Esplanade Quarter development: Scrutiny review and referendum (P.44/2015) – comments.

STATES OF JERSEY

ESPLANADE QUARTER DEVELOPMENT: SCRUTINY REVIEW AND REFERENDUM (P.44/2015) – COMMENTS

Presented to the States on 15th June 2015 by the Council of Ministers

STATES GREFFE

2015   Price code: B  P.44 Com.

COMMENTS

The  Council  of  Ministers  ask  the  Assembly  to  reject  this  proposition.  The development of high quality office space for the financial services industry is essential for the future of our Island and the health of its economy.

Background

The concept of a finance centre was established in the 2002 Island Plan and has been through a great deal of change since 2006, when it was decided to commission a Masterplan rather than allow ad hoc development. During this time the concept has been debated 8 times by the Assembly and we have proceeded in line with these decisions. To assist Members, a short timeline is provided as an Appendix.

Overview

This is an issue that was rightly debated in 2008, when the Minister for Planning and Environment brought a proposition asking the Assembly to support the Esplanade Quarter Masterplan. It was again debated in 2010 when the Council of Ministers proposed the establishment of the States of Jersey Development Company ("SoJDC"). This proposition contained clear rules on phasing the development and on managing risk by requiring sufficient legally binding pre-lets to cover construction costs.1

So, the Assembly has democratically debated and agreed the plan, and it has agreed the means of delivering the plan. In response, SoJDC has commissioned detailed plans, secured planning permissions and has entered into legally binding agreements with a tenant and a local construction company.

Ministers agree the development should be carefully monitored. We agree that each individual  phase  of  the  development  should  be  examined  to  ensure  demand  and viability, and as we monitor its overall progress, we will continue to analyse the suitability of the Masterplan for Jersey.

However,  as  the  Assembly  has  given  the  scheme  and  the  SoJDC  a  democratic mandate,  we  cannot  in  all  reasonableness,  and  without  significant  financial  and reputational damage, freeze all development works while we wait for the Panel Report and a States Debate. This delay could be sizeable and would undermine the growing confidence in our steadily recovering economy.

Any delay would also result in considerable financial cost to the public as SoJDC would breach its legal terms with the tenant and contractor; and damage our reputation as an Island and the credibility of the legislature as a reliable partner. This would include the loss of prospective tenants.

We do understand the concern expressed by Islanders. We are on the side of ordinary working people who want to work and prosper without risking public money. And that is what this scheme will provide.

1 This is the point at which the requirement for 200,000 sq.ft. of pre-lets (established in 2009 to mitigate risk when Harcourt was going to develop the entire Masterplan) fell away, as it related only to the deal with Harcourt.

We have listened to Islanders' concerns about this development and we are taking account of them. Our response is not to stop this development in its tracks: it is to use the flexible nature of the Masterplan as a demand-led scheme to ensure we respond to the changing needs of Jersey as the development progresses; it is to make more provision for open community spaces as the plan evolves; and it is to use returns from the scheme to regenerate St. Helier . This is one of the advantages of owning SoJDC.

The Importance of the Jersey International Finance Centre

This debate is not just about a cluster of buildings. It is about our economic future. We need modern, flexible, well designed office space with state of the art facilities if we want to keep existing businesses and attract new ones.

There is only 15,000 sq.ft of Grade A' office space available in Jersey. This limits choice for businesses that want to move to Jersey, or for established businesses that want to grow. The vacancy rate on this kind of office space is less than 1%.

Countries, cities and communities that don't recognise the fast pace of change will decline and face economic difficulties. We need to adapt intelligently to a rapidly changing global economy driven by technological and regulatory developments. That is how we will ensure that new jobs are created, and that is how we will raise revenue to fund vital public services over the next 20 years as our society ages.

As Jersey Finance said to the Corporate Services Scrutiny Panel –

"wherever a jurisdiction makes a successful investment in developing dedicated financial services district, that region.acts as a significant positive  attractor  for  company  location,  business,  and  jurisdictional substance and reputation".

In other words, the Jersey International Finance Centre is as important in driving economic prosperity to Jersey as Canary Wharf was to London, albeit on a much smaller scale. This development uses public land to provide choice for businesses, competition in the development market, and a return for the taxpayer.

The Jersey International Finance Centre is critical for the regeneration of St. Helier and the consequent protection of our countryside. Businesses are already migrating to the south of town, leaving vacated premises for smaller companies or for conversion into homes. The Jersey International Finance Centre is a perfect fit with this – creating a dedicated new district, attracting business on public land, creating space elsewhere in town for people to live and enjoy, and thereby limiting pressure on our countryside.

The plans for the Jersey International Finance Centre also set aside half the car park site as public spaces – a new park, a new square and tree-lined boulevards. This demonstrates  the  benefit  of  the  SoJDC  developing  this  site:  we  can  ensure  the provision of quality community open space.

The development will secure a financial return to the public – estimated at around £50 million on completion of the Jersey International Finance Centre element of the Esplanade Quarter. As the Masterplan progresses, we will make sure we can use this money for the much need regeneration of our town.

This is genuine strategic thinking, wholly in line with the States Strategic Plan, that responds to the challenges we face as an Island.

The Importance of Protecting Public Assets

No public money is being spent on construction costs.

Just like any other developer, SoJDC has to borrow money commercially. In doing this, the lender has obtained an independent "red book" valuation (prepared by a RICS qualified valuer to an international standard) that has confirmed that the value of the completed building with just the UBS pre-let significantly exceeds the loans to be put in place for the construction.

SoJDC was established by the States Assembly with clear instructions in P.73/2010 as to how this would work –

"Sales – If it is proposed that a specific development is undertaken directly by SoJDC, before committing to construction costs SoJDC will have to secure a sufficient level of legally binding pre-sales or pre-lets to fund the costs of constructing the first phase of a scheme. This will remove part of the sales risk of a particular development project and will ensure  that there  will  be  no financial liabilities  relative  to a particular development's construction costs".

This test has been met through the agreement reached with UBS for the letting of 16,350 sq.ft, with an option for a further 7,000 sq.ft, on Building 4.

This test was explained by SoJDC to the Scrutiny Panel in a written submission to their review dated 27th February 2015 as follows:

"A sufficient level of legally binding pre-let will need to be:

1. Sufficient to secure third party (private) finance for the construction of the building (using only the pre-let, the land for that building and expended pre-development costs as SoJDC equity);
2. Cover  the  interest costs  of the third  party  financing on Practical Completion and expiry of rent-free period; and
3. Be sufficient so that if the building needed to be sold on Practical Completion  with  only  the  initial  pre-let(s)  in  place,  that  the consideration (disposal value) would exceed the debt (construction loan)."

The building has been fully designed and the plans have been fully specified and co- ordinated, and SoJDC has also entered into a fixed price construction contract so costs will not increase.

As to viability of the completed Jersey International Finance Centre, constructing one building at a time with the necessary pre-lets limits exposure, and allows plans to evolve to suit the Island's needs within the parameters of a flexible Masterplan. The financial viability of each building is independently assessed prior to any borrowing

being entered into, and each building that is progressed will produce its own profit. This is how P.73/2010 was designed.

It is instructive to note that the previous Corporate Services Panel, having received a closed briefing from SoJDC, confirmed in March 2014 that –

 "the Panel considered that they had received sufficient information to satisfy themselves as to the viability of the project and would not raise any further questions".

This is not to question the importance of the current Scrutiny review. However, the risks of Building 4 have been properly managed and its viability properly assessed, the risks of the remainder of the project will be managed in the same way and future phases will only progress if financially viable. In assessing this, we also should recognise that SoJDC is operating in a commercial and competitive environment and its agreements with tenants are commercially sensitive with strict non-disclosure agreements  embedded within those agreements,  and that the  company has clear governance  structures,  an  expert  board,  and  clear  lines  of  accountability  to  the shareholder representative.

The consequences of approving this Proposition

If we stop the development now, as the proposition asks, SoJDC will suffer significant financial losses. In line with States decisions, they have entered into legally binding agreements to let premises, to borrow money, and to construct Building 4.

Perhaps even more importantly, our reputation as a reliable partner for business would be fundamentally compromised. We should not place ourselves in a position where the democratically elected Assembly makes decisions, contracts are entered into, and then we  have  to  break  those contracts  because the  Legislature  changes  its  mind.  The Assembly has primacy, it can do this if it wishes, but there will be consequences. We should ask ourselves: What confidence can the finance industry have in us if this is how we operate? How does this look to international investors, who greatly value stability and certainty?

Conclusion

The future phases of the Masterplan – the sinking of the road and the development over the road – do require careful thought and ongoing monitoring.

The Masterplan remains the document to which we work, but Ministers accept that the later phases of it will need further consideration, perhaps even a States debate. The Assembly should, and will, have a role in this, but now is not the time when there is a shortage of available Grade A' office accommodation which limits choice for businesses. This is not a good position for the Island to be in when office based businesses are so crucial.

Ministers understand Islanders are concerned, whether about using public money, losing the car park, or developing this area of town. Some areas of the Waterfront have not lived up to people's expectations. Some, however, are living, breathing examples of high quality community spaces. Weighbridge Square, Les Jardins de la Mer, and Marina Gardens all demonstrate what can and will be provided for Jersey.

Change  is  often  controversial  but  Ministers  would  not  be  serving  the  long  term interests of Islanders if they did not supply the space businesses need in order to remain, grow and move here.

St. Helier has always adapted and changed. The sea used to lap against the walls of St. Helier  Parish  church,  and  Commercial  Buildings  was  the  Waterfront  of  the 19th Century. Previous generations have made bold decisions about the future. If anything, we are being less bold. We are building on a car park, we have secured tenants before doing so, we are taking each building one at a time to ensure viability. This means we can protect public money, and we can deliver the economic and regenerative benefits of the project.

For  all  these  reasons,  the  Council  of  Ministers  ask  the  Assembly  to  reject  this proposition.

APPENDIX

Short Time Line on the Esplanade Quarter Development