing the opportunity cost of capital, assumptions must be made about the rate of returns reserves will generate over the period for which debt may be issued. Treasury has sought to apply assumptions consistent with a prudent degree of risk.
15. The current investment strategy of the Strategic Reserve targets an investment return of RPI+2% 8. Over the last ten years the Fund has generated an annual net

return of over 7%, well above the target – and well above current historically-low interest rates.

8 /assemblyreports/2021/r.7-2021.pdf

16. An illustrative model has been prepared showing the project cost of £756 million drawn value/debt issuance. If the Strategic Reserve were used to fund the Our Hospital project, the projected cost would be the missed opportunity of the returns the drawn assets (£756m) would otherwise have yielded.
17. Two scenarios have been modelled and costed, in the first example £756 million is drawn from reserves and immediately spent (reserves funding). The cost would be £756 million valued in real and nominal terms (i.e. 2021 monetary values). This option would also have an opportunity cost relating to the surrendered returns which could otherwise be earned by the capital. This best illustrated by comparing to the alternative scenario in which the reserves are preserved.
18. In the alternative scenario (debt funding) £756 million is borrowed at a fixed interest rate (coupon) of 2.5%. For simplicity, the borrowing is split equally between two bonds one maturing in 35 and the other in 40 years. The annual coupon payments are met from the investment returns of the unspent reserves (£756 million). Any excess returns are added to the reserves and reinvested earning assumed rate of 4.6% (this is 2% above the FPP long term RPI growth assumption of 2.6%, in line with the current return target of the Strategic Reserve[3]). After 35/40 years the debt will mature and £756 million would be drawn from the retained earnings to repay the debt as two lump sums. It is worth noting that the real value of this payment will have been eroded considerably by 35/40 years of inflation, so although would have the same nominal value, would have a lower real' value.
19. The table below seeks to summarise the projected scenarios outlined in this section and to calculate the full opportunity cost of reserves funding vs debt funding. For clarity the assumptions applied are defined below:

• The reserves funding' illustrates the full cost of immediately drawing and spending £756 million from reserves.

• The debt funding' example illustrates by contrast:

• £756 million example immediately charging an annual coupon of 2.5%, £378 million maturing in 35 years with the remaining £378 million maturing in 40 years, this mirrors potential plans for the structuring of the debt. The proceeds of the issuance are immediately spent.
• The total value of coupon payments are included as the interest cost'. A 2.5% coupon applied over a 35/40-year bond life is a conservative estimate of the bond structure most likely to be issued.

• As no reserves are drawn at the beginning of the project, £756 million of reserves are retained. These reserves are invested to generate an annual return of 4.6% from which the annual interest charged by the bond issuance is paid.
• Excess  returns  after  coupon  payments  are  retained  and reinvested, earning a return at the assumed rate.
• The full value of investment returns generated are detailed as projected investment returns', this is gross of the interest cost' recognised separately in the table.
• On maturity of each of the two tranches of debt the £378 million would be repaid from the retained reserves, the cost of which is recorded in the table as £756 million debt repayment after 35/40 years'.
• When the total costs in the debt funding' example are offset against  the  projected  investment  returns,  the  overall  result would be a net gain for the States of Jersey.

20. Table 6 below clearly demonstrates that the debt funding' option represents significantly better value for money for the States of Jersey.  

Table 6 - Calculating the relative cost of debt funding vs use of reserves

* Both models illustrate the values projected using nominal values (£1 worth the same today as it is in 40 years) and adjusted for inflation (deflating figures to today's value, assuming a constant inflation rate of 2.6% p.a.).

21. Based on the assumptions applied, a significant saving of £1.7 billion in nominal terms (£1.4bn in real terms) would be achieved through debt funding versus reserve funding.

22. An example specifically illustrating the impact of applying debt funding versus reserve funding to the Strategic Reserve are included in section 12.8. The two examples illustrate the same net impact, however the above table specifically isolates the impact of the drawn £756 million to clearly define the opportunity cost. The graph in 12.8 illustrates the impact on the combined holdings of the Strategic Reserve.
23. Drawing the same amount from the Social Security (Reserve) Fund would yield a higher opportunity cost given the higher return target of RPI+3% that the investment strategy of that Fund is targeted to deliver[4]. However, a further basis for not utilising this Fund is that it would be inappropriate to use the Social Security (Reserve) Fund, which is a key part of the Strategy for managing the pressures arising from an ageing population. It is the mechanism by which contribution rates are smoothed over time, effectively acting as a buffer towards the rising burden of pension costs, as the population ages.
24. In summary, use of existing Reserves is not the preferred option for financing Our Hospital, as:

• Use of the Strategic Reserve would largely deplete the Fund, leaving the Island more exposed to future significant changes in the external economic environment

• Use of the Social Security (Reserve) Fund would not be consistent with the Fund's purposes or objectives and would reduce the Island's sizable buffers against the costs of the ageing population

• Use of Reserves would result in a significant opportunity cost of lost investment returns which outweighs the advantages of historically low interest rates available through borrowing, as illustrated in the example above

Financing Our Hospital through borrowing and debt instruments potentially

available to the States of Jersey

25. As described above, the preferred option for financing the Our Hospital project is through the issuance of long-term debt.
26. Part (b) of this Proposition asks the States Assembly to approve the financing of the Our Hospital project through borrowing up to the £756 million.
27. However, this Report does not seek approval for the specific type of debt instrument(s) that will be used or the exact solution for longer term debt
28. The Minister for Treasury and Resources' Debt Strategy, published alongside this Proposition, will outline how the issuance of debt will be managed at the appropriate time and in the most favourable format based upon independent advice. The Debt Strategy enables the Minister for Treasury and Resources to identify and employ the most appropriate and cost-effective debt instrument(s)

for the States of Jersey as an overall package of debt given the external market and environmental conditions.

29. The following paragraphs outline the potential debt options available to the States of Jersey and present an appraisal of each under current market conditions undertaken by the Treasury & Exchequer Department, working with our financial advisers, Ernst & Young.
30. These core debt solutions are summarised below in order that Members are informed about the options available to the States.

• Retail Bond - targets private investors and could allow Jersey residents to invest in the Our Hospital project whilst enjoying a reasonable rate of return. It is important to note that Retail Bonds are different from Public Bonds bought by institutions.

The total value of Retail Bond issuance is typically lower than the value required to fund the Our Hospital project - usually between £50-200 million. Such issuances are also expected to incur greater cost than a Sterling Public Bond alternative and require significant ongoing administration, for which the Government of Jersey doesn't currently have the infrastructure to manage.

Furthermore, the bond maturity profile would typically extend to only 3-7 years, exposing the States of Jersey to additional risk if there is a need to refinance project debt, should rates rise or market conditions deteriorate. Given the timeframe, debt would need to be reissued to provide a sufficient timescale to repay the outstanding debt without significant rises in tax revenue or sale of assets. There is a requirement to have an active relationship with investors, and those investors are likely to be "unsophisticated" in investment and regulatory parlance, as they may well be first-time investors, requiring greater protection.

• Private Placement – are typically sold directly to one or more sophisticated institutional buyers, such as US or UK insurance companies and have grown in popularity due to reduced availability of long dated bank debt at competitive pricing. UK institutions contribute a significantly smaller liquidity pool than US domiciled equivalents, but a large and increasing number of UK companies are active in this market.

As private placements are not exchange traded, they generally attract an illiquidity premium, which is an additional return paid to the issuer for the additional risk of tying up capital in a less liquid asset. However, they are not publicly rated and are usually not subject to any ongoing disclosures thus are less transparent than traditional bond issuance. Private placements can also include burdensome financial covenants that require the issuer to remain

in compliance with certain ratios, which increases the administrative costs of ongoing monitoring of the borrowing.

The Private Placement market is rarely used by sovereign issuers such as the States  of  Jersey  which  indicates  that  there  could  be  a  higher  level  of execution risk than other debt options. In addition, Private Placements also typically charge higher rates than issuance in the Rated Public Bond markets.

• Project  finance  –  a  secure  finance  facility  could  be  tailored  for  the construction of the Our Hospital project, whereby funding profiles match the cash requirements of the project, reducing, in theory, the cost of investing borrowing proceeds whilst they remain unspent during the early years of construction (a negative cost of carry).

A typical project finance structure involves a Special Purpose Vehicle (SPV) being set up as the borrowing entity, which would also act as the contracting entity for the construction contracts. A guarantee from the States of Jersey to the SPV could help reduce the cost of the debt, although project finance structuring is likely to be more expensive than some of the other solutions explored in pure funding cost terms. It can provide other qualitative benefits through  the  terms  of  the  financing  arrangement,  such  as  ongoing maintenance or facilities management, although this type of financing has not been tested in a Jersey environment.

To obtain an appropriate tenor (>25 years) for the project financing, an associated Bond issuance is also likely to be required. This reduces the benefit of matching funding to cash-flows (as referenced above) and the negative cost of carry becomes an issue again. This also adds complexity in arrangement and execution.

• Revolving  Credit  Facility  –  such  as  the  facility  employed  by  the Government of Jersey during the Covid-19 crisis, are rarely used for long term financing and are more commonly used in organisations with weaker credit  profiles  –  who  cannot  therefore  easily  access  capital  markets. Typically, the tenor is much shorter in bank financing compared to debt financing.   The  terms  of  revolving  credit  facilities  typically  require renegotiation over a cycle as short as 2-3 years, which would expose SoJ to significant risk in terms of refinancing – both the quantum of debt and rate would be subject to the prevailing market conditions. In the worst-case scenario, an unexpected market shock could result in funding being fully withdrawn before the Our Hospital project was even completed.

Short-term  financing  arrangements  would  mean  that  SoJ  cannot  take advantage of historically low rates over the repayment cycle. In the longer term, a revolving credit facility means that project costs would be uncertain as the need to refinance and secure long-term financing will make planning difficult and increase risk to an unacceptable level.

Revolving credit facilities are unlikely to be a standalone solution, however, may be more flexible in terms of drawdowns and therefore it is likely that the existing revolving credit facility will form part of the funding solution identified through the Debt Strategy.

• Public Rated Bond – offers the most cost and risk-effective access to debt funding available to the States of Jersey. This Proposition does not ask the States Assembly to approve the issuance of Public Rated Bonds, however, whilst noting that the Minister will determine the optimum solution through the Debt strategy, it could be expected that the States would issue Sterling bonds. If this is identified as the preferred option for the issuance of debt, following further expert external advice, and subject to market conditions, the Minister for Treasury and Resources may issue two Sterling bonds, for approximately equivalent values, with bullet maturities (the bonds are repaid in a single lump sum on maturity) of up to 40 years in the public market. Such bonds require the payment of a fixed rate of interest on a semi-annual basis (twice per year) for the full term of the debt.

Subject to advice closer to planned issuance, it is currently expected that that the issuance of Public rated bonds will form a substantial element of the financing for Our Hospital.

The rationale for using a Public Rated Bond is as follows:

• The public Sterling bond market issues more debt in larger tranches – there are more buyers' and sellers' – which ensures the greatest chance of securing the full value of debt required at an appropriately low rate.

• Issuance can be achieved with a minimum of or no financial covenants which will simplify ongoing administration. However, if SoJ opt to enter into a green' or Environmental and Social Governance' (ESG) bond, which would be likely to achieve a lower coupon (fixed interest rate),  but  potential  with  a  higher  reporting  requirement.  This  is considered  in  more  detail  later  below  (Sustainable  Finance Frameworks).

• Jersey has experience in the market and a proven track record following the issue of the £250 million housing bond in 2014. Jersey's existing presence in this market may provide some assurance to investors and increase the attractiveness of the bond and would also allow Treasury

and Exchequer to leverage existing knowledge and documentation to help control costs.

• The full net proceeds from the planned bond will be received on issuance  of  the  debt.   A  more  staggered  drawdown  with  smaller tranches is difficult to achieve without incurring additional cost. This provides funding certainty but does necessitate the management of the borrowed funds over the short-term construction timeline and greater carrying costs.

• As interest rates rise, bonds typically fall in value and a Public Rated Bond can be repaid early subject to certain costs. This means that should there be a normalisation' of rates to a level more in line with historic averages, we would expect a fall in the market value of the bond and  under  certain  circumstances,  this  may  present  SoJ  with  the opportunity to repurchase the bond and effectively repay the debt early at a discount.

• The strength of Jersey's balance sheet allows SoJ to access external debt at historically low rates over a long-term investment horizon. Bond issuance allows SoJ to retain its current reserves and associated investments, which will protect ongoing flexibility to react to future uncertainty. For example, in times of crisis, national emergency or severe economic recession the existence of a strong balance sheet would allow SoJ to secure short-term funding on more favourable terms. In the case of a major disaster, the option to utilise the assets of the  Strategic  Reserve  is  still  available  while  alternative  –  and potentially less palatable – sources of funding are developed (e.g. taxation, sale of other assets).

• The long-term nature of a Public Rated Bond allows the financing burden to be spread over an appropriate timescale so that the financial burden is aligned with the lifespan of the asset.

• Sustainable Finance Frameworks – the issuance of Public Rated Bonds can include a green' or Environmental and Social Governance' Bond. Proceeds  of  such  Bonds  are  used  to  fund  projects,  activities  and investments that directly aim to help address or mitigate a specific social issue.   These  types  of  bonds  are  attractive  to  investors  due  to  their commitment to positive social and/or environmental outcomes.

Given the nature of the Our Hospital project, it is likely that it would meet the required definition of a positive social outcome.

Investments with greater social value can attract a greater number of investors and could allow SoJ to enjoy a lower coupon given enhanced investor appetite. Such investments could also help enhance the Island's reputation from an Environmental and Social Governance perspective.

However, the suitability of such an arrangement would need to balance the total  cost  of establishing  and  operating  the likely  enhanced  reporting requirements, the impact of potential debt covenants and the lower coupon such a bond would be expected to attract.

As a responsible steward of capital, SoJ already seeks to incorporate Environmental and Social Governance considerations into its activities, and the issuance of a 'green/ESG' Bond would enhance the transparency of such a framework and help to embed such arrangements into the fabric of SoJ's existing decision-making processes.

Expected issuance costs associated with a public bond issuance

10.31 Costs of issuance are included within the definition of financing costs and are proposed to be drawn from the Strategic Reserve. The costs would be dependent on the form of debt issued; the intended c. £756 million public listed bond(s) would be anticipated to incur the following costs:

• Legal costs (Jersey and UK) SOJ and Book Runners

• Credit Rating listing fee & listing fees

• Advisors fees (including Book Runners, Auditors fees, financial advisers)

• "Roadshow" costs

10.32 These above costs are projected to equal circa £4 million, the exact cost will be dependent on the results of tendering processes, the terms of the issuance, and on determination of the optimum issuance timetable.

10.33 Part (d)(v) of this Proposition identifies an initial drawdown of up to £2 million from the Strategic Reserve Fund in 2021 and paid into the Consolidated Fund with a new Head of Expenditure – Debt Management, established to cover all costs relating to the management and administration of the financing for Our Hospital.

Government of Jersey Debt Strategy

1. Alongside this Proposition the Minister for Treasury and Resources will present the first Debt Strategy for Jersey. This sets out in more detail the Council of Ministers policy to enact, control and monitor the States' debt programme and provides the framework within which it will be operated. The framework is intended  to  include  the  ongoing  issuance  programme,  arrangements  for  the servicing of debt, monitoring of the overall debt position and the long-term strategy for repayment of debt.
2. The Debt Strategy includes the following:

• Overarching governance arrangements and principles under which the Minister will manage the debt programme.

• An outline of issued, approved (but not issued) and planned future debt issuance  under  consideration  as  part  of  the  consolidated  debt programme

• Finance  cost  servicing  arrangements  and  the  planned  repayment mechanism

• Debt  monitoring  metrics  and  target  limits  to  ensure  regular  re- assessment of the States' strategic position

3. The optimal structure, maturity and type of debt instrument that will be issued, will depend on the most up-to-date information on market conditions, demand, cost and risk.
4. The proposed total borrowing requirement will be summarised in the forthcoming Government Plan 2022-25.
5. The strategy reflects the Minister's long-term plans but also provides the flexibility to transparently adapt plans in reaction to market conditions and the financial position of the States.

Case Study - How the Our Hospital Debt Could be Repaid

12.1 Section (c) of this Proposition asks the States Assembly to approve the use of the long-term return of the Strategic Reserve to pay for the servicing and repayments of any debt issuance.

12.2 The Debt Strategy will enable the Minister for Treasury and Resources to assess and manage the most appropriate debt instruments and the most cost-effective ways of repayment.

12.3 However, to support States Members understanding of how the Our Hospital debt could  be  repaid,  officers  from  Treasury  &  Exchequer  supported  by  their investment  advisor,  Aon,  have  conducted  a  review  to  present  an  illustrative example of the ability of the Strategic Reserve, to:

• Service the ongoing coupon costs of £756 million debt – a figure used to present a simplified example, as above

• Generate sufficient returns to repay the debt as it falls due over the anticipated 40-year time horizon

12.4 As per this Proposition, the Strategic Reserve is to be used as a sinking fund to repay both debt capital and service coupon payments. The Investment Strategy and Debt Strategy documents are designed to provide the flexibility to issue the most  cost-effective  debt  instruments  in  accordance  with  prevailing  market conditions at the time and to optimise the positioning of the Strategy Reserve to the exact characteristics of that debt. The modelling outlined below represents a conservative estimate of the debt characteristics which will be issued and return characteristics of the strategy optimised to meet the associated debt obligations. The contrasting model of drawing an equivalent amount from the Strategic Reserve

immediately serves to demonstrate the opportunity cost of a funding mechanism based on drawing from reserves.

5. The results indicate that the capital value of the Fund, if invested over the life of the debt, would, with a high degree of confidence, be able to meet the criteria outlined  in paragraph  12.3. However,  this  assumes that  there are not  large drawdowns on the Fund and the objectives of the Strategic Reserve would need to be modified. If there were drawdowns of size in the future, then a different approach to funding the coupon payments and meeting the debt repayments as they fell would be required.
6. The Fund will be used to retain and compound investment return from its assets over time to achieve the funding target, i.e. repayment of the debt. This simple example has been prepared to illustrate the process.
7. The most recent valuation of the Strategic Reserve exceeds £1,000 million which is  invested  with  a  target  return  of  RPI+2%.   Applying  the  long  term  RPI assumption of the Fiscal Policy Panel of 2.6%, the expected return of the Fund, in the long term, is 4.6%, well above the estimated debt coupon ceiling of 2.5%. The growth in fund value, taking account of the compounded return of the Fund and net of drawings to meet a 2.5% coupon are illustrated below. The projected return is sufficient to both service the coupon and to fully repay the issued debt, assumed in this example to fall due in equal tranches after 35 years and 40 years.
8. In the below example, the profile of the preferred debt funded option has been contrasted with funding drawn directly from the Strategic Reserve. In the debt- funded example, bond proceeds of £756 million have been excluded. These monies would be expected to be drawn over a short-term window (2-4 years) and would likely be invested in a lower risk strategy which does not create significant investment returns due to the level of capital protection required. Although their inclusion  would  further  improve  the  return  profile  in  the  initial  years  their exclusion better demonstrates the impact of compounding returns on the larger portfolio more clearly.
9. It is important to note that the above example is a simplified model to illustrate the more complex stochastic modelling prepared by Aon and reviewed by the Minister for Treasury and Resources' independent Treasury Advisory Panel. In reality, the returns of the Strategic Reserve will not be smooth over time, as to generate long- term returns the portfolio is exposed to risk which will be reflected as volatility in asset values. Over a short-term time horizon such volatility will be pronounced, however the time horizon of the Fund's strategy allows for assets to be held through periods of market dislocation to earn a superior long-term return.

With a fixed rate bond, as is expected to be issued, the interest rate is fixed over the life of the issuance. The following chart illustrates the impact of issuing at a

rate (3.25%) above and (1.75%) below the core bond interest rate assumption (2.5%). Current market conditions indicate that issuance could be achieved at a rate below the 2.5% core bond interest rate assumption.

10. In our examples, the value of the £756 million debt issuance exactly equals the value of cash received by the Strategic Reserve. A public issue bond, as the envisioned issuance structure, is subject to the rounding down of coupon rates to the nearest 1/8th of a percentage point and can result in a differential between the coupon rate at which a bond is issued and the market rate demanded by lenders. To compensate for the rounded down coupon a discount is applied to the bond issuance receipts. The methodology is relatively complex, but over the life of the bond, the value of the lower coupon and lower initial receipts offset and are effectively only a timing difference. As a financing cost, the impact of any discounting of proceeds will be managed through the Strategic Reserve with the gross value of the bond aligned to the remaining costs of the Our Hospital Project to provide certainty over the £756 million funding requirement. The impact of this discounting is not considered to be significant relative to the repayment profile of the bond and is to be managed through the Debt Strategy / Investment Strategy documents.
11. Investment of any assets for a return above the risk-free rate will necessarily involve exposure to risk, but this is appropriate over a long-term investment horizon.   Over  the  long-term,  the  opportunity  to  reassess  and  modify  the investment  approach  in  response  to  market  conditions  is  consistent  to  the Minister's published  Investment  Strategy.   Furthermore,  the required  return

allows for a diverse range of assets to be held to minimise the likelihood of any irrecoverable impairment. To maximise the chance of the Fund meeting its investment objective however, modifications are required to the objectives of the Strategic Reserve, these are explored in the following section.

Modification of the Objectives of the Strategic Reserve.

1. Part (c) of this Proposition asks the States Assembly to modify the objectives of the Strategic Reserve, so that the debt can be effectively managed.
2. This will enable the proceeds of the debt issuance to be paid into the Strategic Reserve until those funds are required to be drawn to finance the approved hospital construction. The Strategic Reserve will also be utilised to service any debt coupon (interest) payments, the costs of administering the debt and to build the Fund's value over time with the intention of repaying the debt on maturity.
3. On  5  December  2006,  the  States  approved  P133/2006:  Establishment  of  a Stabilisation Fund and Policy for Strategic Reserve and thereby confirmed the policy for the Strategic Reserve as:

 "the Strategic Reserve is a permanent reserve, where the capital value is to be

used in exceptional circumstances to insulate the Island's economy from severe structural decline such as the sudden collapse of a major Island industry or from major natural disaster."

4. P.122/2013: Draft Budget Statement 2014 defined the balance of £651,216,000 as at 31st December 2012 as the capital value of the Strategic Reserve and that, for future years, the capital value be maintained in real terms by increasing the capital value in line with increases in Jersey RPI(Y)
5. P.84/2009:  Strategic  Reserve  Fund:  use for  Bank Depositors' CompensationScheme enabled the Strategic Reserve to be used, if necessary, for the purposes of providing funding of up to £100 million for a Bank Depositors Compensation Scheme.
6. P.76/2015: Strategic Reserve Fund: funding for Independent Jersey Care Inquiry and transfers from and to the Consolidated Fund allowed the Minister to bring forward proposals for the use of income earned on the Strategic Reserve above that required to maintain the capital value.
7. The key objective of the Fund remains unchanged and the Strategic Reserve will continue to serve as a critical component in supporting the Island's economy as a permanent reserve. Preservation of the Fund's capital value provides future Governments with significant flexibility of action with a proportion of the growth of the Fund allocated to the repayment of debt.

8. The preservation of the capital of the Fund through debt funding of the Our Hospital project ensures the options to use the Fund as a source of funding for short term finance or to draw from the Fund in an emergency are retained. The objective of the Fund, however, makes clear that impact of these actions would necessitate consideration of any changes required to ensure that the States of Jersey meets its obligations to repay the debt in the long term.

The Need for Compulsory Purchase

1. Whilst the total budget and principle of financing Our Hospital are vital decisions for this Assembly, the project cannot be delivered without acquiring the land required to assemble the site for delivery.
2. Part (e) of this Proposition asks States Members to approve the use of Compulsory Purchase powers, to acquire property as a last resort but also as a mechanism to resolve rights or covenants which need to be newly put in place, cancelled or modified to serve the development. It also requests approval for the budget for Compulsory Purchase, which is included in the total project budget.
3. As noted earlier in this Report, the ambition of this project is to deliver a completed hospital by 2026. To achieve this, the site will need to be assembled and clear, and any rights or covenants resolved, for when construction commences. The use of the compulsory purchase process will enable the Our Hospital project to be delivered without the additional risk of costly delay.
4. By adopting P.129/2020 Our Hospital Project: acquisition of land for the new hospital at Overdale (P.129/2020) the States Assembly were satisfied that the land should be acquired, by compulsory purchase, if necessary, for the purposes outlined in the Article 2 of Planning and Building (Jersey) Law 2002, which include protecting and improving Jersey's general amenities, character and physical environments economic, social or environmental well-being[5].
5. Compulsory purchase will facilitate the development and improvement of Overdale for Jersey to have a modern and first-class hospital, fit for the needs of its population. In turn, executing the works is likely to contribute to the purpose of development or use of the land in a manner that best serves the interests of the community[6].
6. The many benefits which will be derived from the development of Overdale for the hospital described in this Report and the OBC provide a compelling case in the public interest for the use of compulsory purchase powers.

7. It is acknowledged that compulsory purchase will affect the rights of the present owners. There has been careful consideration of the balance to be struck between those rights and the wider public interest. The compelling case in the public interest justifies the interference with rights of those with an interest in the affected land in using compulsory purchase when balanced against the risks outlined in Section 0. It reflects the area of land required to deliver proposals in the RIBA2 Concept Design13.
8. Those owners whose land, or rights over land, will be acquired, cancelled or modified by the compulsory purchase will be entitled to compensation as provided by Compulsory Purchase Law and the Planning and Building (Jersey) Law 2002, such compensation to be settled in the absence of agreement by a Board of Arbitrators  appointed  by  the  Royal  Court.   There  has  also  been  extensive consultation  and  negotiation  with  all  affected  parties  and  where  possible, agreement reached.
9. Careful consideration has been given on the extent of land to be acquired or over which new rights are to be acquired. Without ownership and/or control of that land it is not possible to deliver the comprehensive scheme for the preferred site.

Acquisition of property and changes to rights and covenants

10. In approving P123/2020 Our Hospital Site Selection: Overdale (P.123/2020) and P.129/2020 the States Assembly agreed that a hospital would be delivered within the boundaries illustrated on the plan in the Report appended to P.123/2020. Following the approval of P.123/2020, the design of Our Hospital began in earnest.
11. P.129/2020 formally notified the Assembly of the intention to acquire land and properties covered by the Proposition. The properties included in P.129/2020 at the time of lodging, on 6th October 2020, were those that were identified as being essential for the delivery of Our Hospital at Overdale, as set out within the Site Evaluation Report.
12. The design of Our Hospital is an iterative process and as consultation with Islanders,  including  statutory  and  non-statutory  stakeholders  continues,  and technical studies are undertaken, it progressively evolves.
13. As the design has advanced, it has become clear that the acquisition of further properties would support the delivery of Our Hospital at Overdale and the Public has since acquired or is in the process of acquiring those properties by agreement under the Standing Order 168 process. Those properties formed part of the preferred site in P.123/2020 but were not identified on the plan at Appendix 1 to

13 https://ourhospital.je/news-and-updates/article/riba-stage-2-report-published

P.129/2020 as at the time of lodging P.129/2020 they were not required to deliver the site masterplan. The plans appended to P.123/2020 and P.129/2020 are included as Plans 1 and 2 respectively at Appendix 1 to this report for comparison.

14. The preferred approach has always been to acquire any necessary properties or land through negotiation and fair and proper compensation. At the time of lodging the Public has acquired or is in the process of acquiring by agreement the land and properties shown on Plan 3 at Appendix 1. We thank the former owners for the part that they have played in enabling the people of Jersey to have the new hospital that they both need and deserve.
15. P.129/2020 approved in principle, that the Minister for Environment should be empowered, in exercise of the powers conferred by Article 119 of the Planning and Building (Jersey) Law 2002 and subject only to the approval of requisite funding, to acquire the land and any interest therein by compulsory purchase on behalf  of  the  Public  in  accordance  with  the  provisions  of  the  Compulsory Purchase Law.
16. It is not the Government of Jersey's preferred approach to use compulsory purchase powers, other than as a last resort. Although all third-party landowners within the Preferred Site have been approached, regrettably, it has not been possible to agree or conclude terms with all of them in the 9 months since P.123/2020 and P.129/2020 were approved.
17. However, the delivery of Our Hospital depends on the timely resolution of any land  ownership  issues  to  ensure  the  project  is  not  unduly  frustrated  or compromised. The position has now been reached where there is no alternative means  of  ensuring  that  the  assembly  of  land  for  the  preferred  site  can  be completed other than by the use of compulsory purchase powers. Compulsory purchase is now needed as a measure of last resort. The land authorised to be purchased compulsorily is the land described in Plan 4 at Appendix 1 and those areas where agreement has not been reached are provided for information on Plan 3 at Appendix 1.
18. The compulsory purchase process can run in tandem with continued efforts on the part of Government to negotiate terms for acquisition of the remaining property, in the hope that it will complete the land assembly by agreement, which would avoid the need to apply all stages of the Compulsory Purchase process unless absolutely necessary.
19. The final step of the Compulsory Purchase process and vesting of land in the Public will not be executed until the successful determination of the Planning Application for the new hospital and access.

14.20 The power to acquire land conferred by Article 119 of the Planning and Building (Jersey) Law 2002 also includes the power to acquire new rights or override or amend existing ones. Plan 4 at Appendix 1 to this report (and described in Plan 3 at  Appendix  1)  not  only  includes  land  which  will  need  to  be  acquired  by Compulsory Purchase, but also includes land over which rights or covenants need to be newly put in place, cancelled or modified to serve the development. To this effect, the use of Compulsory Purchase powers also serves as a mechanism to:

• Resolve issues where land is already in Public ownership but is subject to rights or covenants that may need to be cancelled or modified.

• Put in place new rights, which may either be temporary for construction and or longer term for servicing, use and maintenance.

14.21 Full technical information in the RIBA2 report provides the justification for the need to acquire or access particular areas that will require the resolution of existing rights, covenants and ownership of land. The report can be found online and the areas are illustrated on Plan 3 at Appendix 1. Some of these areas include:

• A drainage tank below People's Park – to ensure adequate drainage and protect the area from flooding. The tank will be buried below ground and the surface will be reinstated to green space for public use. Further, water stored in the tank could be recycled for irrigation. The drainage tank will be carefully sited to minimise any impacts on existing trees. Access for construction and ongoing maintenance will be required. NB: a precedent already exists as there are other drainage tanks below People's Park that service nearby developments and soakaways in private land have been established to drain island roads.

• The edge of the existing play area in People's Park will be impacted by the provision of the  active  travel  route  –  however,  any  area  lost  can  be reinstated within the Park area, following full consultation with the Parish of St Helier.

• Rights of access will be required to access other areas of People's Park during the construction phase. These are illustrated on Plan 3 at Appendix 1.

• Rights will be needed for the construction and maintenance of retaining structures to the access road and active travel areas.

• Some areas of Victoria Park and Lower Park will need to be acquired to provide a cycleway from Victoria Promenade to People's Park, improve the strategic road network to effectively manage traffic flows and ensure resilience of access to the hospital and nearby town centre road networks. These are indicated on Plan 3 at Appendix 1 where it can also be seen that these can be replaced by amenity areas to the south of Victoria Park and within the current Inn on the Park Car Park.

• Rights will also be needed for access during the construction phase to re- locate the pétanque terrains within Victoria Park.

• In the area to the east of People's Park, currently used as parking, there is a requirement to remove an existing covenant and resolve discrepancies in

ownership information. Where possible, existing areas of hardstanding will  be  re-used  for  the  proposed  improved  crossings,  footpath  and cycleway. The impact on all trees in the surrounding area will be kept to a minimum and they will either be re-located or re-provided.

• Access will be needed during the construction phase to some areas adjacent to the George V Cottage Homes and Clos des Monts through Westmount Gardens, for the connection of utilities. A large area has been indicated on Plan 3 at Appendix 1. to enable a route to be chosen that makes allowance for existing trees and ecology to minimise impact and provide safe working spaces. Surveys during the next stage of design will establish exactly where access will be required.

22. Furthermore, some small additional areas of land are required for highway improvements since their designs have evolved during concept design as further consultation has taken place with Highway Authorities and stakeholders. Plan 3 at Appendix 1 reflects these small areas.

Funding for Compulsory Purchase

23. Section 1 of P.129/2020 advised that approval for a credit of the monies for any compulsory purchase would be brought forward in a separate Proposition at a later date.
24. Part (e)(iv) of this Proposition brings forward this approval and asks the States Assembly  to  approve  up  to  £36  million  as  a  credit  for  the  monies  for  any compulsory purchase in accordance with the requirements of the Compulsory Purchase of Land (Procedure) (Jersey) Law 1961. This allowance is made within the overall budget of £804.5 million.
25. The figure of £34.3 million provided in the OBC represents a realistic estimate based on current information; the difference to the upper limit of the credit of monies of £36 million would be funded from project contingencies within the £804.5 million. Setting an upper limit provides flexibility for further negotiation if  material  changes  in  valuations  occur,  especially  given  the current  volatile property market. This flexibility will ensure that negotiations are taken as far as reasonably possible and compulsory purchase really is a measure of last resort.
26. As noted in Section 14.20, Plan 4 at Appendix 1 to this Report not only includes land which will need to be acquired by Compulsory Purchase, but also includes land over which rights or covenants need to be newly put in place, cancelled or modified to serve the development. The credit of monies of £36 million therefore provides for the whole of the acquisitions, whether already agreed by negotiation or likely to be subject to the Compulsory Purchase process. As provided for information in Appendix 1, Plan 3 the majority of the land has already been secured through negotiation or is already in Government of Jersey ownership.

Risk Assessment

1. All capital build projects carry risk and risk registers that capture the key project risks and mitigations for a New Build Option and a Baseline Comparator Option

have been included in the Our Hospital Outline Business Case (see Appendix 3, Section 4.11).

2. There are a number of key risks associated with the Our Hospital Project, particularly the funding and cost. These include:

• Inflation – there may be an increase in costs per square metre if the current trend  in  construction  inflation  rates  in  Jersey  continues.  Any  delay  in progressing the project could mean that costs increase.

• Market reputation – Jersey's reputation in the hospital design and construction market was impacted by previous iterations of the project, which did not progress  to  construction.   Further  delay  could  potentially  result  in  the Government losing its Design and Delivery Partner and leave Jersey in a significantly  compromised  negotiating  position  with  potential  construction partners – or even without potential construction partners. The construction industry, both in the UK and further afield, is likely to experience increased pressure due to the UK Government's commitment to a major investment in infrastructure, including health infrastructure. This could suppress market appetite for yet a further iteration of Jersey's hospital project.

• Deterioration of the current health estate – Appendix 3 Sections 2, 3.3 & 3.4 of this report describes the deteriorating condition of the current health estate and the challenges this poses to patient wellbeing and health outcomes, staff recruitment and retention and the continued delivery of sustainable health and care in Jersey. This is one of the main and most pressing drivers for progressing Our Hospital. The impact on maintenance and running costs for the current hospital estate will continue to increase, and increase substantially, with further delay.

• Recruitment and retention of health staff – quality clinical professionals want to work in outstanding, modern facilities. As our health estate deteriorates, it will become harder to attract the best health professionals to Jersey, which, in turn, will impact the quality of care for Islanders.  

• Economic prosperity – if the health estate is left to deteriorate, then, over time, the quality of care may deteriorate given the constraints that are placed on our clinicians  in  delivering  healthcare.   Consequently,  the  health  of  Jersey's population will also deteriorate, reducing the size of our economically active population – and therefore Government revenues – which will put Jersey's economic prosperity at risk.

• Interest rates affecting borrowing rates – as the world emerges from the Covid-19 pandemic, Jersey is in the fortunate position of having a major capital project poised at this advanced stage of development. Delay to budget and financing approval is likely to jeopardise the favourability of bond interest rates and lead to a more expensive hospital or a less appropriate hospital for the same investment cost.

• Delays in the project timeline – if the project is delayed at this stage, then the cost implications will be in the region of £100,000 per day as a result of

inflationary effects and additional team costs. A briefing note outlining the costs of delay was sent to all States Members in February 2021.

• Abortive costs – if this Proposition is not supported, or if the project does not progress to completion, the Government of Jersey will bear significant abortive costs.

• Global effects – notwithstanding the robust cost controls that are in place, the project cannot influence global factors such as the impact of Brexit on supply chains and the costs of materials. These external risks will be mitigated wherever possible to minimise the effect on costs

Financial and Manpower Implications

16.1 There are no additional manpower implications that will require funding outside of the total project budget outlined above, except for those associated with debt issuance and monitoring, highlighted in this report.

Conclusion

1. The case for a new hospital for Jersey has been well made and has been accepted by the States Assembly. The OBC concludes that the New Build Option:

• is the only option that achieves the Critical Success Factors

• is cheaper in absolute terms than the Baseline Comparator

• delivers greater benefits to patients, staff in the Health and Community Services Department and the wider community – significantly more benefits to all stakeholders than the Baseline Comparator

• offers  an  opportunity  to  modernise  not  just  Jersey's  healthcare facilities, but to be a key enabler of change for the wider healthcare system

• in addition, deferral of a decision to invest in Our Hospital at this stage could potentially have significant implications for Our Island.

2. Our Hospital cannot continue to progress without the necessary funding needed to deliver the project.
3. This Proposition asks the States Assembly to agree a total cap for expenditure on the Our Hospital project so that Islanders and the Assembly can be assured that the total Our Hospital budget cannot exceed £804.5 million without further approval of the States Assembly.
4. In  isolation  the  proposed  total  capital  budget  of  £804.5  million  is  very considerable amount of money. However, in the context of the overall investment required to deliver health and care services over the next 40 years to our Island's

ageing population (£240 million expenditure in HCS in 202014), this figure quickly becomes a more understandable level of investment into Island outcomes.

17.5 Financing Our Hospital through borrowing – as opposed to using existing reserves

– will allow the States of Jersey to take advantage of historically low interest rates

– which will be fixed if a bond is issued – and maintain existing reserves, which are expected to yield a higher return than the interest that would be paid on debt. In other words, by borrowing, the States of Jersey generates a net positive gain.

17.6 This Proposition asks the States Assembly to agree financing through borrowing, which:

• is appropriate for the nature of the project – major capital projects such as this require  substantive  investments  to  progress  to  delivery  and  realise  the anticipated benefits and outcomes.

• is appropriate given the current economic climate– the investment in Our Hospital will support Jersey emerging from the challenges of the past eighteen months by providing work for local individuals and companies now and into the future.

• is appropriate given the journey to date – the challenges of the past nine years have been overcome and Our Hospital is no longer a distant goal. As time has passed the cost of a new hospital for Jersey has been impacted by inflation – and without approval to progress to delivery, the public purse will feel further inflationary impact. Jersey has the opportunity to act now and mitigate this risk by agreeing a budget and securing borrowing at favourable and historically low interest rates.

17.7 Our Hospital project cannot continue to progress without the use of Compulsory Purchase powers.

17.8 This Proposition asks the States Assembly to approve the use of Compulsory Purchase, to be used as a last resort to acquire the land needed where commercial terms  cannot  be  reached  with  landowners  and  also  to  resolve  existing  land covenants and title issues. This provides assurance that Our Hospital will have the best opportunity to meet the critical deadline of 2026 when the cost of maintaining the current hospital estate will escalate sharply. The States Assembly is also asked to approve the budget for Compulsory Purchase, which is included in the total project budget of £804.5 million.

17.9 The Our Hospital Project has learned lessons from previous iterations of the project. Consultation with all key stakeholder groups was established from the outset as key to successful delivery of a new hospital for Jersey. Specifically,

14 Annual Report and Accounts 2020, P131 - https://www.gov.je/SiteCollectionDocuments/Government%20and%20administration/R%20G overnment%20of%20Jersey%20Annual%20Report%20and%20Accounts%202020.pdf

clinical consultation has been the primary driver of design to ensure that the very people who will work in Our Hospital have shaped their working environment and ensured it is fit for purpose. Ongoing consultation with all stakeholder groups including the public continues to inform and shape Our Hospital as the project progresses. This is a truly clinically led hospital project.

10. The  important  role  that  the  Scrutiny  process  should  play  in holding  the Government  to  account  for  the delivery  of major initiatives such  as  Our Hospital is  acknowledged  and  respected  by  the  Our  Hospital  project  team, Political Oversight Group and the Council of Ministers. The Future Hospital Review Panel has already completed two detailed reviews in support of the project  which  have  concluded  that  the  project  has  identified  the  optimum preferred options.
11. The Our Hospital Political Oversight Group remains committed to engaging with the Panel's upcoming review and considering any review outputs to improve the overall management of the project to facilitate the delivery of Our Hospital. This will provide further assurance for the Assembly and the people of Jersey that the Our Hospital project is providing value for money whilst improving health outcomes in the delivery of Our Hospital.
12. It is difficult to conceive of a more comprehensive approach to political, clinical and community engagement than that employed by the Our Hospital project. This approach has, in the view of the Council of Ministers, produced a broad consensus that this investment represents Jersey's best opportunity to deliver a new hospital. The Council of Ministers is also cognisant that this could be a last opportunity' because it is difficult to envisage any future States Assembly being able to galvanise the political, financial and community capital towards an alternative proposal should this proposition be defeated.
13. In addition, the necessary and detailed technical work, risk management, controls and due diligence are in place to enable the States Assembly to authorise these recommendations and move forward with a project that will provide lasting benefit to Islanders of this, and future generations.
14. This Assembly has approved Overdale as the preferred site for Our Hospital. This Assembly has approved a preferred primary access route for Our Hospital. Having done so, the Assembly must necessarily look forwards.

Re-issue Note

This Projet is re-issued because part (d)(i) of the proposition referred to the wrong Appendix. This has been corrected to:

"Major Projects of Appendix 2 of the Government Plan as set out in Appendix 2 of the Report accompanying the proposition;"

Appendix 1: Plan 1 - Plan appended to P.123/2020 showing the boundary of the Proposed Hospital Site

Appendix 1: Plan 2 – Plan appended to P.129.2020 showing land to be acquired if necessary

Appendix 1: Plan 3 - Informatory supplementary plan describing areas of land and rights to be acquired

Appendix 1: Plan 4 - Compulsory Purchase: Plan showing boundary of land and rights to be acquired

Appendix 2 – Revised Government Plan tables

Table 3 – Revised Borrowing 2021-2021 – Appendix 2 of the Government Plan 2021-2024

Table 4 – Major Projects – Appendix 2 of the Government Plan 2021-2024

Table 5(ii) Capital Heads of Expenditure of Appendix 2 of the Government Plan 2021- 2024