Incorporation of Ports of Jersey

STATES OF JERSEY

INCORPORATION OF

PORTS OF JERSEY

Lodged au Greffe on 27th July 2012

by the Minister for Economic Development

STATES GREFFE

2012   Price code: C  P.70

PROPOSITION

THE STATES are asked to decide whether they are of opinion

1. to approve the incorporation of Jersey Airport and Jersey Harbours as a single limited company wholly owned by the States of Jersey, to be known as Ports of Jersey' as set out in the attached Report;
2. to request  the  Minister  for  Economic  Development  to take  the necessary  action  to prepare  for  incorporation,  including  the preparation of legislation for the Assembly's consideration, with a target date for achieving incorporation of 1st January 2015.

MINISTER FOR ECONOMIC DEVELOPMENT

REPORT

1. Executive Summary

The primary goal in incorporating Jersey Harbours and Jersey Airport is to enable them to continue to be the provider of essential, lifeline public services to the Island, but to do so in a commercial and sustainable manner that will improve services for customers and generate a positive return to the States.

If the Harbours and Airport businesses were to continue to operate as they did before 2011, they would be unable to meet capital requirements from current cash-flows. This  would,  in  the  absence  of  major,  unbudgeted  States  funding,  jeopardise  the ongoing operation of the Island's key strategic gateways and threaten the continued provision of vital safety services such as the Coastguard and the Channel Islands Control Zone.

There is the opportunity through incorporation, not only to grow the businesses and increase efficiencies, but also to remove a potentially major financial burden for the States and to generate a positive return to stakeholders. This would be in the form of taxation and possibly dividends paid to the States as well as enhanced services to users of the Ports.

There is a well-established model for incorporation, as exemplified by Jersey Post and Jersey Telecom, which transfers the businesses to a limited company wholly-owned by the States, but led by a Board of Executive and Non-Executive Directors, with the relationship  with  the  States  as  shareholder  governed  by  a  formal  shareholder agreement.

While there is a cost to incorporation, comprising both a one-off element and ongoing expenditure, the overwhelming balance of evidence illustrates that the commercial disciplines required by an incorporation will repay this investment many times over. The financial model, using the assumptions contained in Appendix A, indicates that the Ports will be self-sustaining contributors to the States for the long term.

Attempts  to  apply  the  commercial  disciplines  referred  to  above  without  an incorporated structure and the governance processes that go with it have not, to date, had an effective impact, because management and control is too dissipated between various components of the States, such that commercial focus and consistent decisive action is often inhibited.

The process of incorporation involves the transfer of assets and staff to a 100% States- owned company that will operate as a utility company within Jersey and therefore be required to pay taxes and rates as any other utility company would.  Appendix B outlines  the  project  governance,  critical  path  and  projected  costs  to  allow  the incorporation of the Ports of Jersey on 1st January 2015.

2. Background

Jersey Harbours and Jersey Airport are "Trading Operations" defined within Part 4 of the Public Finances (Jersey) Law 2005. Other Trading Operations, notably Jersey Telecom and Jersey Post, have subsequently been incorporated and are operating successfully as independent wholly-owned companies with an independent Board. The Minister for Treasury and Resources represents the shareholder interest on behalf of

the States. When the incorporation of Jersey Telecom and Jersey Post was first mooted in the 1990s, the clear intention was that the other Trading Operations would follow suit. This report is consistent with the Policy and Resources Committee report: 2000 and Beyond: Strategic Policy Review', endorsed by the States in 1995, in that it seeks in-principle approval for the incorporation of Jersey Harbours and Jersey Airport.

Since the formation of the Trading Committees in 1991, both Jersey Harbours and Jersey  Airport  have  become  substantial  businesses  with  a  combined  turnover  of £43.7 million. The 2 ports are the strategic transport gateways on which the Island's community,  economy  and  therefore  the  well-being  of  its  residents,  are  totally dependent. In 2011, the 2 ports handled the movement of 2.2 million passengers and 488,000 tonnes of freight and fuel. A more detailed breakdown of passenger and freight services is given at Appendix D.

In  addition  to  commercial  port  activity,  Jersey  Harbours  provides  marinas  and moorings for local boat-owners and visitors – from the "Five Gold Anchor" marinas in St. Helier  to  moorings  in  the  outlying  harbours.  Jersey  Airport  provides  a comprehensive network of commercial routes, facilities for business aviation and for local and visiting private aircraft. Jersey Airport is contracted, through the Minister for Economic Development, to provide air traffic control for the Channel Islands Control Zone on behalf of the French and UK authorities. Importantly, Jersey Harbours also provides the coastguard service for our territorial waters; this essential public service, which in most jurisdictions is funded by taxpayers, is funded in Jersey entirely from the Harbours' revenues.

In 2010, the Minister for Economic Development appointed a Shadow' Board of Directors for Jersey Harbours and Jersey Airport. The Terms of Reference for the Shadow Board were approved by the Assembly in P.47/2011. The purpose of this was to  improve  the  governance  of  the  2 organisations,  and  to  drive  their  commercial development,  efficiency  and  effectiveness,  to  the  point  where  incorporation represented a credible proposition.

Jersey Harbours and Jersey Airport have made excellent progress in this regard over the last 18 months under the guidance of the Shadow Board. Significant operating efficiencies have been achieved, and a range of commercial developments are being actively  pursued.  Under  the  leadership  of  a  new  Group  Chief  Executive,  the 2 organisations have been integrated into one. This has already yielded efficiencies resulting in annual cost savings of £1 million, some of which has been reinvested into building future capability in the businesses. There is a high degree of confidence that, within an incorporated governance structure, further business improvements can be made.

When announcing the appointment and Terms of Reference of a Shadow Board in 2010,  the  Minister  for  Economic  Development  defined  the  first  objective  of  the Shadow Board –

• to  define  the  optimum  operational  and  governance  structure  and  make recommendations to the Minister for Economic Development to implement changes as necessary.

On  24th  March  2011,  and  consistent  with  this  objective,  the  Minister  formally requested that the Shadow Board should consider governance options and recommend

any proposed changes. The Shadow Board has completed this process and reported to the  Minister  that,  subject  to  States  approval,  Jersey  Harbours  and  Jersey  Airport should be incorporated as a single entity. The Minister accepted this recommendation and, in a Statement made on 15th September 2011, confirmed that he had instructed the Group Chief Executive to work with the Shadow Board to prepare a business case. It is this business case that forms the basis of this Report and Proposition.

With the experience of Jersey Telecom and Jersey Post behind it, the States has a model for the incorporation of Trading Operations, and the intention would be to adopt  the  same  broad  approach  where  appropriate,  or  to  adapt  based  on  lessons learned. This will include clear arrangements under the Island's competition policy regime to protect and promote the interests of consumers. This aspect is of particular importance given that, by definition, both the port and the airport are, and will remain, natural monopolies in Jersey.

The process of incorporation will include the transfer of defined assets from the States of Jersey into the ownership of the new 100% States-owned company, the drafting and approval of necessary legislation, establishing proper regulatory oversight, preparing the governance and company structure, identification of the range of continued service obligations for the new business and the transfer of staff. To ensure that the process of Jersey  Harbours  and  Jersey  Airport  incorporation  can  be  delivered  efficiently,  a consolidated high-level project plan has been developed and included at Appendix B. The  high-level  project  plan  demonstrates  the  timeframe  and  critical  path  that incorporation will follow if agreed in principle by the States. If approved, detailed project planning and implementation will commence with immediate effect.

3. The drivers of change

1. Intent and precedent

It was the clear intent of the States during the 1990s when the Trading Committees were originally established that, in time, they would be incorporated. Jersey Telecom and Jersey Post are now well established as successful, independent businesses, which have been free to manage the opportunities and challenges in their respective markets. Since incorporation, both Jersey Telecom and Jersey Post have been able to respond quickly to market dynamics in a manner that, in all probability, would not have been possible had they continued as States Departments.

2. Financial sustainability

The  incorporation  of  Jersey  Harbours  and  Jersey  Airport  supports  the  Resource Principles outlined in the States Strategic Plan in providing the mechanism to ensure sustainable services to the Island, and by creating the ability to plan expenditure on capital and infrastructure over the long term, together with considering carefully the appropriate sources of funding for major projects. Incorporation of the Ports further removes  what  could  be  significant  liability,  risk  and  uncertainty  from  the  States planning and budgetary process.

In order for long-term sustainability of these businesses to be achieved, there needs to be adequate income generated from their operations to support continued investment and  provision  of  community  services  (such  as  maintaining  the  Island's  historic harbours  and  providing  coastguard  services).  As  Trading  Operations,  all  current investments are met from the Trading Funds rather than general taxation and as such,

in order to avoid raising tariffs to cover such public interest burdens, the cost base must be reduced or business growth must be achieved.

3. Performance improvement

Whilst progress has already been made during the integration of Jersey Harbours and Jersey  Airport,  the  required  improvements  in  performance  can  only  occur  once management and Shadow Board are held fully accountable for results. Success of this business can then be measured across the following dimensions –

1. Financial – Requiring profitable, sustainable and growing businesses;
2. Operational – Facilities must remain open, safe and secure;
3. Environmental – Reducing the impact on the Island and raising environmental standards;
4. Social – Participating actively in the community, economy and society.

Identifying and implementing high impact improvements across these dimensions will deliver demonstrable gains for Jersey, but will depend for success on enabling the new organisation to pursue corporate best practices within the relevant policy framework set by the shareholder.

4. Transparency, regulation and governance

Incorporation will bring greater clarity for safety and security of the Island's ports by clearly  separating  regulatory  from  operational  functions.  In  order  to  ensure  these essential  services  are  operated  in  the  most  effective  way,  the  businesses  will  be governed by a Board of Directors accountable, through the Minister for Treasury and Resources,  to  the  States  as  sole  shareholder,  and  with  the  appropriate  regulatory agencies retaining proper oversight of the business and its operations.

5. Ports estate

There is a clear need to preserve the integrity of the port and airport operational estates to  ensure  the  ports  can  adequately  address  future  demands,  changing  needs  and regulatory requirements. Current arrangements have resulted in missed opportunities to optimise operational efficiency, and the return achieved has been compromised because of complex procedures or inconsistent decision-making.

4. The benefits of change

The primary goal in incorporating Jersey Harbours and Jersey Airport is to enable them to continue to be the provider of essential, lifeline public services to the Island, but to do so in a commercial and sustainable manner that will improve services for customers and generate a positive return to the States.

Greater commercial freedom will mean being able to take a more flexible approach to develop a wider range of products and services to meet the needs of customers and plan for the future.

There will be particular benefits for different groups and organisations –

1. Customers

Incorporation  will  deliver  a  more  responsive  organisation  with  higher  levels  of customer service and the introduction of new and improved services. By increasing the agility and flexibility in the organisation, the Ports of Jersey will be better able to adapt the  operations  to  customer  needs.  Through  the  process  of  moving  towards incorporation, some services currently within the Ports of Jersey portfolio, such as those currently provided by Communications Services, may require further review to determine where such services may best be delivered.

Incorporation will allow the Ports to leverage their asset base for development and growth in a way not possible under current arrangements. By deriving incremental revenues  from  the  assets,  revenue  streams  will  be  diversified,  with  consequently reduced reliance on fees and tariffs from commercial customers.

In  an  incorporated  entity,  management  is  focused  on  building  a  business  that  is successful in terms of financial performance, operational and safety effectiveness and which increases the range of products and services available to customers. Quicker decision-making and operational agility will bring these new products to market faster than is possible today.

Finally, the intention is to transfer all staff into the incorporated entity on their existing terms and conditions. Through consultation with staff and trade unions, the entire organisation will be linked firmly to the success of the business through a fit-for- purpose reward and remuneration structure. Incentivising excellent performance will lift customer service levels.

2. States of Jersey

Based on current financial projections, by incorporating the Ports, the States provides the opportunity for significant new revenue streams to the Treasury to be realised in the form of taxes and dividends.

The Ports should be required to provide a return to the States commensurate with the fair value of the assets made available to the company, adjusted to reflect community and heritage obligations undertaken by the businesses. Through incorporation, these businesses would be treated as any other utility in Jersey and hence provide income to the States through taxation, dividends, and licences.

The financial model for incorporation indicates that of the potential £140 million profit that could be generated by the Ports through to 2032, £76 million could be returned to the States in the form of cash (comprising tax receipts and dividends) as well as continued Service Obligations. This projection would still allow the Ports to settle recognised obligations (including the pre-existing pension liability), fund the identified capital programme and retain reasonable funds for investment. It should be noted  that  included  in  the  £140 million  profit  are  significant  Service  Level Agreements with other States Departments, in particular engineering services. The value of this relationship to the States is estimated at £60 million over the period of the model.

On incorporation, the scope of the service obligations currently provided by Jersey Harbours and Jersey Airport will become the responsibility of the new company. If this Proposition is agreed by the States, the next stage will be for each of the non- commercial services to be defined and the forecasted costs confirmed. The benefit of defining each of the obligations in this way is that non-commercial service provision, such  as  the  Coastguard, will  be  given  much  greater  transparency  and  will allow political agreement on the standards to which such services will be provided.

The  additional  cash  receipts  of  £42 million  for  taxes  and  dividends  would  be incremental to the existing provision of public services in the Island (£34 million). Appendix A of this report illustrates our current financial projections.

£'m

Ports  Return Financial  to States Projection  of Jersey

Profit before Tax and Public Service Obligation  140

Value of Public Service Obligation to States  (34)  34

Profit before Tax after Public Service Obligation

Tax payable to States

Profit after tax

Dividends payable to States

Retain for investment  64

Amounts due to States  76 While the financial gains for the States are significant, further wider benefits include –

• Public  services –  the  intention  is  that  all  current  service  obligations,  for example Jersey Coastguard, continue to be provided through the Ports.
• Heritage services – the Island's historic harbours will require continued repair and maintenance, and the financial model is based on the Ports continuing to provide this important service.
• Community and economy – becoming a commercial business, focussed on the needs of customers and able to seek new business opportunities, the Ports will contribute  to  the  Island's  economic  growth  on  a  broad  front  as  well  as providing a more vibrant environment.
• Incorporation will enable proper management of the extensive asset base of the company and, in doing so, reverse the position where the Ports represent a potential financial burden to the States to one where there is a very realistic expectation of generating a sustainable return to the States Treasury.

3. Employees

A growing business must attract, retain and develop talented people to keep growing. This necessary growth comes from a commercially astute organisation identifying and delivering new products, services and business which will provide employees of the new incorporated company with greater development opportunities than is possible today.

Staff will be transferred to the incorporated entity on identical terms and conditions to those to which they are entitled as States' employees. There will be a full process of consultation with staff and trade unions. Over time, the incorporated company could change its terms and conditions of employment to reward individuals and teams for their  contributions  to  the  success  of  the  business,  but  entitlements  for  existing employees, such as pension entitlement, would not be affected by this. The ability to recognise and reward individuals and teams for their contributions to the success of the business is not possible within the current States remuneration structures.

Finally,  as  the  integration  of  Jersey  Harbours  and  Jersey  Airport  has  already demonstrated,  there  is  great  power  in  engaging  and  listening  to  employees.  The integration process has already started to provide the environment that allows creative ideas  to  be  developed  and  implemented  to  improve  business  performance  and customer experience. The ability to incentivise the delivery of such improvements in an agile and responsive manner will create a platform for further suggestions for improvement, increasing overall capability, performance and delivery.

4. Ports of Jersey Limited

Incorporation will deliver commercial freedoms, while retaining the ability to reap the benefits of a satisfactory return on assets that will allow the Ports to re-invest in quality services directly for the Island's benefit, and to continue to ensure that the ports meet Island and public service obligations as will be defined in detail as part of the project.

This will be achieved through the ability to –

• Optimise the use of the asset base to generate greater revenues and diversify our income stream.
• Build  cash  reserves  through  growth  and  efficiency  and/or  raise  external funding in order to invest in improved technology and high quality services, and improvements to facilities for customers.
• Act in partnership and joint ventures with other companies, or negotiate more favourable  terms,  to  provide  more  comprehensive  service  packages  and achieve economies of scale to the benefit of the Island as a whole. This has been a key ingredient for the growth and success of Jersey Telecom that is enabled by a company able to act independently and commercially, yet within a well-ordered regulatory framework operated in the interests of consumers.

• Create  a  better  working  environment  for  employees  by  achieving  greater performance  eventually  through  reward,  training  and  career  development, which also provides additional flexibility within the organisation.

The Ports will aim to be valued as an essential service provider to the Island whose success is measured by its business performance, customer experience and engaging its  people.  Business  performance  includes  lifting  financial  and  operational performance, and also extends to improving the environment and society. It will set at its overall aim to delight customers through excellent service, and to create an agile and high-performing team across the ports.

5. Parishes

The Parishes of St. Helier and St. Peter will benefit from the payment of occupiers' rates by the Ports, compared with the current position where the States does not pay rates on its own property. Given the nature of the land occupied by both the port and the  airport,  it  is  expected  that  it  will  be  necessary  to  develop  bespoke  valuation arrangements for this, perhaps mirroring the UK Central Rates List regime for large- scale sites. There has already been initial dialogue on this with the Connétable s of St. Helier and St. Peter , and this issue will be taken forward with the relevant rates committees.

5. What regulatory oversight of the new company will be required and how will it be achieved?

Incorporation of Jersey Harbours and Jersey Airport will require a modern regulatory framework  to  ensure  proper  accountability  for  the  diverse  functions  of  the  new organisation,  as  well  as  governing  its  relationship  both  with  the  States  as  its shareholder and with other bodies that oversee economic, marine and aeronautical regulation.

A crucial aspect of incorporation will be to ensure that the new company's rights to operate the Island's airport and seaport, parts of which will by definition be exclusive, are matched by clear and enforceable but realistic obligations to secure and promote the interests of users, customers and through the States as shareholder, taxpayers. Such obligations must allow for the financing of its operations to be wholly sustainable whilst ensuring that operational safety is fully assured.

Regulatory arrangements will be required that, whilst proportionate, are sufficient to ensure, and give public assurance, that the company is not able to abuse its dominant or exclusive position in the markets in which it will be operating; and that there is a high level of transparency in, for example, its pricing policy and contract procedures. There  is  work  to  be  done  on  developing  the  necessary  legal  and  administrative arrangements for this aspect of incorporation, but it is envisaged at this time that legislation  will  provide  for  licensing  in  a  way  similar  to  the  approach  taken  in regulating other incorporated former States Trading Operations.

Arrangements will be put into place to ensure that the new company does not abuse any natural' monopoly in the provision of harbours and airport services in Jersey and that, for example on pricing, it acts appropriately in the interests of its shareholder, users and its customers. Consideration may also need to be given to the possibility of extending the regulatory framework to other dominant providers within the ports.

For the new company, incorporation would bring freedom to take decisions to enhance the services provided to the Island but, importantly, within an agreed policy and regulatory framework that ensured transparency and accountability. For example, it is likely that the current enforcement roles of Harbour Master and Airport Director would be separated from commercial activities. This has been the case in the past with the separation at times of the roles of Chief Executive of Jersey Harbours and Harbour Master.  In  practice,  this  happens  under  current  arrangements;  however  within  an incorporated entity, the separation would be transparent.

6. Legislation

A legislative model for incorporation of a States Trading Operation was developed a decade ago for the incorporation of Jersey Telecom and Jersey Post and it will be the intention  to  follow  this  as  closely  as  practicable,  including  development  of  an appropriate competition and regulatory regime. The existence of this model, agreed ten years ago by the Assembly, will make the law drafting requirements considerably easier than might otherwise have been the case.

Notwithstanding, there will need to be a range of other legislative or rule changes in order to achieve the policy objectives set out in this report. This will include –

• Giving the new company utility rights, privileges and obligations necessary for the provision of port, coastguard and airport services in Jersey.
• Amendment as necessary of the Harbour and Light Dues (Jersey) Law 1947 and  the  Harbours  (Administration)  (Jersey)  Law  1961,  and  various Regulations made under them, for example on control of boats and protection of cables in territorial waters.
• Ditto,  inter alia,  the  Civil  Aviation  (Jersey)  Law  2008  and  associated Regulations, the Airports Act 1986 (Jersey) Order 2000, the Air Navigation (General) (Jersey) Regulations 1972, the Airport Dues (Jersey) Law 1956 and certain other relevant legislation.
• Enabling the Minister to authorise the new company to do certain things on her  or  his  behalf,  such  as,  for  example,  taking  formal  responsibility  for relations  with  the  Channel  Islands  Director  of  Civil  Aviation  (air  safety regulation) and strategic relations with bodies such as the UK Civil Aviation Authority and the UK Maritime and Coastguard Agency.
• Setting out an appropriate legal and contractual framework to allow the new company  to  undertake,  with  the  assent  of  the  Minister,  non-commercial' activities on behalf of the States. Examples would include the Coastguard (which  is  currently  funded  from  commercial  port  income  in  the  form  of Harbour  and  Light  dues),  maintenance  of  the  Island's  historic  harbours, opening  the  Airport especially  for  emergency  flights  and receiving  Royal Navy vessels or Royal Air Force aircraft without charge.

7. Corporate structure and shareholder arrangements

The corporate structure of the new company is of paramount importance and this will be a particular focus of the Shadow Board in the lead-up to incorporation. Discussions will take place between Jersey Harbours and Jersey Airport, the Minister for Treasury and Resources and the Comptroller and Auditor General to reach agreement on the principles for the corporate structure of the Ports based on the following –

• It is expected that the overall financial contribution made by the company to the States will be at least as great as it is now and will increase as the profitability of the company increases.
• The future returns to the States of the incorporated Ports are dependent on the transfer of sufficient assets into the new entity.
• The structure and mechanism for determining the amounts and timings for payment of the licence fee and dividend will be agreed prior to incorporation, and  thereafter  between  the  company  and  the  Minister  for  Treasury  and Resources.
• The  relationship  between  the  incorporated  Ports  and  the  States  as  100% shareholder will be governed by an appropriate shareholder agreement in the form of a Memorandum of Understanding (MOU). There are examples in the case of Jersey Telecom and Jersey Post on which to draw.
• Both Jersey Harbours and Jersey Airport provide non-commercial' services to meet the needs of public policy. Examples of such public services include the  Coastguard  and  the  maintenance  of  outlying  harbours.  Within  the incorporated structure, arrangements will need to be put in place with the States as shareholder that protect such services and ensure their viability.

8. Property

All relevant land and buildings owned by the public and under the operational control of Jersey Harbours and Jersey Airport at the point of incorporation will be transferred to the Ports on a basis to be negotiated and agreed with the Minister for Treasury and Resources. In principle, it is proposed that the assets to be transferred will be as described in Appendix C.

9. Transfer of staff

At December 2011, Jersey Harbours and Jersey Airport had a total of 250 employees. Upon incorporation, the intention will be that all employees at the transfer date will transfer to the company carrying over their existing terms and conditions. During the process of integration there has been extensive consultation with staff and Unions, and it is fully recognised that this approach will continue to be undertaken openly and thoroughly in the months ahead.

Specifically  on  pensions,  there  has  already  been  good  dialogue  with  the  PECRS Committee of Management about the proposed incorporation, including the treatment of Jersey Harbours' and Jersey Airport's share of the so-called pre-1987' debt that the

States agreed in 2005. Jersey Harbours' and Jersey Airport's combined share' of this debt has been calculated by the PECRS Actuary to be circa £18 million.

Firm proposals on this will be included in the detailed papers on the incorporation that will be put to the Assembly in due course.

10. Project timescales

The  critical  path  for  the  incorporation  project  is  described  fully  in  Appendix B showing a realistic completion date for the incorporation project as the end of 2014. The development of legislation and conveyancing have ultimately determined the length  of the  project,  and  these  timescales  have  been  agreed  by  a  newly-formed working group consisting of representatives of the Law Officers' Department, Law Draftsman's  Office,  CICRA,  Economic  Development  and  Chief  Minister's Department. Any delay in the progression of work in these areas will have an effect on the project delivery date.

To drive the project forward, a programme office will be established with a strong governance structure based on project management best practice, and to oversee all aspects of the programme and keep under constant review all details, timelines and costing.

11. Conclusion

This Report lays out a compelling case for the incorporation of Jersey Harbours and Jersey Airport under the Ports of Jersey Limited, a 100% States-owned company. Not only through the reduction in financial liability, but also through a significant return to the States and a better deal for customers, the ability for the States to meet public service obligations will be very considerably enhanced.

The  incremental  benefits  to  a  range  of  stakeholders  demonstrate  substantial improvements for our customers, employees, the parishes and the public at large.

Whilst there is a cost associated with the project of incorporation, this is an investment to achieve greater gains than is possible under the current arrangements.

There will no doubt be several challenges to be addressed on the path to incorporation, but in drawing on sound models developed through the previous incorporation of Trading Operations we have an excellent framework for the successful delivery of the project.

12. Resource implications

Based upon initial planning, the estimated project cost of incorporation to the Trading Fund is as follows –

Area  £000s External Finance and Audit  225

Legal Support (including legal, legislative, regulatory, corporate structure

and contracts)  920

Consolidated IT (including systems, databases, assets registers,

maintenance, etc.)  160 Project work-stream support  100 Programme Management  150 Review of Financial Model and Business Case  35 Consultation (including public, notices, feedback, meetings)  30 Contingency (@ 10%)  162 Total estimated project cost to 31st December 2014  1,782

Financial and manpower implications

The full cost of the incorporation project is detailed above. These funds will be drawn from the existing trading fund and so have no direct effect on the finances of the States. There are no manpower implications beyond those directly funded as part of the incorporation project.

FINANCIAL MODEL

A consolidated financial model has been created based upon 2 separate standalone models previously in use at the Jersey Airport and Jersey Harbours, which seeks to provide an indication of potential performance based on certain key assumptions as outlined below. We have reflected the increased project costs within our cash balances to ensure these are captured within the model.

Assumptions

The consolidated model is predicated upon a number of key assumptions, including –

1. Period/Timing – The model period isto 2032 and the Incorporation Date is set as 1st January 2014. The current project plan has identified 1st January 2015 as the target date for incorporation, which should not have material impact on the overall 20 year financial model.
2. Capital  Programme –  Capital  Expenditure  is based  upon  the  Capita Symonds Review undertaken in 2011.
3. Balance Sheet – The balance sheet is based upon States of Jersey published accounts. It is important to note that the asset base is therefore as currently stated and not, for example the property estate specified inAppendix C. This is an  identified  work-stream  in conjunction  with Treasury/Jersey  Property Holdings and it is anticipated that any net difference in valuations will not be material.
4. Staff – Employees will be transferred on existing terms and conditions.
5. Pension – Liability (c.£18 million) to be paid in full on incorporation from existing Trading Fund balances.
6. Inflation – Inflation is set at 2.5% per annum throughout the model for both tariffs and costs. Airport Dues increases have been set at inflation less 0.5%.
7. Borrowing – No borrowing is included in the model.
8. Growth  Volumes –  No  increases  in passenger  volumes  are  included  in respect of Harbours and are limited to +1% per annum in respect of Jersey Airport. A cumulative +5% increase in Jersey Harbours' freight volume is also included.
9. Channel Islands Control Zone – it has been assumed that the provision of services to the UK and France will continue through life of the model on substantially the same basis as currently exists.
10. Commercial Opportunities – Commercial Projects targeted at a minimum of 8% return.

11. Tax – Taxation is charged at a 20% of net profit before depreciation, and after an estimate for capital allowances payable in the following year. The pension liability has been deemed a tax deductable expense and therefore 20% of the value added to the deferred tax asset.
12. Capitalisation – States to own 100% Ordinary Shares (no Preference Shares).
13. Dividend – A dividend policy will be agreed with the shareholder in due course; however for the purposes of the model, a dividend assumption of 12.5% of Profit before Tax has been made.
14. Return –  All  current  Service  Obligations  will  continue,  for  example Coastguard, as a Return to the States and services currently received continue on the same basis.
15. Cash – The cash from both businesses will be combined and available funds used for investment in either business.

Against an agreement in principle to incorporate the Ports of Jersey, an independent validation of the financial model, including the revised target date of 1st January 2015, and  the  respective  assumptions  will  be  commissioned  during  the  project  of incorporation.

The output of the model indicates a sustainable Jersey Harbours and Jersey Airport as essential service providers that are able to finance the defined capital programme whilst delivering to the States of Jersey a potential cash return by way of taxation and dividend, as well as non-cash contributions in respect of existing service obligations.

Figure 1 – Summary of cash-flows for Incorporated Ports of Jersey

£'000 40,000

35,000 30,000 25,000 20,000 15,000

Capex

Cash Balance PBTD

10,000 5,000 0

2011 2013 2015 2017 2019 2021 2023 2025 2027 2029 2031

(Note: PBTD = Profit before tax and depreciation.)

This forecast should be considered the context of the past performance of the Trading Funds which have each required cash injections from the States from time to time, including  below-ground  works  at  the  Airport  and  St. Catherine's  Breakwater  in respect of  Harbours.  Following  a  period  of  modernisation  which  has  precipitated incremental improvements in performance (including integration), each department is now  in  a  position  where  a  modest  profit  of  £1 million  is  being  reported  whilst generating  substantial  £10 million  trading  cash  surpluses.  Furthermore,  this  has allowed  the  departments  to  build  up  viable  cash  Trading  Fund  balances  of c.£30 million.

£'m Income Expenditure

Trading profit Depreciation*

Profit

One-off impairments*

Retained profit

Capital Expenditure

Add back non-cash items (*) Other Balance Sheet movements

Transfer to/(from) Trading Fund

Opening Trading Fund balance Trading Fund movement

Closing Trading Fund balance

2009  2010  2011

41.8  42.5  43.7

31.0  33.9  33.0

10.8  8.6  10.7

12.5  11.1  9.6

(1.7)  (2.5)  1.1

0.0  13.8  0.0

(1.7)  (16.3)  1.1

18.0  4.5  8.8

12.5  24.9  9.6

3.9   1.9   1.6

(3.3)  6.0  3.5

23.8  20.5  26.5 (3.3)   6.0   3.5

20.5  26.5  30.0

This outcome, combined with the independently verified review of the long-term capital programme (which resulted in the removal of significant discretionary projects, most specifically the East of Albert scheme at a value of c.£30 million) has resulted in a more favourable current position than would otherwise have been anticipated.

£'000  2014 – 2018  2019 – 2023  2024 – 2028  2029 – 2032  Total Buildings and

Infrastructure  30,273  31,189  12,065  31,915  105,442

Plant and

equipment  13,910  66,501  69,747  46,527  196,685 Total  44,182  97,690  81,812  78,442  302,126

The potential performance indicated by the forecast is, however, firmly predicated upon an ability to create a sustainable step-change in profitability of the organisation by the application of commercial discipline with particular focus on a more effective use of the underlying asset base. Commercial projects currently under review are consistent with the Island Plan and future projects are anticipated on a reasonably conservative 7 year cycle. Whilst current projects remain commercial in confidence these include projects related to growth in corporate aviation, expansion of aviation cargo facilities and office/light industrial/residential development in conjunction with the  States  of  Jersey  Development  Company.  The  wider  commercial  objective  is underpinned by the ability to operate within an environment of continued investment in providing Open, Safe and Secure' facilities whilst contributing to the wider society and community by recognising their position as a strategic asset to the Island, our people and the economy.

Table 1 – Proforma Revenue Account for the period from Incorporation to 31st December 2032

£'m

Ports  States Revenue  1,081  Operating costs  (706)  

Gross profit  375  Depreciation  (242)  

Profit after Depreciation  133  

Net Interest received  3  

Profit from sales of Fixed Assets  4  

Profit before Tax and Public Service Obligation  140  

Value of Public Service Obligation to States  (34)  34 Profit before Tax after Public Service Obligation

Tax payable to States

Profit after tax

Dividends payable to States

Retain for investment

64  

Return to the States

76

This means that the States would receive £76 million over the period of the model, £42 million in cash and £34 million as contribution for the Public Service Obligations (non-cash).

Whilst the £34 million in Public Service Obligations contributions are present today, and would be provided to the States with or without incorporation, the £42 million is incremental cash for the Treasury. This needs to be considered in the context of an annual turnover of c.£50 million and a 20 year time period.

The return to the States is made up of 3 components –

• Contribution to the Public Service Obligations (e.g. Coastguard and Historic Harbours);
• Tax paid; and
• Dividends paid.

Figure 2 – Incorporated Ports of Jersey – composition of the return to States

£'000 4,500

4,000 3,500 3,000 2,500 2,000 1,500 1,000 500 0

Historical Harbours Coast Guards Dividend paid Taxation paid

18 20 30 32 2014 2016 20 20 2022 2024 2026 2028 20 20

It should also be noted that included in the underlying costs of the combined entities are significant Service Level Agreements with other States Departments, in particular Engineering Services. The value of these relationships to the States is estimated at £60 million over the period of the model.

APPENDIX B

PROGRAMME PLAN

This Programme Plan is indicative of what needs to be achieved in order to meet the milestones identified. Upon agreement of this Report and Proposition by the States, there will be further detailed engagement with the relevant States Departments to validate the assumptions and timelines made within this high-level plan. A programme office  will  be  established  with  a  strong  governance  structure  based  on  project management best practice, and will keep under constant review the programme details, timelines and costing.

Key political decisions

Programme Governance Structure

Programme Costs

• Area   £000s  
  • External Finance and Audit   225  
    • Legal Support (inc. legal, legislative, regulatory, corporate structure and contracts)   920  
      • Consolidated IT (inc. systems, databases, asset registers, maintenance, etc.)   160  
        • Project work-stream support   100  
          • Programme Management   150  
            • Review of Financial Model and Business Case   35  
              • Consultation (inc. public, notices, feedback, meetings)   30  
                • Contingency (@ 10%)   162   Total estimated project cost to 31st December 2014   1,782  

Work-streams

MAPS

AIRPORT OPERATIONAL AREA

PORT OPERATIONAL AREA

STATISTICS

RISK MATRIX