Energy from Waste Facility - funding

STATES OF JERSEY

ENERGY FROM WASTE FACILITY: FUNDING

Lodged au Greffe on 20th May 2008

by the Minister for Treasury and Resources

STATES GREFFE

PROPOSITION

THE STATES are asked to decide whether they are of opinion

in a c cordance with Article  11(8) of the Public Finances (Jersey) Law 2005 to amend the expenditure

approval for 2008 approved by the States on 18th September 2007 in respect of the Transport and Technical Services Department head of expenditure, to permit the withdrawal of an additional £102,810,000 from the consolidated fund for its capital expenditure in order to fund the provision of the preferred solution for the replacement of the Bellozanne incinerator of an Energy from Waste facility, as set out in sections 8 and 10.1 of the Report of the Transport and Technical Services Department dated 20th May 2008.

MINISTER FOR TREASURY AND RESOURCES

REPORT

ENERGY FROM WASTE FACILITY: FUNDING

Executive Summary

• The Minister for Transport and Technical Services has asked the States, in accordance with its Solid Waste Strategy, to approve a preferred solution for the replacement of the Bellozanne incinerator with an

Energy from Waste facility subject to the necessary funding being made available.

• The Public Finances (Jersey) Law 2005 requires that the total cost of a capital project be available for withdrawal from the States Consolidated Fund in the year that project commences. The total cost of the

Minister for Transport and Technical Services' preferred solution is £106.3 million. The States has currently only approved the withdrawal of £3.5 million for this project in 2008. Additional expenditure approval of £102.8 million is therefore required in order to commence the project. The States has in the 2008 Business Plan made provision for the withdrawal of a Capital Allocation of £7 million per annum from 2009 to fund the procurement of the preferred solution. Full provision of the

anticipated cost was not  proposed  because the  Financial Forecast at  the time  of  the Business  Plan indicated insufficient funds would be available without cancelling all other States capital expenditure. At the time the final cost of the preferred solution was not yet known, but it was envisaged that the £7  million allocation would be used to service some form of loan that would enable the full cost of the project to be paid for over a 25  year period.

• Since the approval of the 2008 Business Plan the States Financial Forecast has improved, to the extent that the current Financial Forecast indicates there will be sufficient unallocated funds available in the

Consolidated Fund to permit the withdrawal of the full cost of the project from the Fund in 2008. Whilst the Public Finances (Jersey) Law 2005 requires the full cost of the scheme be provided for in 2008, the majority of project cashflows will be spread over a period of 3  years:£36.9  million in 2008,

£36.4  million in 2009 and£26.4  million in 2010. The States will have sufficient cash balances from which to make these payments in those years.

• Treasury analysis shows that funding the project from the States own cash balances now will be cheaper than borrowing for it over 25  years with the existing£7  million allocation. The necessary funds being

available in the Consolidated Fund, the Minister for Treasury and Resources is proposing the States approve the required additional expenditure approval for 2008.

0. B a ckground
1. O n 13th July 2005 the States approved proposition P.95/2005 which proposed the Solid Waste Strategy and charged the then Environment and Public Services Committee:

(v ) to investigate fully alternative and conventional technologies to provide the final disposal route for

the residual waste remaining following the implementation of the systems and facilities as set out in (previous) paragraphs (above) and to recommend a preferred solution for a replacement of the Bellozanne incinerator to the States with an accompanying cost/benefit analysis, environmental and health impact assessment no later than December 2008.

T h e M  inister of Transport and Technical Services' proposition seeks to meet this requirement.

2. In the same States debate, the then Policy and Resources Committee wasasked:

to p r o p o s e t he inclusion of a funding strategy for the capital projects identified in (v) above (i.e.

including the replacement facility) within the States Business Plan 2006-2010 by, if necessary, re- prioritising or deleting existing projects, or identifying additional sources of funds.

3. T h e States hasaddressed this requirement, in part, byapproving £7 million per annum allocations from 2009 onwards to a project sinking fundin the CapitalProgramme approved in the States 2008 Business Plan. At that time itwasenvisaged those allocations would be used to service borrowing for the full cost of the scheme, insufficient funds being available for withdrawal from theConsolidated Fund.
4. S in ce the approval of the2008 Business Plan the States FinancialForecast has improved significantly such that the current FinancialForecast indicates there will be sufficient unallocated funds available in the Consolidated  Fund  to  withdraw  the full  cost  of the  project  from  the  fund in 2008.  The Treasury Department has accordingly assessed the relative meritsof utilising the States owncashbalancesover the borrowingsolution.
5. T h e Treasuryhasworked in conjunction with the TransportandTechnicalServicesDepartmentand its external advisers to gain an understanding of the project and its funding requirements. This report setsout those requirementsand the Minister for TreasuryandResources' proposals forthe full fundingofthe preferred solution.
6. E x tensive details of the  background to  the scheme are  included in  the Minister for Transport and Technical Services' report andproposition.This report, therefore, focuses solely on the financial aspects of the proposal.

0. F u ndingrequirement
1. H a ving conducted a tendering process the Minister for Transport and Technical Services has proposed, with the support of the Council of Ministers, to purchase a 105,000  tonne capacity EfW from that department's preferred bidder, a consortium headed by CNIM (the CNIM consortium'), for a fixed price of £93.35  million.
2. T h ere are a number of other costs associated with the project including enabling works, decommissioning costs and project management costs. The table below shows the total cost of the project.

Engineering Procurement and Construction (EPC) Contract 93.35 Jersey Electricity Company (JEC) Connections 0.40 Decommissioning of the Bellozanne incinerator 2.08 Project Management (including incurred Feasibility costs) 6.85 Total Cost 106.31 Less existing budget (3.50) Total additional budget requirement 102.81

3. T h e additional funding requirement is shown to be £102.81  million because an allocation of£3.5 million has already been made available to the department from the 2008 StatesCapitalProgramme.The total cost of £106.31excludes provision for contingency itemswhich will bemanaged from within the risk element of the States Capital ReserveVote.

0. F l uctuations – ExchangeRate
1. T h e Engineering and Procurement Construction (EPC) contract is partially subject to currency risk with certain agreed payments being quoted in Euros. The States therefore has a currency exposure to the rate of exchange between the Euro and Sterling.
2. T h is exchange risk will be eliminated upon the signing of the contract with the preferred bidder at which time the Euro/Sterling rate will be deemed to freeze for the purposes of the contract payments. All contract payments will be made in Sterling.
3. T h e Treasury has conducted a sensitivity analysis of the currency exposure and obtained expert advice on anticipated currency fluctuations. As with all States capital projects the Treasury will monitor and manage the fluctuations risk. The cost of any currency fluctuations will be met from the Capital Projects Reserve Vote in the event this increases the cost of the project.

0. T i ming of project costs
1. T h e preferred bidder has agreed a fixed schedule of payments for the EPC contract these are set out in the table below together with the timing of the associated enabling, management and decommissioning costs.

2008 2009 2010 2011 2012 Total £'000s £'000s £'000s £'000s £'000s £'000s

EPC contract Enabling Works JEC Connections Decommissioning Project Management

0. F u ndingOptions

29,423 35,096 25,395 3,436 – 93,350 2,350 1,270 – – – 3,630 400 – – – – 400

– – – – 2,080 2,080

4,710 1,120 1,020 – – 6,850 36,883 36,366 26,415 3,436 2,080 106,310

1. T h ere are essentially two alternatives available to the Minister for TreasuryandResources to secure funding for the procurementof the EfW plant.

(1 ) T o fund in full from the unallocated balance in the Consolidated Fund in 2008; and (2 ) T o borrow the funds and repay over the life of the asset.

2. U n der the provisions of the Public Finances (Jersey) Law 2005 the States may authorise the withdrawalof the additional funding required provided the Financial Forecast indicates there is a sufficient unallocated balance in the ConsolidatedFund at the end of2008.
3. B a sed on the latest Financial Forecast there will be sufficient unallocated funds available in the Consolidated Fund from whichto fund the full cost of the scheme in 2008.SeeAnnexes A.1 and A.2 showing the forecastpositionwithand without funding of the EfW.
4. It i s noteworthy that actual States cashflows inclusive of this project are far healthier than a glanceat the financial forecast(produced in accordance with the requirements of the finance law)mightsuggest.The States is in factpresently holding cashbalances,excluding Stabilisation Fundand Strategic ReserveFund monies, of approximately £240 million. Thetimingofcash inflows and the phasing of fully funded capital projects over several years are the main reasons for the healthy cash position relative to the Financial Forecast figures that are preparedon a budgetary basis.

Why use the Consolidated Fund unallocated balance rather than borrow?

5. T h e financial assessmentsundertakenby the Treasury indicate that the cost offinancing the scheme if itis funded from the consolidated fund unallocated balance will beless than the cost of available borrowing given a variety ofassumptionsaboutreturns.
6. V a riable borrowing rates beinginclusiveof a margin,risk premium and arrangementfeesaremore expensive than the loss of return generated on the Statescashinvestments.The relationship betweenthese rates will be maintained into the future regardless oftheabsolutelevelofinvestment return orborrowing rate. For this reason entering into a variable rate loan has been discounted asanappropriatefunding solution.
7. B o rrowing at a fixed rate. Thefinancial analysis indicates that although intheshorttermborrowingmay appear attractive, over the longerterm, longer dated investments inthe financial marketsindicate that funding the project from the consolidated fund is likely to providethecheapest form of financing. In other words, utilising the unallocated balance on the Consolidated Fund has the advantageofnot tying the States into a 25 year debt obligation that may well become unattractive in the future. Taking such a risk with taxpayers' money whentheStates retains sufficient cashbalancesof its own would beimprudent.

Possible implications of utilising the Consolidated Fund balance

8. If income falls below expectations measuresmayneed to betaken to bring the estimated balance on the Consolidated Fund back into balance.

0. C o nclusions
1. T h e recommendedfunding solution is to finance theprocurementoftheEnergy from Waste facility from the unallocated balance in the Consolidated Fund.
2. A n alysis indicates the utilisation of existing funds should be cheaper than borrowing. Borrowing is likely to be more expensive and to enter into long term borrowing at a time when the States has excess cash balances could be considered an unnecessary risk to take with taxpayers' money.

ncial Forecast before the proposed EfW

ng solution

2007 2008 2009 2010 2011

s Income

Income Tax 0/10% Corporate Tax Structure

Goods and Services Tax Impôts Duty

Stamp Duty Tax/Stamp Duty on Share Transfer Other Income

Island Rate

430 460

– –

– 30

55 53 29 30

– 1

38 39 10 10

475 490 510

(9) (77) (82) 45 46 47 54 54 54 31 32 33 1 1 1 37 33 31 10 11 11

States Income 562 623 644 590 605 States Expenditure

Net Revenue Expenditure 480 510 525 546 565 Net Capital Expenditure Allocation 42 40 38 39 39

Total States Net Expenditure 522 550 563 585 604 Forecast Surplus/(Deficit) for the year 40 73 81 5 1

One-off expenditure

Income Support – Transitional relief 0 9.7 6 4 2 Revised Forecast Surplus/(Deficit) 40 63.3 75 1 (1)

Transfer to Strategic Reserve -10 0 – – – Transfer to Stabilisation Fund 0 -38 – – –

Estimated Consolidated Fund balance 80 105 180 181 180

ial Forecast after the proposed EfW

g solution

2007 2008 2009 2010 2011

Income

Income Tax 430 460 475 490 510 0/10% Corporate Tax Structure – – (9) (77) (82)

Goods and Services Tax – 30 45 46 47 Impôts Duty 55 53 54 54 54

Stamp Duty 29 30 31 32 33

Tax/Stamp Duty on Share Transfer – 1 1 1 1

Other Income 38 39 37 33 31 Other Income reduced interest effect – (0) (3) (5) (5)

Island Rate 10 10 10 11 11 States Income 562 623 641 585 600

States Expenditure

Net Revenue Expenditure 480 510 525 546 565 Net Capital Expenditure Allocation 42 40 38 39 39

EfW Capital Expenditure Allocation – 103 – – – related reduction in States Capital Allocation – – – (7) (7)

Total States Net Expenditure 522 653 563 578 597 Forecast Surplus/(Deficit) for the year 40 (31) 78 7 3

One-off expenditure

Income Support – Transitional relief 0 9.7 6 4 2 Revised Forecast Surplus/(Deficit) 40 (40) 72 3 1

Transfer to Strategic Reserve -10 0 – – – Transfer to Stabilisation Fund 0 -38 – – –

Estimated Consolidated Fund balance 80 2 74 77 78