Future Hospital: approval of preferred scheme and funding

STATES OF JERSEY

FUTURE HOSPITAL: APPROVAL OF PREFERRED SCHEME AND FUNDING

Lodged au Greffe on 31st October 2017 by the Minister for Treasury and Resources

STATES GREFFE

2017  P.107

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, and their Act dated 1st December 2016, which approved in principle the site location for the new General Hospital; and –

1. to approve the Preferred Scheme contained within the Future Hospital Outline Business Case with a capital expenditure budget of up to £466 million;
2. to approve, in accordance with the provisions of Article 3(3)(a) of the Public Finances (Jersey) Law 2005 ("the Law"), the establishment of a Special Fund to be known as the "Hospital Construction Fund" and to approve the Fund's purpose, as set out in Appendix A to the report accompanying this proposition;
3. to authorise, in accordance with Article 21(1) of the Law, the Minister for Treasury and Resources to borrow up to £275 million towards the construction of the Preferred Scheme, and to direct that the amount borrowed be paid into the Strategic Reserve Fund;
4. to agree that the Strategic Reserve Fund policy be amended so as to authorise the transfer from the Strategic Reserve Fund to the Hospital Construction Fund, drawn down as required, the sum representing the balance of up to £466 million after deducting the £23.6 million already allocated in connection with this project in previous Budgets;
5. to agree that the Strategic Reserve Fund policy be further amended so as to authorise –

1. that  the  costs  of  borrowing  and  ongoing  finance  and administration costs related to the borrowing be borne by the Strategic Reserve Fund; and
2. the repayment from the Strategic Reserve Fund of the amount borrowed in accordance with paragraph (c) above; and
3. that  on  the  final  account  of  the  Preferred  Scheme  being presented, any unspent monies shall be returned to the Strategic Reserve Fund.

MINISTER FOR TREASURY AND RESOURCES

REPORT

Executive Summary

Jersey is not alone in the challenges of maintaining the health and wellbeing of an ageing population. However, unlike many jurisdictions, we are facing up to these challenges and putting in place a range of policies to tackle them. A Hospital that is fit for purpose is  an  essential  component  of  our  strategy,  and  will  provide  high-quality  medical treatment both now and in the future. The current Hospital has developed piecemeal over many decades and its physical condition, as independently assessed, is rapidly becoming inadequate. All credible solutions for a new Hospital require a once in a generation' investment.

This proposition has been lodged by the Minister for Treasury and Resources in order to comply with the rules set out in the Public Finances (Jersey) Law 2005; however, if those rules were not as they are, this proposition would have been in the name of the Council of Ministers, reflecting their support for this proposal and their belief that this is absolutely the right solution to make progress to address the challenges we face.

This is a crucial decision for the States Assembly to make. In approving the proposition "Health  and  Social  Services:  A  New  Way  Forward"  (P.82/2012)  as  amended (P.82/2012 Amd.) on 23rd October 2012, the States Assembly approved that –

"the Council of Ministers co-ordinate the necessary steps by all relevant Ministers  to  bring  forward  for  approval  proposals  for  the  priorities  for investment in Hospital services and detailed plans for a new Hospital (either on a new site or a rebuilt and refurbished Hospital on the current site)".

In  approving  the  proposition  "Future  Hospital:  preferred  site"  (P.110/2016)  on 1st December 2016, the States Assembly approved the preferred site for the Future Hospital, in principle, as being the current Jersey General Hospital site with an extension along the east side of Kensington Place and other nearby sites, including Westaway Court.

This  Proposition  requests  approval  of  the  Preferred  Scheme  that responds  to  the identified requirements for modern safe, sustainable, and affordable Hospital services as anticipated by "Health and Social Services: A New Way Forward", and which are in line with the "Acute Service Strategy" approved by the Minister for Health and Social Services in a decision signed on 18th July 2016 (MD-HSS-2016-0035).

The Preferred Scheme is a New Build Hospital on a part of the current site, with additional properties on Kensington Place and a New Build support facility at Westaway Court, contained within the Future Hospital Outline Business Case ("OBC") with a capital expenditure budget of up to £466 million.

An indicative capital cost of up to £466 million for the project cost of developing the concept envisaged was proposed in "Future Hospital: preferred site" (P.110/2016). The cost estimate incorporated all works to the main Hospital, together with all related relocation, site acquisition, enabling works and associated fees, but was an indicative estimate, founded on area-based assumptions. Significant further design, as well as planning and procurement activity, was needed before a final cost could be provided.

A significant amount of work has been ongoing to inform the workforce assessments and plans, to develop a concept design, to develop the proposed procurement strategy and outline planning approach, to tender for a supply-chain construction partner, and to commence  the  planning  of  relocation  works,  as  well  as  undertaking  extensive stakeholder and clinical engagement throughout. This work has provided more cost certainty on the construction costs, and the detail within the OBC is intended to provide Members with sufficient information in order to make the decision to invest.

The OBC provides the case for this investment. It set out the whole life costs associated with the delivery of the Preferred Scheme and associated details in relation to its nature, scale, profile and cost-drivers.

The capital cost estimate of £466 million includes works required to repurpose the Granite Block, but not any other legacy buildings. The cost of acquiring property to form the Preferred Site are included, as are the costs to build temporary clinical blocks, and the cost of relocating the corporate functions to free up the space necessary to allow a single phased main construction.

The cost estimate will be managed in 2 parts. The optimism bias and contingency ("risk") will be managed by the Treasury, leaving the delivery team to manage the remaining estimated project costs, including an estimate for inflation. The contingency sums, if and when required, will be accessed through a process of challenge and agreement between the delivery team and Treasury.

The workings associated with the cost estimate for this project have been brought together with the assistance of Gleeds Management Services (Hospital project advisers) and EY (Hospital project financial advisers) who have provided advice over the costs and modelling associated with their estimates.

As set out in P.110/2016, the Future Hospital provides an opportunity to crystallise the very best of Jersey in a high-quality and enduring safe, sustainable, and affordable Hospital.

The core purpose of the Future Hospital will be an environment that provides excellent care for everyone, all of the time, now and for the future. The States Assembly now has the opportunity to put this vision into practice through approving this Proposition.

This report summarises the key aspects of the OBC, describing –

• the context in which the need for the Hospital is defined in the Strategic Case;
• the method by which the Options were appraised, in accordance with best practice, and the selection of the Preferred Scheme in the Economic Case;
• the means by which the Preferred Scheme can be procured in the Commercial Case;
• the long-term financial impacts of the Preferred Scheme in the Finance Case; and
• the capability and capacity of the client to safely deliver the Preferred Scheme in the Management Case.

This will be Jersey's largest single capital investment in a generation. After considering all the options and consulting with expert advisers, the Minister for Treasury and Resources, with the support of the Council of Ministers, is proposing to raise the funding

required through a blended solution; borrowing, supplemented by existing reserves. That borrowing is proposed to be by means of a public-rated sterling bond.

That borrowing would be repaid by future excess returns on the Strategic Reserve Fund. The proceeds of any future sales of property or other strategic assets would be used to further strengthen reserves.

It is not planned to raised additional taxation to pay for the new Hospital.

The Treasury Advisory Panel ("TAP") is established by the Minister for Treasury and Resources to advise him, the Assistant Minister and the Treasurer of the States on matters relating to investment decisions, and may also be requested to provide advice on other relevant Treasury matters. The Panel comprises –

• an Independent Chairman;
• the Treasurer of the States of Jersey and/or delegated Treasury Director; and
• up to 3 Non-Executive Members (currently 2).

The Panel was requested to recommend a suitable funding methodology for the Future Hospital project requirements, using its relevant expertise, experience and knowledge.

On  13th April 2017,  the  Minister for Treasury and  Resources received  a  formal recommendation from the TAP, further to and consistent with advice from other experts, as follows –

1. A public-rated sterling bond issuance is the optimal debt instrument to finance the construction of a new Hospital rather than using sums from the Strategic Reserve.
2. Once the States Assembly have formally confirmed that a bond will be issued, a hedging arrangement should be implemented to protect the States from large movements  in  gilt  yields  before  the  bond can  be  issued  (details  of  the instrument(s) to be used to be confirmed at a later date).
3. The Panel is satisfied that it is reasonable to assume a 5% (RPI + 2%) long-term rate of return from the Strategic Reserve Fund.

Since that recommendation was issued, other suggestions have been made regarding the shape and form that borrowing should take. The TAP has provided its views on these alternatives and has reconfirmed its recommendation. In coming to its conclusions, the TAP has utilised the research and analysis provided by the Minister's external advisers EY, Aon Hewitt (in respect of expected investment returns), and the report from the Chartered Institute of Public Finance and Accountancy commissioned by the Corporate Services Scrutiny Panel.

Their report says –

"Having  considered  the  research  and  analysis  and  carefully  considered  the alternatives put forward it remains TAP's recommendation that the public-rated sterling bond issuance remains the optimal approach to financing the construction of a new Hospital for the following reasons:

1. This is by far the most flexible solution. It provides the maximum protection of the Strategic Reserve so that it is available for alternative uses should it be needed. For example in times of crisis, national emergency or severe economic recession funds will be readily available without having to resort to borrowing (if at all possible) at an unfavourable time on unfavourable terms, or alternative sources of funding which may take time to develop (e.g. taxation, sale of other assets).
2. Long term fixed rate funding is available that matches the projected life of the asset (30 to 40 years). The full requirement can be raised in a single fundraising without covenants or restrictions. The States credit rating is AA- and this coupled with an issuance of this size would be sufficient for the bond to be included in a number of market indices – thereby generating demand.
3. Long term interest rates are currently at unprecedented low levels and the States will be able to take advantage of these and provide cost certainty over the full life of the debt.
4. Providing the maximum protection of the Strategic Reserve, with the expected returns of at least 5% over the life of the borrowing, provides sufficient returns to pay both the interest on the bond and the principal at maturity.
5. SoJ  has  experience  of  bond  issuance  and  the  ongoing  operational requirements."

In January 2017, the Minister for Treasury and Resources sought the Fiscal Policy Panel's ("FPP") advice on the proposed funding strategy. Its response was positive to the proposal –

"The Panel has discussed your proposals and we feel that at a high level the strategy of borrowing money through a bond issue, allowing the returns from the investment of the Strategic Reserve to pay for the interest and build up in the fund (to repay the capital borrowed) is sensible in view of the fiscal and economic outlook. We agree that the assumptions you have made about the likely returns and interest rates seem to be prudent and appropriate, although there is always considerable uncertainty around any such assumptions.

There are however a number of risks to the proposals that we would draw your attention to. These are not significant enough to require a different approach, but are issues that merit further consideration and where necessary further contingency planning."

The FPP referred to risks to the strategy, some of which are now reduced as a result of the lower level of borrowing being proposed. For example, the likely annual coupon cost of borrowing around £400 million was £10.5 million. Borrowing £275 million is likely to have an annual coupon cost of approximately £7 million, a significantly lower cost of borrowing.

There is a precedent for issuing such a bond. When we saw the need to invest in improving  and  adding  to  our  social  and  affordable  housing  stock,  we  issued  a £250 million public-rated sterling bond. That decision is now producing more and better-quality homes for Islanders.

The benchmark interest rates on borrowing through such bonds are at a historic low, so by borrowing at a low rate of interest, we can leave our existing reserves in place where they generate returns that are expected to exceed the cost of borrowing.

The average annual return on Jersey's Strategic Reserve Fund since 1986 has exceeded RPI by 4.4%. From 2006 – 2016 the average annual return was 6.6%, which was 3.80% above RPI(Y).

After consultation with independent investment advisers, for modelling and options appraisal, Treasury has assumed a long-term rate of return of RPI(Y) + 2% on the Strategic Reserve Fund.

Financial advisers have helped to assess the price of a fixed-rate £275 million public- rated sterling bond, which was estimated to be within a range of 2.64% to 2.74% on 24th October 2017. Using that assumption a cash receipt of approximately £265 million after discounting for the published coupon rate of 2.625%, rounded down to the nearest 1/8th of a percent, as is the market norm to allow comparability between all bonds in the market place.

These figures demonstrate that it makes sense to borrow through a bond then repay the interest and, eventually, the capital, using excess returns on the Strategic Reserve Fund. The capital amount the States Assembly agreed to protect, increasing each year with inflation, would be protected and available for future generations.

Markets and other circumstances may change, and it is important that some flexibility is retained to make detailed decisions, with advice from the TAP, closer to any bond issuance.  The  current  approach  would  be  to  borrow  up  to  £275 million  over 30 to 40 years, with the balance coming from reserves and sums already agreed. The money raised would be placed in the Strategic Reserve Fund prior to being drawn down into a specific fund set up for the Hospital construction – the Hospital Construction Fund.

This funding proposal will increase our borrowing, but Jersey will still have very low rates of borrowing compared to elsewhere. It would take our debt to GDP ratio from 6% to 13% (at £275 million). This is well below most countries; for example, the U.K. has a ratio of 89%. While there is a risk that the cost of any future borrowing could increase as a result, our strong position makes this unlikely. Jersey's balance sheet remains extremely strong and we are using this borrowing to build an asset. Matching a long- term asset with a long-term liability is both a logical and typical approach.

Fluctuation of returns in the early years may mean using the Strategic Reserve Fund capital in some years and paying it back in other years.

Every funding proposal carries some risk but, based on current knowledge, this is the best way to make the most of our considerable reserves and strong balance sheet. It takes advantage of the fact that the historically low cost of borrowing is less than conservative estimates of future income from our Strategic Reserve Fund in the long term, and it does this without requiring direct contributions from Islanders through additional charges or taxes.

We need to offer our population the best healthcare possible, and to do this we need a new Hospital. After taking professional advice, this is the most prudent way to raise the funds needed to build a Hospital that meets modern standards and that can continue to evolve as healthcare changes.

The Outline Business Case ("OBC")

This Report summarises the Outline Business Case ("OBC") and sets out the appraisal work, to build a safe sustainable and affordable General Hospital. The OBC tests the options available to the Health and Social Services Department in meeting the challenge of implementing the transformational expectations of P.82/2012.

It follows the format of the United Kingdom H.M. Treasury Five Case Model (2013), with appropriate adjustments where needed to reflect jurisdictional differences between the U.K. and the States of Jersey. Key examples of these include –

• No purchaser and provider split working in an internal market in Jersey;
• Absence of tariffs for units of activity in the Hospital in Jersey;
• Different model of primary care funding in Jersey;
• Island factors with respect to model of care and delivery of services;
• Single General Hospital providing comprehensive acute care in an Island.

This Report and the OBC are comprised of the following sections:

The Strategic Case – Delivered in 3 parts [A–C] this sets out the overall context for the project. It updates the position established within the Strategic Outline Case ("SOC") to reflect further Project development. It ensures that the Project continues to deliver against  the  business  needs  of  the  Hospital  and  the  wider  health  and  social  care organisation in which it sits. This section makes the case for change and sets out the key issues to be addressed by the Future Hospital Project.

The Economic Case – Sets out the process followed in economically evaluating the agreed options, and confirms the Preferred Scheme that delivers the greatest value for money in the way that it addresses the investment objectives of the Project.

The Commercial Case – Sets out the nature of the delivery process and confirms the specific contractual and procurement arrangements to be put in place to deliver the Preferred Scheme.

The Finance Case – Sets out the financial position of the Preferred Scheme relative to project constraints and the current Hospital's revenue profile.

The Management Case – Details how the delivery of the Preferred Scheme will be managed, and sets out specific project control arrangements for the required enabling works, the transition period up to the opening of the Future Hospital, and for the management of the current General Hospital during the period of construction.

1. The Strategic Case

P.82/2012 ("Health and Social Services: A New Way Forward") has resulted in an extensive network of new and enhanced services in the community. As part of this, a broader range of organisations are delivering significant and increasing elements of service, and many stakeholders are involved in developing strategies (e.g. for Mental Health, Primary Care and Out of Hospital' services) in ways that complement the 3 key principles of the Acute Service Strategy –

• Admission avoidance – doing all we can so that patients do not need to be cared for in Hospital in the first place;
• Admission prevention – when Islanders do not need to come to  Hospital, making  early  decisions  and  providing  treatments  in  ways  that  reduce  the numbers needing to be admitted;
• Early discharge – when Islanders do need to be admitted, making sure their care is as safe and clinically effective as possible so that they are able to return home or to care outside Hospital at the earliest opportunity.

Although significant progress has already been made in delivering the expectations of P.82/2012, the need to replace the Jersey General Hospital remains a pressing strategic priority and a key objective for the Health and Social Services Department.

The Strategic Case covers the existing condition of the Hospital, its ability to respond to the changing needs of the population, how new ways of working can support the case for change articulated in P.82/2012, and how the broader Health and Social Services stakeholders have been involved in the process of developing the OBC.

Estate condition

With clinical accommodation dating from the 1960s, the current Hospital comprises a disparate collection of buildings developed piecemeal to different healthcare standards, 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 difficulties.

These conditions were noted within the "Jersey General Hospital – Strategic Outline Case" received by the States of Jersey in 2013. Despite recent investment in key elements of engineering infrastructure, a Six Facet Survey' – an industry standard way of evaluating the condition of Hospital buildings (completed by independent expert advisers in 2015) indicated that the overall situation remains largely unchanged, with further dilapidation largely offsetting any improvement made in the General Hospital estate since that date.

The risk of operational failure of Hospital infrastructure therefore remains significant. This  risk  will  only  increase  as  age  compromises  the  operation  and  reliability  of infrastructure and building fabric.

Functional suitability and spatial challenges

The "Jersey General Hospital – Strategic Outline Case" drew attention to the poor functional suitability. For example, the majority of in-patient accommodation in multi- bedded bays impacts patient experience, hinders privacy and dignity, and restricts good infection prevention and control. Key parts of the Hospital are significantly below the standards expected within modern Hospital facilities in the U.K. and other jurisdictions.

The following difficulties, noted at that time, remain the case and cannot be effectively addressed due to the constrained site and inflexible structure of the ageing buildings –

• Inefficient  and  ageing  design,  leading  to  poor  geographical  relationships between clinical departments;
• Poor space  standards,  which  are increasingly compromising effective  care delivery;
• Lack of flexibility, thereby hindering the development of facilities in response to the changing needs of medical practice;
• Poor separation of patient, visitor and logistics flows, thereby compromising patient confidentiality;
• Poor gender separation, undermining privacy and dignity;
• Mechanical and electrical plant reaching the end of its useful life, and poor supporting mechanical and engineering infrastructure with increasing cost of maintenance and equipment replacement;
• Poor fire safety standards, undermining the best standards of evacuation in the event of a fire.

These  issues  have  a  compound  effect  on  the  operation  of  the  Hospital,  limiting performance improvement, hampering transformational initiatives and, in damaging staff morale, are likely to hinder staff recruitment and retention.

Population and demography

The 2016 Population Estimate published by the States of Jersey Statistics Unit indicates that significant population growth has been recorded in recent years. This is forecast to continue.

A change in age distribution is the most significant component in relation to the delivery of health and social care. The number of Islanders aged over 65 and, more specifically, those aged over 85, is set to grow more quickly than other age-groups. On average, these service users typically place the most significant demand on the Island's health and social care.

Both population size and structure are critical to determining the size of the Future Hospital. The Health and Social Services Department's medical planning and financial advisers have undertaken demand modelling using industry standard methods. This has been completed based on a +700 net inward migration planning assumption each year. This modelling forecasts that the demand for in-patient adult general medical and surgical wards is likely to exceed their availability in the current General Hospital from 2018, particularly in periods of peak demand.

From that point, increased bed pressure brought about by changes in demand is likely to result in an increase in the use of off-Island services as the General Hospital works to balance day-to-day elective and emergency demand for beds.

In addition to the base planning assumption of +700 net inward migration each year, modelling  sensitivity  has  been  calculated  at  around  +325,  +1,000  and  +1,500  to demonstrate the Future Hospital's response to these scenarios.

Further work to increase out of Hospital' capacity will help to manage this demand. The funding for this initial transformation work is already included within the Medium Term Financial Plan 2016 – 2019.

Plans are in place to manage these operational pressures in the General Hospital in the period up to the opening of the Future Hospital. The configuration and condition of the current Hospital is, however, unhelpful in relation to these plans and limits the extent to which Hospital-based service and infrastructure improvements can be made.

These  challenges  are  mitigated  by  the  Future  Hospital  enabling  schemes,  where improved ways of working and better functional arrangements supporting wider health system transformation will continue to be realised. This will enable bed capacity in the General Hospital to meet forecast future demand in the transitional period to the opening of the Future Hospital and thereafter.

Interventions planning and new ways of working

Despite the constraints imposed by the physical configuration and condition of the current Hospital, the Health and Social Services Department has embarked on a detailed exercise  to  identify  improvements  in  service  delivery  capable  of  easing  current pressures, and at ways of improving overall efficiency and productivity.

An  extensive  benchmarking  exercise  comparing  the  General  Hospital's  current performance to that of an appropriate peer group of NHS and other island Hospitals has been completed. This benchmarking has identified areas where other general Hospitals have improved productivity in ways that can inform similar improvements locally.

Benchmarking results were shared with clinicians across the Hospital to engage them in identifying lessons that could be learned, and the alternative practices that could be adopted in the Jersey General Hospital.

As a result, a detailed series of Interventions' has been prepared, setting out General Hospital and wider health and social care system changes that can be realised by the time the Future Hospital opens. Some of these benefits, when not wholly dependent on Future Hospital infrastructure, could help manage demand pressures sooner.

These  Interventions'  demonstrate  both  productivity  opportunities  and  benefits  in patient care to facilitate an effective response to future demographic and population changes.

The Interventions' are presented in a Benefits Realisation Plan' that forms part of the OBC. The Future Hospital, in addition to delivering these productivity-related benefits, also realises a number of broader benefits in terms of patient outcomes, patient safety, and patient experience.

The Future Hospital is the right-sized General Hospital for Jersey in its Island context to meet the demographic changes in the coming decades. Its size has been modelled to recognise the wider transformation in the health and social care services, within which the need for the General Hospital has been identified. Its size reflects to the productivity improvements needed to ensure the most effective use of a General Hospital and how to respond to the changing demands of regulation and accreditation and, not least, the demands of Islanders for continual improvements in the safety and quality of healthcare services they require.

Stakeholder engagement

Effective stakeholder engagement will remain central to the delivery of the Future Hospital. The principles underpinning this continuing engagement are set out in the Stakeholder Engagement Strategy' approved by the Future Hospital Project Board in September 2016.

Internal clinical and non-clinical stakeholders continue to be engaged in the Future Hospital design process, ensuring that appropriate clinical advice and local factors are included in the detailed design of the Hospital. Internal and external stakeholders have also been engaged in the benefits appraisal process. This ensures that their collective opinions have been able to influence the choices being made within the Project.

Wider stakeholder engagement has been a priority throughout the Project, and has been undertaken using a range of media including roadshows, direct mail, social media, and through a managed Future Hospital project website. This will continue throughout the life of the Project.

2. The Economic Case

Economic appraisal of the options for developing a replacement Jersey General Hospital has followed H.M. Treasury Guidance and best practice as set out in the "The Green Book – Appraisal and Evaluation in Central Government".

In approving "Future Hospital: preferred site" (P.110/2016) on 1st December 2016, the States Assembly agreed in principle that the preferred site for a new Jersey General Hospital would be on the current Hospital site, with an extension along the east side of Kensington Place and other nearby sites, including Westaway Court.

The Future Hospital Political Oversight Group considered criteria that a successful project would be required to meet at its meeting on 12th May 2016. The Future Hospital Project Board accepted these as project constraints relating to the specific nature and configuration of the Preferred Site at its meeting on the 23rd May 2016. These were –

• that the safe operation of the Hospital will be maintained throughout;
• that the Hospital will be located on the Jersey General Hospital site;
• that additional properties on Kensington Place will be acquired;
• that the Hospital will be operational within 7–8 years;
• that the Hospital will be delivered at a comparable cost to new build site options;
• that some flexibility in Planning Policy will be tested;

• some  operational  compromise  will  be  accepted  to  support  the  spatial constraints;
• a high-quality new build Hospital will be delivered;
• that there will be support for the release of adequate on-site area; and
• that the Hospital will be delivered in one main construction phase.

The Outline Business Case considered the most appropriate form of development for the Future Hospital on the Preferred Site.

To  meet  the  mandatory  requirements  of  the  "The  Green  Book –  Appraisal  and Evaluation in Central Government", Do Nothing' and Do the Minimum' options were assessed.  These  options  provided  a  reference  point  against  which  the  economic differences between all options could be fully understood, so that a preferred best performing scheme could be identified.

Option 1 – Do Nothing

This option represents the status quo in that it anticipates that only the statutory defects identified within the existing Hospital are addressed. It does not address current spatial and functional deficiencies, nor does it provide any additional capacity to deal with future population change-driven demand, with patients increasingly being sent for treatment overseas as capacity is exceeded. Indeed the need for ongoing refurbishment leads to a reduction of in-patient bed provision compared to the existing capacity.

In this option, the capacity of the adult medical and surgical beds is forecast to be exceeded by the demand by 2018, leading to increased off-Island elective health care provision and longer waiting-lists This predicted shortfall will to some extent be managed by activities covered within P.82/2012.

Option 2 – Do the Minimum

The structure of the existing Hospital and the constrained site minimises the scope to make any significant functional or capacity improvement. This option therefore reflects an extension of Option 1 to include a temporary ward decant facility and costs to support ward refurbishments over a 10-year period.

Despite providing some capacity to improve performance, like Option 1, it does not address current spatial and functional deficiencies. In not providing any additional capacity over the existing provision to deal with future population change, patients will increasingly need to be sent off-Island for treatment as capacity is exceeded.

In this option, the capacity of the adult medical and surgical beds is forecast to be exceeded by the demand by 2018, leading to increased off-Island elective health care provision and longer waiting-lists. This predicted shortfall will to some extent be managed by activities covered within P.82/2012.

Two further options were considered that offered the potential to meet the Project's Strategic and Investment Objectives.

Option 3 – A new build Hospital on a part of the current site and the refurbishment of a support facility at Westaway Court

This option anticipates a new Hospital on the vacated part of the existing General Hospital site, built to modern U.K. technical and spatial standards; and the refurbishment of Westaway Court to accommodate services to support the Hospital's Out-patients and Ambulatory Care systems.

Option 3 increases in-patient bed capacity to meet the Project Brief. In doing so, it provides greater capacity to meet future demand driven by demographic changes, and leads to reduced levels of need for off-Island care when compared to Options 1 and 2.

In this option the capacity of the adult medical and surgical beds will be exceeded  by  the  forecast  demand  by  2046.  By  using  the  flexibility  that standardised single ensuite bedrooms provides across specialities within the Future Hospital capacity, it will have the potential to meet demand beyond this date in ways that are not possible in Option 1 and Option 2.

The enabling phase programme for Option 3 is extended to manage the complex and sensitive refurbishment of the Maternity and Pathology Departments within the existing Hospital.

Due to available space constraints within the existing Westaway Court building, Option 3 creates sub-optimal clinical adjacencies within the Ambulatory Care and Out-patients Departments.

Option 4 – A new build Hospital on a part of the current site and a new build support facility at Westaway Court

This Option anticipates a new Hospital on the vacated part of the existing Hospital site, and a new build at Westaway Court to accommodate services to support the management of Out-patients and Ambulatory Care provisions in the Future Hospital.

Option 4 increases in-patient bed capacity to meet the Project Brief. In doing so, it provides greater capacity to meet future demand driven by demographic changes, and leads to reduced levels of need for off-Island care when compared to Options 1 and 2.

In this option, the capacity of the adult medical and surgical beds will be exceeded  by  the  forecast  demand  by  2046.  By  using  the  flexibility  that standardised single ensuite bedrooms provides across specialities within the Future Hospital capacity, it will have the potential to meet demand beyond this date in ways that are not possible in Option 1 and Option 2.

The enabling phase programme for Option 4 is prolonged to encompass the increased size of Westaway Court, to include Pathology, but this reduces the co-ordination risk of carrying out refurbishment works in the existing Maternity Department.

The bespoke new build Westaway Court replacement is able to accommodate the appropriate mix of Ambulatory Care and Out-patients Departments to retain the best clinical adjacencies.

Options appraisal

The merits of each option have been considered fully within the Outline Business Case by comparing the cost of delivering each one against the extent to which it delivers the Project's Strategic and Investment Objectives.

A review of the Strategic and Investment Objectives established within the approved Strategic Outline Case was completed in June 2017. This review concluded that the Investment Objectives remained appropriate. There was, however, merit in expanding some elements of the Strategic Objectives to improve their use in evaluating Jersey General Hospital site-specific development options.

The Strategic Outline Case Investment Objectives, expanded Strategic Objectives, and Project constraints are set out in the table below.

Benefits appraisal

The qualitative benefits of each Option were established through a U.K. H.M. Treasury compliant appraisal process.

These benefits were independently evaluated by stakeholders drawn from across the health  and  social  services  system,  including  clinicians,  user  groups,  key  patient representatives, Primary Care and out of Hospital' providers. This ensured that broad and well-informed consideration was given to how the options would support the new ways of working set out in P.82/2012.

The appraisal concluded that Option 4 – A new build Hospital on the current site and a new build at Westaway Court – provided the greatest level of benefit when compared to Option 3. It also scored significantly better than the mandatory reference Option 1 and Option 2.

Neither Options 1 nor 2 met the Strategic Objectives. In addition, they do not offer any significant opportunity to support the wider transformational expectations of "Health and Social Services: A New Way Forward" (P.82/2012).

The table below indicates the unweighted and weighted benefits results. The Preferred Scheme scores highest in both. Weighted benefits are prioritised to reflect the relative importance of the separate aspects, unweighted benefits do not reflect this relative priority.

Cost appraisal

Capital costs have been developed by Gleeds Management Services as the Project's Technical Advisers.

Revenue costs have been established within a long-term revenue model prepared by EY. These  costs  reflect  the  importance  of  demographic  change  and  performance improvements appropriate to each option.

Net Present Value

U.K. H.M. Treasury Guidance indicates that economic appraisal must consider the full term of a Project. In this case, the appraisal will be based on an 8-year period up to the potential opening of a new Hospital and 60 operational years thereafter.

Net Present Value considers all future costs for the delivery of the Options, but presents these future costs in today's terms, in accordance with best practice.

Costs on a Net Present Value ("NPV") basis calculated over this term indicates that the Preferred Scheme (Option 4) would be the least expensive, followed by Option 3. Options 1 and 2 are the most expensive, as under these options increasing levels of off- Island treatment will become necessary as demand for acute health care increasingly exceeds the capacity of the existing Hospital.

Total NPV representing capital, costs of funding, transitional and revenue costs is set out in the table below –

Value for money assessment

Taking the combined cost and benefit outcomes indicates that the Preferred Scheme (Option 4) continues to offer the best value for money over the economic life of the Hospital. It delivers significantly greater benefits for relatively lower costs over time.

The Preferred Scheme

Based on this analysis Option 4 – a new build Hospital on part of the current site and a new build support facility at Westaway Court – is the Preferred Scheme. In addition to offering the best value over time, it includes a range of benefits that support future change and improvements in patient experience by creating –

• an  environment  suitable  for  modern-day  operating  practices,  with  a  high- quality, flexible working environment supporting the most modern and efficient clinical performance;
• a Hospital designed to support services being planned around the patient and encouraging  greater  integration  between  Hospital,  and  out  of  Hospital' services;

• better co-location of clinical departments within Ambulatory Care provision and developing one-stop-shop' approaches to care;
• a safer Interim Hospital;
• a greater confidence that the Future Hospital can be delivered within planning parameters;
• a  functionally  appropriate  building  developed  sensitively  within  its surroundings, that architecturally contributes to the quality of the town centre civic realm;
• clear separation of patients, staff, Public and facilities flow through the building;
• shared community space offering opportunities for the whole health and social care system;
• improved management of control of infection;
• improved opportunities for the provision of private healthcare;
• accommodation that is fit for purpose, highly flexible and consistent with Islanders' needs for healthcare;
• a building and supporting infrastructure with flexibility to accommodate future technological and clinical practice change; and
• the Hospital's design based upon clear objectives that fully embrace and support the health system transformation set out within P.82/2012.

Some cost estimations are not included: for instance, the potential capital receipt or cost of any redevelopment of the remainder of the current General Hospital site, and the longer-term revenue implications of key worker accommodation arrangements. These costs, or income, are a consequence of the new Hospital build rather than a direct cost of construction. These consequential costs are, however, being estimated by the project team and considered by those responsible for this project.

The cost of demolishing or developing the remainder of the existing site not required for the Future Hospital, has not been factored into the £466 million cost estimate. There has been no decision at this time as to what the remainder of the current site might be used for. It may be that the States Assembly use the opportunity to redevelop it. Alternatively, the site could be earmarked for other uses or sold, but until a plan is developed in due course, those costs are outside the current estimate.

Part of the current proposal is to make use of Patriotic Street Car Park to access the new Hospital. The development costs of adding a further 2 levels to the car park have now been worked through and are included in the £466 million. The Car Park Trading Account will be used to fund the general refurbishment of the car park, as originally planned.

3. The Finance Case

The whole life capital and revenue financial costs associated with the delivery of the Preferred Scheme, such as ongoing lifecycle costs, and equipment replacement, have been estimated and used for planning purposes and as an assessment of affordability. These estimates have been calculated using the expertise of external advisers based on operational modern equivalent Hospitals. We will have further detail on this as we proceed during the feasibility process, but an average annual cost of approximately £10 million after construction has been estimated inclusive of equipment replacement.

Capital costs: expenditure, funding, and affordability

The analysis has shown that the current capital cost estimate falls within the envelope set in P.110/2016, as shown in the table below:

Given the current capital cost estimates are within the P.110/2016 capital sum, the capital costs meet the definition of affordability' provided by the States Assembly.

The funding and financing costs for this sum are set out in the Funding Strategy element of this Report.

Revenue costs: expenditure, funding, and affordability

The revenue costs for the Preferred Scheme show increases in funding requirements in future MTFP periods as set out in the table below. The quantum of change in revenue expenditure is largely driven by future changes in demand and not the costs directly associated with the Preferred Scheme. This Report and the OBC do not represent a

funding request, but provide a model to help inform decision-makers. The OBC makes explicit the assumptions upon which the future costs have been predicted.

Hard and Soft Facilities Management Costs (estates, housekeeping, and energy and utilities), largely reflect increases in costs due to the size, and therefore the capacity, of the Future Hospital to meet the demand for more treatments.

The capital expenditure for the Future Hospital and support facility at Westaway Court represent a significant investment by the States of Jersey in the health and well-being of Islanders and the Island's social and built infrastructure.

To maintain the buildings and equipment in a high-quality, fit-for-purpose condition, a change in approach to asset management is needed from the current relatively ad hoc responses to a planned programme of asset maintenance.

Whilst these could be considered additional costs as a result of delivering the Hospital, it is at least, in part, the shortfalls in investment in such lifecycle maintenance that has led to the deterioration of the existing Hospital buildings and the need to replace them.

With regard to the end of MTFP 4 (2027), the analysis indicates that a number of the estimated costs such as those related to clinical services are modelled as funded based on historic approaches. Beyond this point into MTFP 5 changes in funding strategy are less certain. Each will be dependent on affordability and other circumstances at the time of approval.

Whilst the sums needed to operate the new Hospital are substantial and increasing, some are unrelated to the delivery of a new build Hospital. Compared to the "Do Nothing" Option, the revenue costs of implementing the Preferred Scheme would avoid costs in the region of £14 billion between 2016 and 2084.

Taking into account the capital cost and associated funding financing charges of the preferred scheme shows a slightly reduced but still very significant cost saving of £13.3 billion.

Population forecast and sensitivity analysis

The size of the Future Hospital is driven by the forecast demand for treatment. As set out in the Strategic Case, a central scenario of +700 net inward migration has been used to forecast demand and assess the costs and benefits of different options to meet this.

Sensitivity analysis has also been undertaken in relation to variations in the population as set out in the figures below. The scenarios used reflect the population scenarios produced  by the  States of Jersey Statistical Unit. The  analysis  shows that if the population forecast is less than the central +700 inward migration scenario – if, for example, it is +325, the new Hospital will have capacity to meet demand until 2056, a full 10 years more than if the +700 scenario is realised. If, however, the population change is +1,000 or even +1,500, the new Hospital capacity will be reached some years before 2046. As is currently the case, the potential exists to use private beds and other speciality beds to meet adult in-patient demand if this is considered a priority.

4. The Commercial Case The Site

The Future Hospital will be constructed on a site formed from the vacation and demolition of Peter Crill House and the Gwyneth Huelin Wing, and the demolition of other properties acquired on Kensington Place. This approach allows the existing Hospital functions to operate safely whilst a sufficiently large site can be cleared for the Future Hospital to be constructed in a single phase. This is summarised below –

Procurement arrangements

Following a range of supply-chain engagements, a detailed procurement strategy has been developed for delivery of the main construction phase. This is supported by more appropriately scaled strategies for delivery of the enabling schemes and relocation works.

The strategy indicated that procurement of the main contractor would follow the Restricted  Process'  procurement  route  to  ensure  that  the  financial  standing  and technical capability of the main contractors is robustly evaluated. This work has already commenced with the vetting and review of interested contractors underway.

A two-stage tender process is recommended, with the intention of the States of Jersey eventually entering into an NEC 3 ECC Option C – Target Cost contract. This is considered to offer significant benefit in terms of its scope to mitigate risk, to adopt buildability opportunities, and to drive and include aspects of agreed design innovation. It anticipates the following –

• achieving an early appointment of the main contractor ahead of the completion of design, and potentially achieving a quicker start on site;
• securing the appointed contractor's pre-contract services' to provide direct construction expertise into the design, into construction sequencing and into sub-contractor selection;
• retaining greater client involvement in the pre-selection and appointment of sub- contractors;
• motivating the design and construction team to drive out cost and to drive in value; and
• transferring  a  greater  degree  of  design  and  other construction  risk  to  the contractor.

The detailed procurement strategies were developed in full consultation with the local, U.K. and international industry and with States of Jersey procurement officers. This has been done to ensure market attractiveness whilst fully reflecting all aspects of the States of Jersey's financial and procurement Regulations.

Programme

The overarching programme sets out the dates and critical path elements required to deliver the Future Hospital. These have been developed through detailed analysis and review by the Technical Adviser, having full regard to the content and nature of each aspect of the work.

Risk apportionment

The  project  team  and  Technical  Adviser,  in  following  industry  standard  Risk Management processes, have managed project risk continuously. A Risk Register has been maintained throughout the project development period. It has been used to inform risk, contingency, and optimism bias pricing within the capital cost profile of the Project.

The Project's risk management approach aims to allocate risk to the party that is best placed to manage it.

The proposed contract strategy reflects this and aims to strike a balance between risk allocation  and  contractor  incentivisation.  The  precise  division  of  what  is  termed gain/pain-sharing will be finalised during target cost agreement that will be completed as part of the main contract resolution.

Planning Permission

An Outline Planning Permission for the Preferred Scheme was submitted at the end of June 2017; the Minister for the Environment confirmed that this application would be the subject of a Public Inquiry, appointed a Planning Inspector and confirmed the date

of this Inquiry to be held in November. Following the Inquiry, the Planning Inspector will produce a report for the Minister who will subsequently determine the outcome of the application.

The enabling projects will be the subject of separate planning applications where they are required to meet with the programme.

5. The Management Case

Noting the need to both demolish part of the current General Hospital and construct the Future Hospital in close proximity, specific management arrangements have been developed to provide the level of control and safeguarding needed to assure the safe operation of Hospital services. These are set out in the Project Execution Plan ("PEP") used to guide the establishment of organisational arrangements, the resource levels needed to continue to deliver the current General Hospital safely, and the Future Hospital within time, quality, and cost parameters.

Project Teams and Governance

The governance structure acknowledges that the Future Hospital Project forms part of a wider health system transformation being delivered in response to P.82/2012, and notes that close resource and governance integration is needed for successful delivery. The Project and Programme Management Office ("PMO") functions will be established to support the organisational arrangement set out below:

Benefits Realisation

The  Health  and  Social  Services  Department  is  committed  to  realising  significant benefits from the Future Hospital. To achieve this will require the investment of clinical and management resources.

This effort will need to be sustained over an extended period. The Project Team therefore needs to support clinical leads and operational managers to deliver these benefits in the transitional period before the opening of the Future Hospital.

A Benefits Realisation Plan has been prepared and has captured benefits emerging from 2 distinct routes –

The  qualitative  benefits  resulting  from  the  enhanced  capability  and functionality provided by the Future Hospital, which are similar to the benefits delivered  by  any  General  Hospital  of  similar  size  and  scope  in  other jurisdictions.

Wider  quantitative  and  productivity  benefits  emerging  from  an  agreed Interventions  programme'  contextualised  to  the  Island.  This  has  been developed to help implement new ways of working and new clinical models set out in the Acute Service Strategy. This Strategy explicitly acknowledges that the success of the Future Hospital is dependent on how Hospital services work in conjunction with out of Hospital' services, primary care, and the voluntary and community sector across the whole of health and social care.

Stakeholder Engagement

The Stakeholder Engagement Strategy approved by the Project Board in September 2016 anticipated the following 5 project stages –

Site Selection

Investment Decision

Detailed Design Phase Construction and Commissioning Operational Phase.

The Strategy will deliver an Annual Engagement Plan to the Future Hospital Project Board in the quarter preceding the start of each phase. The plan will set out the engagement activities needed to ensure that, throughout the Project, each phase is delivered  effectively,  and  that  appropriate  forms  and  levels  of  engagement  are maintained to secure stakeholder input and feedback.

Change Management

Reporting to the  P.82/2012 Transition Steering Group, the Acute Service Strategy Implementation  Group  will  manage  the  clinical  and  wider  health  system  change required to support the functionality of the Future Hospital by providing –

• the oversight and implementation of Acute Service Transformation in Jersey, to ensure services are safe, sustainable, affordable, integrated, and delivered in partnership in accordance with P.82/2012;
• the oversight and implementation of re-designed services (with operational, workforce,  financial  and  clinical  governance  responsibilities)  supporting Clinical Directors and Operational Leads to realise the benefits set out in the Future Hospital OBC;
• guidance and advice through the existing General Hospital and wider Health and Social Services governance structures.

The Group will add value by identifying and developing links between P.82/2012 work- streams, presenting these opportunities to Clinical Directors and Divisional Leads, and helping to consider and clarify wider system risks to safe, sustainable and affordable acute service delivery in the years ahead.

The group will be led by the Hospital Managing Director, co-ordinated by a Programme Lead, and supported by a project support infrastructure required for an investment of the size described in the OBC.

Contingency Plans

The delivery of the Future Hospital and the management of the Interim Hospital in the period up to and during construction are both identified on the States of Jersey corporate risk register. Significant system wide impacts would be experienced if either of these programmes failed.

The key points of failure would be –

• significant delay to the opening of the Future Hospital; or
• failure of the current General Hospital during the design and construction period of the Future Hospital; or
• demand for services currently provided exceeding the capacity of the current General  Hospital  in  the  interim  period  before  the  opening  of  the  Future Hospital.

Should any of these risks materialise, business continuity actions would need to be undertaken, for example –

• more delivery of Hospital services off-Island
• increased waiting lists for elective surgery
• acceleration of the Future Hospital programme delivery
• provision of temporary accommodation for Hospital services.

Key Worker Accommodation

With regard to the provision of key worker accommodation lost on the existing site, discussions have been ongoing with Andium Homes Limited, recognising that provision of  accommodation  is  not  a  primary  function  of  the  Health  and  Social  Services Department, and that such matters should be managed by specialists.

In the short term, the property, The Limes', has been transferred to Andium and will provide an interim solution to the key worker accommodation requirements as a result of the need to vacate Westaway Court. Any necessary costs required before the next MTFP are now planned to be covered by the construction budget. These costs were not originally included, as they have emerged as part of the process of planning, as no other source of funding has been identified in this MTFP.

The annual cost of accessing Andium Homes' properties is yet to be decided, but for planning purposes, estimates of approximately £700,000 are being used and once costs are finalised, Health and Social Services will need to consider what growth bid might be required in the next Medium Term Financial Plan (MTFP) 2020 – 2023.

6. OBC Conclusion

There is a strong case for change in relation to the service and infrastructure of the existing Jersey General Hospital. P.82/2012 made it clear that substantial service re- design was needed if the Island was to be able to respond to the forecast demographic change. With respect to acute services, the opportunity to do this is limited within the existing infrastructure of the current General Hospital.

The most recent independent buildings' condition survey highlighted that much of the General Hospital is structurally deficient. It cannot be reconfigured to meet increasingly demanding modern standards of health care. Patient and staff experience is significantly less than it could and should be.

The States of Jersey commissioned an extensive review of the best location for a new General Hospital.  P.110/2016 determined the need for a new Hospital to be fully functioning by 2023. To achieve this it needed to be built in one phase. Part of the existing General Hospital site, augmented by acquisition of adjacent land, was the preferred site agreed by the States Assembly in December 2016.

Using U.K. H.M. Treasury guidance, this Report has considered 4 options for Future Hospital provision on the preferred site. The Options' appraisal analysis considered the costs and benefits of each of these options against strategic and operational criteria. Option 4, a new build Hospital and a new build support facility at Westaway Court, was the best performing option. It is therefore the OBC Preferred Scheme.

The Preferred Scheme offers benefits over Option 3 by ensuring flexibility of space, providing consistency of room types, reducing the risks associated with retaining the Pathology  Service  on  site  during  construction  works,  delivering  the  best  clinical adjacencies for the ambulatory care model and responding to legacy issues of retaining the Westaway Court tower block.

An analysis of the financial cost of delivering this Preferred Scheme has shown that the upper capital cost condition established in P.110/2016 for the new Hospital can be met.

The analysis shows that the revenue cost associated with delivering the Preferred Scheme are lower by a significant margin when compared to a Do Nothing option. This is in large part driven by the increased cost of off-Island care that would be needed in an Option 1 (Do Nothing) or Option 2 (Do the Minimum) scenarios, given the lack of capacity in the existing Hospital.

The delivery of the Future Hospital as a new build on part of the existing site and a new build support facility at Westaway Court is a significant and complex task for the States of Jersey and the Project Team.

The site constraints, acquisition of additional properties, associated enabling schemes for permanent and temporary relocation of services, the overall scale of investment, and the timeframe for delivery, all combine to highlight the need for strong internal project management,  a  highly  competent  delivery  construction  partner  and  appropriate contracting arrangements.

The combined cost and benefits outcomes indicate that the Preferred Scheme continues to offer the best value for money over the economic life of the Hospital. It delivers significantly greater benefits for relatively lower costs over time.

The project development to date demonstrates the strength of the internal client and consultant team, with the Outline Planning Application submitted in June 2017 based on RIBA Stage 1 design information.

The  delivery  plan  involves  working  with  local  construction  and  non-construction partners to deliver the enabling schemes and working with an off-Island contractor to deliver the main Hospital.

Throughout the design process, the use of Design Quality Indicators ("DQI") and Building Research Establishment Environmental Assessment Model ("BREEAM") standards will be rigorously adopted, reviewed, and updated to achieve a quality and sustainable design solution across the project.

Significant soft and formal market testing has been undertaken in ways consistent with States  of  Jersey  procurement  requirements.  The  market  response  to  the  Pre- Qualification Questionnaire process for the main Hospital have now been received and evaluated. The responses provide confidence that the project is attractive to contractors and the procurement process will deliver a sufficiently competitive process that will deliver good value for money for the States of Jersey and a strong delivery partner with the capability, expertise, and reliability to deliver the Future Hospital project on time and within budget.

The States of Jersey already has an established governance system to support the project management of major capital investments. However, the scale and complexity of the Future Hospital construction, combined with the transformation of care pathways, requires the strengthening of programme and project management arrangements.

Throughout the build and early delivery phase, a well-proven project management methodology  will  be  adopted  and  implemented  by  the  Project  and  Programme Management Offices ("PMO") for which costs have been allocated in the Project budget. The PMO will be integrated into a governance structure that ensures full transparency and accountability through the Future Hospital Project Board, Political Oversight Group, Council of Ministers and the States Assembly, with regular reporting and approval and other governance processes relating to the Project.

There will be a strong emphasis on continued engagement, with input from stakeholders in and outside the Hospital to ensure the design of the Future Hospital and new means of service delivery within it meet the full range of expectations of these stakeholders.

Consistent with best practice, a  comprehensive  benefits realisation plan has been developed to ensure timely and comprehensive tracking of benefits and evaluation of service change. This has been designed to provide a basis for accounting and reporting to Islanders the benefits resulting from this once-in-a-generation investment in their social, economic and health economy.

The Future Hospital provides an opportunity to crystallise the very best of Jersey in a high-quality and enduring safe, sustainable, and affordable Hospital. It allows the people of Jersey to embody in physical form a special place where special life events happen that is easily accessible to all. It is informed by a core purpose to always be there when Islanders or their families need the care that they cannot always provide for themselves. It is where the skills of Hospital staff can be best used to help Islanders whose illness or injury hinders what they wish to achieve in their lives to allow peaceful deaths or those of their loved ones.

A  Future  Hospital  should  reflect  the  essence  of  what  we  value  most  on  Jersey, representing our community values of caring for each other and caring for ourselves, where the care of patients and their families is at the heart of all we do. It should also indicate in material form evidence that these values are more than just words.

The Future Hospital will be the largest single capital investment in a generation. With this investment comes a responsibility to ensure it provides the best value for money it possibly can. This can only be achieved by providing Hospital and other healthcare services in different ways in the years to come. We must do this as public expectations rise as to what a Hospital can provide when the resources needed to meet these expectations will be increasingly constrained.

The Future Hospital will enable States Members to create a legacy that respects but does not revere the past, by repurposing the oldest part of the current General Hospital and restoring the public realm around the setting of the Granite Block. As importantly, it provides, for Jersey, a new building with a design quality reflecting the optimism with which the Island looks to the future.

The Funding Strategy

When the States approved P.82/2012, Members confirmed the requirement to bring forward detailed plans for a new Hospital.

In the Budget 2014, the States Assembly agreed that transfers from the Strategic Reserve Fund ("the Fund") may be used for the "planning and creation of new Hospital services in the Island".

In the Budgets for 2014 and 2015 the States granted £10.2 million and £22.7 million respectively from the Fund, so as to provide funding for these purposes.

At the time of the Budget 2014, the plan was to develop a dual-site facility combining new build and refurbishment at a then estimated cost of £297 million. The funding strategy was to fund this cost over the period of the development out of returns from the Strategic Reserve Fund, over and above those required to maintain the current value of the Fund's balance at December 2012.

When Senator A.K.F. Green was appointed as Minister for Health and Social Services, the  dual-site  option  was  revisited,  and  in  2016  the  States  Assembly  approved P.110/2016 – "Future Hospital: preferred site".

Given the latest estimate for this proposed development, £466 million, the funding strategy agreed in principle by the States in Budget 2014 was no longer appropriate. It is unlikely that there would be sufficient returns from the Strategic Reserve Fund whilst protecting the capital value over the construction period, therefore this option cannot be relied upon.

In 2016 a funding strategy for the New General Hospital was lodged which set the budget of £466 million and proposed the preferred funding mechanism; a public-rated sterling bond issue, supplemented by existing reserves, with the potential at a later date to use proceeds from the sale of strategic or fixed assets to strengthen reserves.

That proposition was amended by the Corporate Services Scrutiny Panel; its preferred funding mechanism was to pay for the construction from reserves and to replenish the balance of the reserves by means of annually inflated payments from general revenues.

The Council of Ministers agreed it was wise to withdraw the proposed funding strategy until the Outline Business Case ("OBC") for the Hospital was complete, and then to bring the 2 proposals together to the States Assembly for one decision.

A significant amount of work has been ongoing to inform the workforce assessments and plans, to develop a concept design, to develop the proposed procurement strategy and outline planning approach, to tender for a supply-chain construction partner and to commence  the  planning  of  relocation  works,  as  well  as  undertaking  extensive stakeholder and clinical engagement throughout. This work has provided more cost certainty on the construction costs, and the detail within the OBC is intended to provide Members with sufficient information in order to make the decision to invest.

In parallel to the OBC activity, a review of the funding strategy for the new Hospital has also been under way.

The advice the Minister for Treasury and Resources has received from expert advisers and from the Treasury Advisory Panel ("TAP"), suggests a preference for a higher level of borrowing than this funding strategy proposes. However, with States Members' views in mind, and recognising the importance of retaining flexibility for the future, the Minister proposes a lower level of borrowing.

The TAP was not asked to consider any wider issues when making its recommendation. It was asked to concentrate on a recommended funding solution for the Hospital and then on various technical variations on how to borrow, such as asset backed commercial paper and a bond ladder, none of which were deemed suitable for this project.

Cost estimation

A capital cost and cash-flow have been developed and are set out below.

Year Cash Flow  Total 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 TOTAL

£ £ £ £ £ £ £ £ £ £ £ £ £

Works Cost after location factor 197,256,678 0 0 0 2,717,730 42,784,043 68,806,644 61,444,717 21,503,543 0 0 0 0 197,256,678 Risk 9,712,839 0 0 0 133,820 2,106,669 3,388,011 3,025,513 1,058,826 0 0 0 0 9,712,839 Fees 35,627,519 2,315,789 11,578,944 10,821,859 6,234,816 4,676,112 0 0 0 0 0 0 0 35,627,519 Non-Works Costs  16,675,668 205,000 11,596,111 100,000 600,000 732,000 2,900,000 542,557 0 0 0 0 16,675,668 Equipment 18,650,035 0 0 0 0 0 0 18,650,035 0 0 0 0 0 18,650,035 Risk 54,486,364 0 0 0 750,693 11,817,836 19,005,815 16,972,299 5,939,722 0 0 0 0 54,486,364 Inflation 53,083,713 60,469 302,346 298,245 1,025,522 7,662,307 15,273,178 21,402,640 7,059,005 0 0 0 0 53,083,713

Main Project Costs 385,492,816 2,376,258 12,086,290 22,716,215 10,962,581 69,646,967 107,205,648 124,395,204 36,103,653 0 0 0 0 385,492,816

Relocation Costs  69,966,901 0 0 52,341,654 6,499,638 2,253,373 734,916 734,916 1,040,081 5,001,326 1,360,997 0 0 69,966,901 Risk  6,213,267 0 0 4,648,093 577,187 200,106 65,263 65,263 92,362 444,132 120,861 0 0 6,213,267 Inflation  4,189,642 862,295 1,351,498 366,201 72,833 1,330,446 206,369 4,189,642

TOTAL COST 465,862,626 2,376,258 12,086,290 80,568,256 19,390,905 72,466,648 108,005,826 125,195,382 37,308,929 6,775,905 1,688,227 0 0 465,862,626

This is still an estimate based on current information, and includes some level of contingency. This is appropriate given the stage of design development.

This budget will be managed in 2 parts. The optimism bias and contingency ("risk") elements will be managed by the Treasury, leaving the delivery team to manage the remaining estimated project costs, including an estimate for inflation. The contingency sums, if and when required, will be accessed through a process of challenge and agreement between the delivery team and the Treasury, as described in the Terms of Reference for the Hospital Construction Fund (see Appendix A). A Financial Direction will be issued to detail how this will work in practice.

Funding options

The scale of this project is unprecedented in Jersey. It is too costly to be funded from the regular annual funds available for the capital programme, so alternative options have to be considered, as they were for Andium's Social Housing programme, and as they were in deciding the previous funding strategy.

When the Budget 2014 was considered, the States was asked to agree to –

• £250 million to provide funding for Andium's Social Housing programme;
• the use of existing resources to progress the planning and creation of new Hospital services; and
• use internal borrowing through an infrastructure investment from the Currency Fund to help finance the Sewerage Treatment Works project.

Two of these funding solutions are in place, leaving the long-term Hospital funding outstanding.

At  a  very  basic  level,  there  are  2 broad  options  when  considering  such  funding requirements – use existing reserves or look to external options. The key considerations when assessing internal or external financing are –

• The scale of financing required – for example, the reserves able to afford £466 million are limited.
• Costs of the funding solution – it is assumed the new Hospital will not generate significant additional income, so the opportunity cost of using existing reserves and interest costs of external options need to be compared, including how to meet such costs.
• Repayment requirement – if external debt is used, a sinking-fund or other future funding solution will be required to repay the amount borrowed.
• Certainty of funds – whether the solution is external or internal funding, the sum of money will need to be ring-fenced to ensure the money is available when required.
• Debt to Gross Domestic Product ("GDP") – it is important that the Island can demonstrate the strength of its economy relative to other jurisdictions and its ability to repay debt. Debt to GDP is a widely recognised metric for investors who are assessing a country's ability to meet its liabilities and therefore its economic strength.
• Currency required – it is difficult to predict with certainty which currency will be needed to pay for building the new Hospital until a provider has been decided upon. As a funding strategy is required ahead of any contracts being in place, it is assumed at this stage that the majority of costs incurred will be in Sterling and that any hedging considerations will be made at a later date, as construction plans become clearer.

Option 1 – Using Existing Reserves

The current policy on the use of the Strategic Reserve Fund capital balance is restricted to exceptional circumstances caused by severe structural decline or major natural disaster, or specifically in relation to the Bank Depositors Compensation Scheme (limited to £100 million).

In the Budget 2014, the States Assembly approved an amendment to the Strategic Reserve Fund policy such that "the Fund may be used for the planning and creation of new Hospital services in the Island".

The funding strategy proposed here varies that existing decision and asks that the Fund may also be used for providing the financing and transaction costs of any borrowing for this project.

The States agreed as part of the 2015 Budget that the capital value of the Strategic Reserve should be maintained at the real terms value of the balance at the end of 2012, which  was £651 million. This  means  the  protected amount increases  annually by RPI(Y). The Budget 2015 report described how the envisaged cost of the new Hospital could be met from the Strategic Reserve Fund over the 10 years of development.

The 2016 – 2019 MTFP assumes returns for the Strategic Reserve Fund will generate, on average, 2% above RPI(Y). In 2016, the return was 13.6%, 11.7% over inflation. This is a possible source of part funding, however, the 2016 – 2019 MTFP already earmarks a proportion of the excess income for other purposes: £56.7 million in 2016, net £50.3 million in 2017, and a further £16 million in 2018. As a result of higher income tax receipts in 2016, the £16 million in 2018 is no longer proposed. A repayment of £20 million is currently planned in 2019. The remaining excess above the capital protected value at that point is estimated at £157 million, based upon a long-term average return of 2% above inflation.

The MTFP projections did not include withdrawals from the Fund for the construction of the Hospital, and further withdrawals are likely to reduce returns.

These simple projections serve only to review the high-level feasibility of funding the Hospital construction entirely through the excess returns of the Strategic Reserve Fund. Based on simple assumptions, the shortfall in funds can be seen in the graph below. The blue line shows the total value of the fund; the gold line shows the protected capital value target as it would be maintained in real terms.

With planned drawdowns and Hospital costs, there would not be sufficient excess returns by 2020. This would require significant contributions out of protected capital value. The Strategic Reserve Fund balance would not return to a level above its Capital value until 2041.

The Strategic Reserve Fund would be most affected in 2024; the deficit against the protected capital value of £868 million is estimated at £230 million.

Before deciding whether or not to use the Strategic Reserve Fund to fund the Hospital build, the opportunity cost and forgone investment returns needs to be considered.

Furthermore at present, borrowing is significantly cheaper than the historic returns on the Strategic Reserve Fund. It would be prudent in this situation to use debt rather than drawdown on reserves.

In these uncertain times, making a decision now to use the Strategic Reserve Fund solely to fund the Hospital construction would compromise the Government's flexibility.

Option 2 – External Financing

There are a number of options available to obtain external financing, including –

• Rated Public Sterling Bond
• Retail Bond
• Private Placement Bond
• Bond Ladder
• Asset Backed Commercial Paper
• Project Finance
• Bank Finance

Rated Public Sterling Bond

Rated public sterling bonds are priced with reference to benchmark "risk free" rates, for example U.K. Gilts. U.K. Gilts are bonds issued by the U.K. government and viewed as low-risk investments that carry as close as you can get to a watertight guarantee repayment. Benchmark rates are at historic lows, offering an opportunity to those wanting long-term fixed rated debt at record low coupon rates.

Investors' appetite for bonds will depend on a clear communication of the credit position, a well-structured marketing process, and an appropriately priced and sized offering. Advice shows that the public bond market continues to show appetite for high grade sovereign and sub-sovereign issuers, Jersey's credit rating of AA- would be an example of a high grade sovereign issuer.

Typical investors in public bonds are large sophisticated institutions. The issuance size of  £250 million  to  £275 million  provides  comfort  over  the  secondary  markets  to investors and is considered to be benchmark sized issuance. Issuances below the benchmark are likely to attract a small premium.

Bonds can be issued for a variety of periods (tenor) and open up the opportunity to borrow over long periods of time.

Bonds can be openly traded after issuance, resulting in changes to holders. Investors will want access to secondary markets liquidity through the bond's inclusion in one or more indexes. Bonds that are liquid and regularly traded tend to attract tighter pricing, as they provide greater opportunities for holders to sell the bonds, in the secondary market, if required. The existing £250 million Jersey bond is listed on The International Stock Exchange' (formally the Channel Islands Stock Exchange).

Bond issuances of smaller amounts can be achieved by "tapping" an existing bond on exactly the same terms and conditions. With the bond's coupon set already (at the point of original issue), the price investors pay on any tap issue, could be above or below par (100) based on prevailing interest rates. As such, investors could pay more than the face

value of the bond (as would be the case at the current time). So with a tap of £150 million you could raise, say £185 million, depending on Gilt yields and prevailing secondary credit spreads at the time of issue.

Furthermore, investors may have less appetite to participate in a tap issue due to maturity concentration risk, with tap issues often triggered by reverse enquiry demand from selected investors rather than primary issuance requirements by the borrower (where new  benchmark  issuance  is  invariably  undertaken).  A  tap  issue  would  be  sized appropriately based on the desired net proceeds required from any such process.

There is a cost of carry risk associated with holding the full value of any bond receipt until such time as the cash-flows are required. This can be managed by holding the receipts in safe assets and not looking to realise a significant return on the money held.

Retail Bond

Retail bonds target retail, or private, investors in contrast to Public bonds bought by institutions.  Such  a  bond  would  allow  Jersey  residents  to  invest  in  the  Hospital development whilst enjoying an attractive return. Issuance volumes have been steady over the last 2 years, but the majority of the new issuances have been for amounts of less than £100 million.

Such issuances are also predicted to be costlier than a Sterling public bond alternative and would not provide sufficient funding in one issuance.

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

Private placements have become more popular in recent years due to the lack of long- dated bank debt at competitive pricing. Private placements are typically sold directly to one  or  more  sophisticated  institutional  buyers,  such  as  U.S.  or  U.K.  insurance companies.  U.K.  institutions  contribute  a  significantly  smaller  liquidity  pool than U.S. domiciled equivalents, but a large number of U.K. companies are active in this market.

Private placements are not exchange traded, so they generally attract an illiquidity premium. However, they are not rated and are usually not subject to any ongoing public disclosures, but will have a direct ongoing relationship with the issuer. Financial covenants that require the issuer to remain in compliance with certain ratios can be a typical feature of a private placement, unlike rated public sterling bonds.

Only a limited number of sovereigns and sub-sovereigns have issued in the private placement market, which suggests a higher level of execution risk than the other options. Private placements also typically price wider than issuance in the rated public bond markets.

Bond ladder with all maturities issued at the outset

This type of debt raises the full amount at inception but sees the debt quantum raised across a number of different maturities. The bonds can have lower individual issuance costs and may not require bond-level credit ratings if issued privately. Total issuance costs may exceed the issuance costs of a (larger) single public benchmark bond issue.

The disadvantage is that the overall interest cost is less certain than the simpler public bond.

This is due to 2 factors –

• firstly, the credit spread over the underlying gilt rate will be higher for each individual bond due to the smaller issuance size;
• secondly, there is ongoing re-finance risk if the returns on the Strategic Reserve are insufficient to repay individual bonds in the ladder as they mature, as the alternative funding solution will be to re-issue another bond (at an unknown market rate).

In addition, there will be a smaller pool of potential investors (as these individual bonds are unlikely to be of a size to warrant inclusion in any indexes), and they may impose restrictions and covenants, thereby reducing further the flexibility of the States to manage its reserves (e.g. re-financing the maturing bonds if needed).

Asset backed commercial paper

Typically, this type of financing is used by corporations and banks to manage their short- term cash-flow requirements (liquidity).

This is not considered a viable alternative for long-dated projects such as this project because of the exposure to market liquidity risk, a risk over which the States of Jersey has no control. In addition, should interest rates rise, so too will the ongoing costs associated with servicing this type of debt.

To raise funding through this method, we have been advised that the full value of the Strategic Reserve would need to be collateralised at a level higher than for traditional assets due to the significant level of equity holdings. Advice received has suggested that the level of the Strategic Reserve would be insufficient to provide sufficient collateral to raise the level of debt required. Furthermore, with the full value of the Strategic Reserve committed, it would be no longer available for its primary purpose.

Project Finance

A secure finance facility could be tailored for the construction of the new General Hospital where funding profiles match the cash requirements of the project limiting, in theory, any negative cost of carry.

A typical project finance structure involves a special purpose vehicle ("SPV") being set up as the borrowing entity as well 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 in pure funding cost

terms. It can provide other qualitative benefits such as ongoing maintenance or facilities management, although that has not been tested in a Jersey environment.

To obtain an appropriate tenor (>25 years) for the project financing an associated bond issuance is likely to be required. With that in mind, the benefit of matching funding to cash-flows is no longer there and the negative cost of carry becomes an issue again. This adds cost of carrying risk as well as complexity in arrangement and execution.

Examples of such structures are, Private Finance Initiatives ("PFI") which were widely used by the U.K. government. They now have a Public-Private Partnerships ("PPP") programme with a more collaborative approach on risk and reward.

Another  financing  arrangement  that  has  been  considered  is  a  sale  and  buy  back arrangement. This is an off-balance sheet financing arrangement in which an owner sells an asset or property to an investor or lender on a cash-basis, and immediately buys it back on a long-term mortgage basis, often index-linked, to retain possession, title, and use. The highest risk with this method is whether it is cost-effective, and when applied to a bespoke building such as a Hospital, whether the cost is indicated to be higher than existing borrowing rates.

No construction project is risk-free, but risks can be managed or transferred. This funding  option could  be  considered  an  effective  way  of  removing  yourself from construction risk; however, by transferring the construction risk to another you will lose a significant amount of control in what is constructed and how. It is acknowledged, however that risks should be shared wherever possible, and doing so through contracts is the way to achieve the best outcome.

Bank Finance

Traditional bank finance is accessed by sovereign entities, but it is more common for those with weaker credit profiles which cannot therefore easily access capital markets. Typically the tenor is much shorter in bank financing compared to debt financing.

Bank financing is more flexible in terms of drawdowns and could be part of a funding solution, but is unlikely to be a standalone solution and carries other risks if the rate is not fixed.

Summary of external funding options

Recommended Funding Strategy

The Treasury and Resources Department engaged with external expert advisers to assist in evaluate the financing options.

After careful consideration of the options available, the recommended funding strategy for the construction of a new General Hospital with a budget of up to £466 million brings together a number of sources into what is known as a blended solution. This would include a further public-rated sterling bond issue, supplemented by existing reserves, with the potential at a later date to use proceeds from the sale of strategic or fixed assets to repay at least some of the withdrawals from reserves.

It is important that options are kept under review and that the right strategy is deployed at the right time. It is important to recognise that the recommended approach may change to allow flexibility. Circumstances are unlikely to change drastically, but it is always possible and it is essential that some flexibility is available to adjust accordingly.

The recommendation to choose external debt is largely driven by the record low levels of debt costs and the need to create certainty of that cost over a long time-period. A financial assessment has been carried out by the Treasury, working with our financial advisers EY, to consider what the cost of borrowing might be compared with a forecast, long-term return on existing reserves, and also taking into account the impacts of differing debt levels.

After consultation with the independent investment advisers for the States, an assumed return of RPI(Y) + 2% on the Strategic Reserve is reasonable over the long term.

Analysis was carried out to look at historical returns on the Strategic Reserve Fund. The average return on the Fund since 1986 is 8.1%. In 1988 the return was 19.9%, being the highest return achieved. In more recent times, 9.6 % was achieved in 2012, 14.1% in 2013 and 13.6% in 2016.

The Treasury's financial advisers have been helping to assess the estimated price of a fixed-rate  Sterling  Public  Bond,  which  is  estimated  at  2.64%  to  2.74%  as  at 24th October 2017.

So by borrowing at historically low rates of interest, the States can leave existing reserves  in  place,  under  investment,  generating  returns  in  excess  of  the  cost  of borrowing.

Borrowing  requires  servicing  (annual  coupon)  and  eventually  repayment.  In  a commercial  environment  such  an  investment  would  be  expected  to  make  returns sufficient to service and repay the debt. Whilst the public sector is not a "for profit" organization, often we would be looking ideally for improved income to service the debt, as in the case of the Affordable Housing Bond. This is not the case with the new Hospital.

The cost of debt is currently so low compared to the estimated income on the Strategic Reserve Fund, that it also allows for the cost of borrowing and the debt repayment to be funded from the excess returns on the Strategic Reserve, and to maintain the capital value, as shown in the following graph, assuming a bond of £275 million.

The model assumes an average long-term return of 5% per annum; over the short term there could be volatility around this long-term average.

This graph shows the capital value of the Fund, in blue, growing over time by inflation. The graph also shows how the excess returns, in red, are affected by the MTFP drawdowns in the early years, and clearly shows the risks to the capital value in the early years and the dip in 2057 when the principal sum, assumed at £275 million, would be repaid for a 40-year bond.

This pictorially demonstrates the strength in the Fund in the long term and reiterates the need to consider this funding strategy over the whole period of the borrowing.

In 2015 a new fiscal framework, R.107/2015, was established for the Medium Term Financial Plan 2016 – 2019 and beyond. This update demonstrated how the previous framework recommendations had been considered and how fiscal decisions needed to be made in the future both in the short and longer terms.

The framework recognises the limitations set in the Public Finances (Jersey) Law 2005 around  borrowing  and  lending,  and  commented  that  whilst  no  changes  were recommended at that stage, it did state that they should be kept under review to make sure they did not constrain fiscal policy decisions. As pointed out by the Fiscal Policy Panel (FPP) –

"a  number  of  existing  rules  and  legislation  such  as  that  covering  the Consolidated Fund and limits on what the States can borrow and lend, still run the risk of being counterproductive in certain circumstances. For example the conservative limits on what the States can borrow could stop, or delay, large capital projects".

The following table demonstrate the levels of borrowing available under Article 21(3) of the Public Finances (Jersey) Law 2005 –

This calculation is presented in accordance with advice received, and demonstrates that there is clear water for borrowing levels to be increased by the proposed funding strategy,  within  the  existing  financial  framework  restraints.  Borrowing  limits  are expected to be considered as part of a complete review of the Public Finances (Jersey) Law 2005 ahead of the next Medium Term Financial Plan.

The States of Jersey has low levels of debt compared with most governments across the world. The current ratio of debt to GDP is 6%. This has been used to demonstrate Jersey's  economic  position  of  strength  for  some  time  now.  If  further  debt  of £275 million was entered into, that would increase the ratio to 13%. By comparison, Australia's debt to GDP rate is 41% and the U.K. rate is 89%. So increasing our debt to this level still leaves Jersey in a very strong economic position.

There are ongoing costs of issuing a bond. These costs are to be met from the excess returns on the Strategic Reserve. These costs include not only the coupon, but also ongoing listing costs of the International Stock Exchange, ongoing and set-up costs, and other administrative costs.

The size of the new issuance needs to consider a number of things, including –

• appetite from investors
• the annual cost of the coupon
• any effect on Standard & Poor's rating for Jersey.

There is a demand for long-dated, high-credit sovereign debt by institutions that have similar characteristic liabilities. This means that there is likely to be sufficient interest in a 30- or 40-year public-rated bond which has a low coupon rate, as it still provides yield to investing institutions.

As well as the low cost of borrowing, low levels of interest put pressure on the possible return that the equivalent sum of money can achieve through investment. There is an argument that using existing reserves is the solution on the basis of low levels of opportunity cost; however, the £250 million – £275 million would need to return less than the coupon rate for that to be preferable. With the current strategy for the Strategic Reserve Fund, a higher percentage total return is expected than predicted coupon costs over that period of time.

With the cost of raising debt at such historically low levels, it is sensible to borrow the majority of the funding needed, leaving reserves to finance the cost of the debt and to maintain flexibility in such uncertain times.

The coupon cost for a bond of up to £275 million is likely to be an amount that can be financed over the long term without the need for further taxes or charges, although there is always the possibility that things may change in the medium or longer term. It is assumed that no further withdrawals being made for other purposes.

The Minister for Treasury and Resources' policy remains to strengthen the size of reserves by considering the sale of strategic assets or significant property.

The modelling work done by the Treasury and reviewed by advisers demonstrates that bond financing costs should be affordable from excess returns on the Strategic Reserve. If income tax receipts were to fall to a level where further withdrawals were necessary from the Strategic Reserve, there may not be sufficient excess returns in every year and there may be a need to use the capital value in the short term to fund the coupons. This use of the capital value of the Strategic Reserve would then be repaid when sufficient excesses are achieved.

Other ways of paying for the debt may be used such as a further savings target, use of part of the capital allocation, further asset sales or other revenue-raising measures as a last resort.

The model produced by the Treasury uses an investment return assumption of RPI(Y) + 2% and the RPI(Y) assumption used is 3% equating to a 5% long-term return.

Over the long term, this return is viewed as reasonable. We have looked back to 1986, when the Strategic Reserve was created, to assess whether we have achieved that target, and on average we have exceeded RPI (and RPI (Y) since 2000), when this adjusted figure was first measured) by 4%. However, the target was not met every year. In the years 2001 to 2003, the target was missed by very a small margin of less than 1%, but in 2008 and 2011 the target was not met by a larger margin. During that period the target was also exceeded by some large amounts; in 1988 the target was exceeded by 16.3%; in 1998 the target was exceeded by 9.7%; and in 2013 by 12%.

This analysis makes it clear that a longer-term view is necessary, and some capital may need to be used to smooth years during which under-performance results in returns not meeting the target assumed.

Advice from the Treasury's investment advisers, Aon Hewitt, has been sought in order to test our target and to further assess assumptions being used. Its analysis assumed that the current strategy would remain in place over the long term and had prudently assumed market  returns  from  assets.  It  believes  that  investment  returns  are  likely  to  be challenging in the short term, but have advised that over the longer term, i.e. the likely term of the bond, there is a higher likelihood that returns will be stronger and that our target figures seem reasonable.

This is also the view of the Treasury Advisory Panel.

From this data it should be assumed that the target return may not be met each and every year, and that it may be necessary to use the capital value in those years. This would then be repaid once returns are sufficient to so do. In the longer run, previous years' out- performance would provide some protection of the capital value.

The Hospital Construction Special Fund

The terms of reference for the Fund are attached as Appendix A to this report. In addition to the Terms of Reference, a Financial Direction will also be issued which will describe how funding will be drawn down from the Strategic Reserve to the Hospital Construction  Fund.  £23.6 million  is  already  in  the  Consolidated  Fund  and  is  the remaining balance from allocations in previous budgets. This money will be used first.

Once  the  money  from  the  Consolidated  Fund  and  the  bond  issuance  have  been exhausted, the residual funding will be drawn from the Strategic Reserve excess returns, to complete the project. If a strategic asset or property asset is sold in the meantime, proceeds may be used to strengthen the Strategic Reserve.

Funding Strategy Conclusion

After careful consideration of the options available, the recommended funding strategy for the construction of a new General Hospital with a budget of up to £466 million brings together a number of sources into what is known as a blended solution. This would include a further public-rated sterling bond issue, supplemented by existing reserves, with the potential at a later date to use proceeds from the sale of strategic or fixed assets to further strengthen reserves.

This allows the States to take advantage of the historically low cost of borrowing, whilst providing certainty over the cost of servicing that debt. The blended solution provides the protection to the Strategic Reserve, allowing it to continue to grow and provide sufficient returns to pay the debt interest.

This solution provides flexibility and allows the Strategic reserve to be available for alternative uses if necessary. For example, in times of crisis, national emergency or severe economic recession, funds will remain readily available without having to resort to borrowing (if at all possible) at an unfavourable time on unfavourable terms.

The proposition has been constructed in a way that allows a small level of flexibility in the final decision. It is essential that the Minister for Treasury and Resources has the authority and support of the Assembly to make the right decision at the right time, based upon professional advice.

The timing of any debt issuance needs to be carefully considered. The market conditions may well be different from now, when the process of issuing the bond has concluded and the deal is to be done. Decisions such as the length of the borrowing period (tenor) need to be made after the potential investors have been visited and their preferred tenor considered. The TAP will be providing advice on these matters.

The pricing at the time of execution will be key to decide at what level and duration the bond would be issued.

At this time, accepting that no solution is without risks, the expected way forward would be to issue debt of up to £275 million for 30 – 40 years, in the first half of 2018, and to hold those proceeds in the Strategic Reserve prior to being drawn down into a newly constituted Special Fund as set up to facilitate and manage the funding requirements around the new General Hospital construction, up to the proposed £466 million total expenditure limit for the Hospital.

The Minister for Treasury and Resources will report back to the Assembly in 2018, once any bond has been issued, to update Members on decisions made and the outcome of those decisions.

Collective responsibility under Standing Order 21(3A)

The Council of Ministers has a single policy position on this proposition, and as such, all Ministers, and the Assistant Minister for Treasury and Resources, are bound by the principle of collective responsibility to support the proposition, as outlined in the Code of Conduct and Practice for Ministers and Assistant Ministers (R.11/2015 refers).

Financial and manpower implications

Workforce plans for each of the key services that will operate within the Future Hospital inform the workforce proposals within the Outline Business Case. These forecast requirements reflect complementary workforce plans for services that operate outside the Hospital in Community and Social Services, in Family Nursing and Home Care, and in Primary Care. Successful delivery of the Acute Service Strategy within the Future Hospital is as much reliant on services provided outside the Hospital as it is on the improvements enabled within it. The forecast revenue costs incorporate the impact of proposed changes to the workforce within the Preferred Scheme, which are set out in detail in the Outline Business Case.

An indicative capital budget of up to £466 million is proposed to fund the cost of developing the Preferred Scheme. The cost estimate incorporates all main works to the main Hospital, together with all related relocation and enabling works and associated fees. At this stage of design development, this cost estimate for the main Hospital is based  on  area-based  assumptions  and  follows  the  Health  Premises  Cost  Guides ("HPCG") budgeting methodology.

The budget estimates for costs not falling within the main Hospital are based on the most appropriate cost estimates drawing on relevant external advice. The costs include works required to re-purpose the Granite Block, but not any other legacy buildings for non-clinical use.

Some key cost estimations are not included within the £466 million proposed budget, including  the  cost  implications  of  key  worker  accommodation  arrangements,  for example, which will require further assessment.

The Outline Business Case (Economic Case) sets out forecast revenue cost for the Preferred Scheme over the period to completion of the project and during the period of operation. These estimates will be used to inform requests to the next and future MTFP funding cycles.

There would be no manpower implications with the funding strategy, as all associated work, other than external advisory work, would be managed within existing resources.

The financial implications of the strategy can be divided into 2 distinct areas: the one- off costs of delivering the solution, and the ongoing costs associated with the solution.

One-off costs

There are a number of upfront fees associated with a public bond issuance.

There is a small range of advisers that the States of Jersey will need to appoint, in a competitive manner, in addition to our main Adviser.

The roles for which appointments will be made at the start of the issuance process include –

• Bookrunner(s) –  Responsibilities  are  numerous,  with  main  roles  including production of investor presentation, arranging roadshow logistics, marketing to potential investors, bookbuilding and documentation, including the Prospectus (which is the main Offering Document to potential investors).
• Legal  adviser:  Responsibilities  of  legal  advisers  include  the  drafting  of documentation. Documents that will require legal input include –

• the Prospectus, which will be signed off by the appropriate Listing Authority.
• the  Subscription  Agreement,  which  is  a  relatively  standard  legal agreement between the States of Jersey and the bookrunners, covering the terms on which the bond will be issued and the representations and warranties of all parties;
• the Trust Deed, which is a legal agreement with the Trustee, setting out the limit of empowerment to act for the bondholders as a group;
• the Agency Agreement, which will be the agreement between the States of Jersey and the Paying Agent; and

• the Auditors' Comfort Letter, which gives the underwriting banks comfort that the Prospectus is accurate, and is usually a standard form letter.

• Legal  advisers  will  be  required  for  both  the  States  of  Jersey  and  the bookrunner(s).
• Paying Agent: usually one of the bookrunners, who will be responsible for the disbursement of funds in connection with the bond, will act as Paying Agent. The paying agent will receive coupon payments from the States of Jersey, and pass on to the holders of the bonds.
• Trustee: again, usually one of the bookrunners will take the role of trustee. The trustee sees that bond interest payments are made as scheduled, and protects the interests of the bondholders if the issuer defaults. The trustee is responsible for the registration, transfer and payment of bonds.

Trustee legal adviser: Legal counsel will be required for the trustee.

The total cost for the previous bond issuance was £1.5 million. At this stage, a range of £1.25 million to £1.5 million is a preliminary estimate from our advisers and these costs will reflect the size of any bond.

Ongoing costs

In addition to the upfront costs there is a small number of fees which are ongoing for the life of the bond. These are a fee to the Trustee and Paying Agent and the International Stock Exchange Listing, which would incur annual fees of approximately £1,000 per debt security.

There will also be the financing costs of any debt issuance over the life of the bond. For planning  purposes  this  has  been  estimated,  assuming  a  £275 million  bond,  at £7.2 million per annum. This is planned to be paid from the excess returns from the Strategic Reserve.

The cost of any hedging arrangements is not included in the advised cost estimates. Advice of TAP is currently to hedge, but a strategy will be finalised once a decision of the Assembly has been made.

APPENDIX A

Special Fund Hospital Construction Fund

The Hospital Construction Fund is established as a "Special Fund" in accordance with Article 3(3)(a) of the Public Finances (Jersey) Law 2005 ("the Law") which enables the States, on a proposition lodged by the Minister for Treasury and Resources, to establish a "Special Fund" for specific purposes.

1. The purpose of the Hospital Construction Fund

1.1  The purpose of the Hospital Construction Fund ("the Fund") is:

1. to facilitate the construction and fitting-out and associated costs of the Preferred Scheme for the Jersey General Hospital Project (the Preferred Scheme) as defined in the Future Hospital Outline Business Case approved by the States; and
2. to  receive  the  following  funding  sources  to  secure  the  "Preferred Scheme" as defined in (a) above –

1. transfers from the Strategic Reserve Fund*;
2. transfers, including capital grants, from the Consolidated Fund;
3. returns generated from cash held in the Hospital Construction Fund prior to being spent on the "Preferred Scheme";
4. any other income deemed specific to the "Preferred Scheme" and approved by the Treasurer of the States.

2. The powers and limitations of the Fund

1. As a Special Fund, the purpose of "the Fund" can only be varied by the States on a proposition lodged by the Minister for Treasury and Resources.
2. Money held in "the Fund" will not form part of the annual income of the States nor the Consolidated Fund balance.
3. Only those costs, as approved by the States Assembly and associated with the "Preferred Scheme" can be met out of "the Fund".
4. The  Hospital  Construction  Fund  will  be  maintained  until  the  "Preferred Scheme" is complete. Upon the winding up of the Fund any balance remaining in it shall be transferred to the Strategic Reserve Fund*.
5. The operation of the Fund must be in line with the Public Finances (Jersey) Law 2005 and States financial directions as appropriate (including any that the Treasurer of the States, with the approval of the Minister for Treasury and Resources, may issue specifically for this Fund).

3. Those empowered to carry out actions on behalf of the Fund

1. The  Minister  for  Infrastructure  has  overall  political  responsibility  for  the delivery of the "Preferred Scheme"; this will include reporting to the States and answering  questions  at  a  political  level  on  all  aspects  relating  to  the construction,  fitting-out  and  associated  costs  of  the  new  facility,  and  for ensuring that the project progresses on time and within the approved maximum expenditure limit.
2. The  Minister  for  Treasury  and  Resources  has  political  responsibility  for ensuring the availability of funding for this project and for the investment of any cash held within the Hospital Construction Fund.

In order to maximise investment returns any sum borrowed will be paid into the Strategic Reserve Fund, will remain there, and only be released in line with specified  trigger  points  in  a  cash-flow  funding  statement  agreed  by  the Treasurer of the States.

3. The  Minister  for  Treasury  and  Resources  also  has  responsibility  for  the management of the "Risk Allocation" of the approved funding, which includes that required to fund "Optimism Bias and Contingencies" for the project. The Treasurer of the States will issue, with the approval of the Minister for Treasury and Resources, a Financial Direction on the process for the management and release of funds from the Risk Allocation.
4. The Minister for Treasury and Resources has responsibility under the Public Finances Law (Jersey) 2005 for appointing an Accounting Officer for the Fund.
5. The Accounting Officer is –

• personally accountable for the proper financial management of the Fund, which includes ensuring that payments from the Fund are progressed in line with States' approvals and that the Fund is administered in a prudent and economical manner;
• responsible for ensuring that proper control and assurance frameworks exist;
• responsible for ensuring that systems are in place to manage risk and all inflationary increases related to the project.

6. The Accounting Officer can delegate functions to others, but will remain personally accountable. In order to ensure that good governance and control of the project is achieved, any delegation must be documented in a Scheme of Delegation.
7. The Comptroller and Auditor General ("C&AG") has a duty under Article 11 of the Comptroller and Auditor General (Jersey) Law 2014 to provide the States with  independent  assurance  that  the  public  finances  of  Jersey  are  being regulated, controlled, supervised and accounted for in accordance with the Law. This duty extends to the Hospital Construction Fund.

4. Control of Expenditure from the Hospital Construction Fund

1. The Accounting Officer has responsibility for the Budget and expenditure relating to the main project (which excludes the "Risk Allocation").
2. The  Minister  for  Treasury  and  Resources  will  be  responsible  for  the authorisation and release of monies allocated in the "Risk Allocation". Once a request  for  funding  from  the  "Risk  Allocation"  has  been  approved,  any expenditure becomes the responsibility of the Accounting Officer.
3. Details of all approvals from the "Risk Allocation" will be subject to approval and will be reported to the Council of Ministers and States in line with Section 6.

5. Release  of  Funds  from  the  Strategic  Reserve  Fund  to  the  HospitalConstruction Fund

1. Funding, including the borrowing for the "Preferred Scheme", will be held and invested in the Strategic Reserve Fund and released to the Hospital Construction Fund on the following basis.
2. Funding related to the main contract – the Accounting Officer, as part of the contract acceptance process, will be required to prepare a cash-flow funding statement for the project which must be issued to the Treasurer of the States. Based on this information, the Accounting Officer and Treasurer will agree that once certain trigger points within the contract have been reached, specified financial transfers will be made from the Strategic Reserve Fund to the Hospital Construction Fund. The Accounting Officer will be responsible for ensuring that the Treasurer is kept fully informed of any issues that may affect these trigger points. The Treasurer will be responsible for ensuring that transfers are made.
3. Funding related to "Risk" – once a request from the "Risk Allocation" has been approved, funding will be released in line with the cash-flow funding statement submitted by the Accounting Officer.

6. Reporting arrangements

1. Six-monthly update reports will be presented, firstly to the Council of Ministers and then to the States, within 2 months of the relevant 6-month period end, on the progress of the construction, until its completion and thereafter until a final account position is reached for all elements of the project. These will include details  of  projected  costs  against  estimated  costs,  and  projected  costs  to completion, including detail of funding approved from the "Risk Allocation". The report will also detail transfers approved from the Strategic Reserve Fund to the Hospital Construction Fund.
2. Details of the Hospital Construction Fund will be included in the published States of Jersey Annual Financial Statement.

*These areas are subject to amendments to the Public Finances (Jersey) Law 2005 that will be brought forward to the States by the Minister for Treasury and Resources.

APPENDIX B

Jersey Future Hospital Project

Outline Business Case

ISSUE DATE 26/10/2017

CLIENT:  PROJECT NUMBER:  VERSION NUMBER:  ISSUING COMPANY: THE STATES OF JERSEY  BLMS0418 NEW HOSPITAL  OBC TEMPLATE CD  GLEEDS ADVISORY

PROJECT  FINAL ISSUE

1. Document Control

2

Contents

1. Document Control ........................................................................................................ 2
2. Introduction ................................................................................................................. 10

General .................................................................................................................... 10

3. The Strategic Case ..................................................................................................... 12

Part A – Strategic Context ....................................................................................... 12 The Island's Healthcare System - overview ............................................................ 12 Healthcare delivery .................................................................................................. 12 Health and wellbeing ............................................................................................... 13 General Health ........................................................................................................ 13 Morbidity and disability ............................................................................................ 14 Mental health ........................................................................................................... 14 Infant and child health ............................................................................................. 14 Lifestyle.................................................................................................................... 15 Population and demand........................................................................................... 15 Demographic change within overall population growth ........................................... 16 Impact of population change on hospital demand ................................................... 17 Use of Off-Island' services ...................................................................................... 18 The effect of Island conditions' ............................................................................... 19 Workforce ................................................................................................................ 20 The Existing Estate.................................................................................................. 21 Policy Overview and Investment Objectives ........................................................... 24 Health system transformation .................................................................................. 27 Project Requirement and Constraints ..................................................................... 31 Contextual Conclusions ........................................................................................... 32 Part B – The Case for Change ................................................................................ 34 Inability to function safely ........................................................................................ 34 Population change ................................................................................................... 36 Poor functional Suitability and space utilisation ...................................................... 38 Supporting the wider health transformation process ............................................... 40 Benefits Realisation and Interventions .................................................................... 42 Case for Change Conclusions ................................................................................. 43 Part C – Confirmed Investment Objectives and Constraints ................................... 45 Introduction .............................................................................................................. 45 Design Vision ........................................................................................................... 46

4. The Economic Case.................................................................................................... 48

Introduction .............................................................................................................. 48 Context and the identification of the Current Options ............................................. 48 Site identification and longlist testing ...................................................................... 49 Development options at the Preferred Site ............................................................. 54 Critical Success Factors .......................................................................................... 55 Long list of on-site development options ................................................................. 57Summary of the short-listed options ........................................................................ 58 Option 1 – Do Nothing ............................................................................................. 58 Option 2 – Do Minimum ........................................................................................... 63

Option 3 –  A new build' hospital on the current site and refurbishment of Westaway Court  68

Option 4 - A new build' hospital on the current site and a new build' at Westaway Court ........................................................................................................................ 74

Revenue Costs ....................................................................................................... 78 Economic Appraisal ................................................................................................. 79 Introduction .............................................................................................................. 79 Non-financial benefits appraisal .............................................................................. 80 Quantification and monetisation of benefits ............................................................ 86 Cash and non-cash releasing benefits estimation .................................................. 86 Distributional effects ................................................................................................ 87 Qualitative Risk Appraisal........................................................................................ 88 Value for Money Assessment .................................................................................. 91 Sensitivity analysis in relation to the benefits appraisal .......................................... 92 Conclusion ............................................................................................................. 95 The Preferred Option now referred to as The Preferred Scheme ..................... 95

5. The Commercial Case ................................................................................................ 96 Introduction .............................................................................................................. 96 Team Establishment ................................................................................................ 96 Site Assembly arrangements and overall plan ........................................................ 97

Project Sequencing ................................................................................................. 99 Enabling Schemes................................................................................................. 100 Acquisition Requirements ...................................................................................... 102 Main Hospital ......................................................................................................... 102 Procurement approach .......................................................................................... 104 Enabling Schemes................................................................................................. 105 Main Hospital ......................................................................................................... 105 Equipment Strategy ............................................................................................... 106 Design responsibility.............................................................................................. 107 Procurement Process ............................................................................................ 108 Selection Criteria ................................................................................................... 110 Pre Contract Services Agreement ......................................................................... 112 Commissioning ...................................................................................................... 112 Contract Type ........................................................................................................ 112 Proposed contract lengths ..................................................................................... 113 Proposed key contractual clauses ......................................................................... 114 Cost Management Strategy and Market Intelligence ............................................ 114 Location Factor ...................................................................................................... 115 Equipment Costs ................................................................................................... 115 Contingency ........................................................................................................... 115Inflation .................................................................................................................. 115 Management of Design and Cost Integration ........................................................ 115 Market Intelligence ................................................................................................ 116 Construction approach .......................................................................................... 116 Required services .................................................................................................. 119 Risk Transfer ......................................................................................................... 119

6. The Finance Case ..................................................................................................... 121

Introduction ............................................................................................................ 121 Capital funding sources and financing .................................................................. 125 Buildings and equipment lifecycle ......................................................................... 130 Additional off-site lease costs, backlog maintenance other costs ......................... 132 Affordability Assessment ....................................................................................... 133 Revenue affordability – Future Hospital operating costs....................................... 135 Analysis of Cost Movements ............................................................................. 136 Analysis of Cost Movements FY16 – FY24 ........................................................... 137 Analysis of Cost Movements FY16 – FY27 ....................................................... 137

Lifecycle affordability ............................................................................................. 139 Baseline Position: Option 1 ................................................................................... 139 Additional off-site lease costs ................................................................................ 142 Comparison of the Preferred Scheme and the Do Nothing' option ...................... 143 Comparison in MTFP Periods: Option 1 and the Preferred Scheme .................... 144 Interventions .......................................................................................................... 144 Workforce impacts ................................................................................................. 145 Population forecast and sensitivity analysis .......................................................... 147 Comparison of capital cost plan approved in P.110/2016 and OBC ..................... 149 Relocation Works .................................................................................................. 151 Contingency, Risk and Optimism Bias .................................................................. 152 Optimism Bias Governance ................................................................................... 152 Conclusions ........................................................................................................... 153

7. The Management Case ............................................................................................. 157 Introduction ............................................................................................................ 157 Project Management Arrangements...................................................................... 158 Project and Programme Management Office (PMO) ............................................ 158 Project Reporting Structure ................................................................................... 159 Project Governance Arrangements ....................................................................... 159 Key Roles and Responsibilities ............................................................................. 161 The Senior Responsible Officers (SRO) ............................................................... 161 The Project Directors ............................................................................................. 162 The Clinical Advisors ............................................................................................. 162 Programme Leads ................................................................................................. 162 Core Team ............................................................................................................. 163 User Groups .......................................................................................................... 164

Knowledge transfer................................................................................................ 165 Summary Project Plan ........................................................................................... 165 Contract Management Plan ................................................................................... 166 Use of special advisers.......................................................................................... 166 Arrangements for benefits realisation.................................................................... 167 Outline arrangements for risk management .......................................................... 169 Delivering the Acute Service Strategy operational change ................................... 173 Acute Service Strategy Implementation Group ..................................................... 174 Outline arrangements for Post Project Evaluation ................................................ 176 Contingency plans ................................................................................................. 177

8. List of Appendices.................................................................................................... 179
9. Glossary of Terms .................................................................................................... 181

Figures

Figure 1: Corporate Director Structure 2017  13 Figure 2: Population Growth Data (Source: States of Jersey Statistics Unit)  15 Figure 3: Population Growth data. Source: States of Jersey Statistics Unit  16 Figure 4: Growth charts  17 Figure 5: Demand and Capacity Forecast 2016-2065 at +700 net inward migration  17 Figure 6: Six-Facet Survey. Areas of review  22 Figure 7: Extract from the 2015 Six Facet Survey  23 Figure 8: List of Policies reviewed  25 Figure 9: Sun Ray Diagram  28 Figure 10: Confirmed project approval requirements and constraints  32 Figure 11: Six Facet Building Condition Survey  36 Figure 12: Demand and Capacity Forecast 2016-2065 at +700 net inward migration  37 Figure 13: Peer Benchmark hospitals  37 Figure 14: OBC Project Objectives  46 Figure 15: Critical Success Factors  56 Figure 16: Existing Jersey General Hospital Location and Context  58 Figure 17: Demand and Capacity Forecast 2016-2065 at +700 net inward migration  60 Figure 18: Option 1 Capital Costs  61 Figure 19: Option 1 Revenue Costs  62 Figure 20: Existing Jersey General Hospital Location and Context  63 Figure 21: Demand and Capacity Forecast 2016-2065 at +700 net inward migration  64 Figure 22: Option 2 Capital Costs  66 Figure 23: Option 2 Revenue Costs  67 Figure 24: Jersey Future Hospital Location and Context  68 Figure 25: Demand and Capacity Forecast 2016-2065 at +700 net inward migration  70 Figure 26: Option 3 Capital Costs  72 Figure 27: Option 3 Revenue Costs  73 Figure 28: Jersey Future Hospital Location and Context  74 Figure 29: Demand and Capacity Forecast 2016-2065 at +700 net inward migration  76 Figure 30: Option 4 Capital Costs  78 Figure 31: Option 4 Revenue Costs  79 Figure 32: Investment Objectives  81 Figure 33: Weighted Benefit Criteria  83 Figure 34: Benefit Appraisal Scoring and Ranking  84 Figure 35: Detailed Benefit Appraisal Scoring and Ranking  85 Figure 36: Risk Appraisal Scoring and Ranking  88 Figure 37: Risk Appraisal Detailed Scoring  89 Figure 38: Option NPVs  91 Figure 39: Options NPVs and Weighted Benefits  92 Figure 40: Option Sensitivity Outcomes  93

Figure 41: Outcomes – Single and Combined Parameters  94 Figure 42: Overall Site Assembly Plan for the Hospital  98 Figure 43: Site Footprint  99 Figure 44: Summary Delivery Programme  99 Figure 45: Enabling Schemes Start and Completion Dates  101 Figure 46: RIBA Stage 2 Outline Programme  103 Figure 47: Timetable for RIBA Stage Development of Main Hospital  104 Figure 48: Procurement Process  109 Figure 49: ITT Timetable  109 Figure 50: PQQ Evaluation Criteria  110 Figure 51: ITT Selection Criteria  111 Figure 52: ITT Scoring Ratios  111 Figure 53: Noise and Vibration Impact Assessment and Mitigation  118 Figure 54: Risk Transfer Matrix  120 Figure 55: Preferred Scheme Capital Cost  125 Figure 56: Funding Sources and Drawdown Profile  126 Figure 57: Gross and Net Project Financing Charges  126 Figure 58: Project Gross and Net Capital Expenditure  127 Figure 59: Buildings and Equipment Lifecycle Costs  129 Figure 60: Clinical Services  129 Figure 61: Hard and Soft FM  129 Figure 62: Off-Site Lease Costs and Other Project Costs  132 Figure 63: Capital Expenditure Funding Drawdown  134 Figure 64: Revenue Cost Summary  136 Figure 65: Revenue Changes between 2-16 and 2024  137 Figure 66: Revenue Cost Changes between 2016 and 2027  138 Figure 67: Option 1 Buildings and Equipment Lifecycle Costs  140 Figure 68: Option 1 Clinical Costs (including off-Island healthcare costs)  141 Figure 69: Option 1 Hard and Soft FM Costs  141 Figure 70: Option 1 Off-Site Lease Costs and Other Project Costs  142 Figure 71: Option 4 Capital and Revenue Costs  143 Figure 72: Option 1 Capital and Revenue Costs  143 Figure 73: Option 1 and 4 Total Cost Comparison  144 Figure 74: Workforce Requirements Forecast by Grade of Staff  145 Figure 75: Workforce Change Analysis 2016-2065  146 Figure 76: Workforce Change Analysis 2016-2065 with Interventions Excluded  147 Figure 77: Demand and Capacity Forecast 2016-2065 at +700 net inward migration  148 Figure 78: Population Sensitivity Testing – Capacity Analysis  148 Figure 79: Population Sensitivity Testing – Workforce Impacts  149 Figure 80: Comparison of Capital Cost Plan Approved in P.110/2016 and OBC – Main Hospital  151 Figure 81: Comparison of Capital Cost Plan Approved in P.110/2016 and OBC – Relocation Works 151 Figure 82: Capital Cost Plan Main Hospital and Relocation Works  152

Figure 83: Capital and Revenue Costs  156 Figure 84: PMO Arrangements  159 Figure 85: Future Hospital Governance Arrangement  160 Figure 86: Project Interface Arrangements with POG  160 Figure 87: Senior Responsible Owner Arrangements  161 Figure 88: Project Governance  164 Figure 89: Programme Miles tone Schedule  166 Figure 90: Special Advisors  167 Figure 91: Likelihood Score Range and Boundaries  169 Figure 92: Impact Score Range and Boundaries  170 Figure 93: Management and Mitigation Effectiveness Score Range and Boundaries  170 Figure 94: Key Risk Extract from Risk Register  173

2. Introduction

General

The need to replace Jersey General Hospital remains a pressing strategic priority for the States

of Jersey and a key objective for the Health and Social Services Department.

This was articulated clearly within the States Report and Proposition P.82/2012: "Health and

Social Services - A New Way Forward" and which formed the basis of the "Jersey General Hospital - Strategic Outline Case" received and approved by States of Jersey in 2013.

This Outline Business Case (OBC) sets out the appraisal work that has subsequently been

undertaken since to test the options available to the Health and Social Services Department in meeting the challenge of implementing the transformational expectations of P.82/2012.

It continues to follow the format of the UK Treasury Five Case model (2013) with appropriate

adjustment where needed to reflect jurisdictional differences between the UK and the States of Jersey. It comprises the following sections:

The Strategic  Delivered in three parts (A-C) this sets out the overall context for the Case  project and updates the  position established within the Strategic

Outline Case (SOC) to reflect further project development and to ensure that the project continues to deliver against the Hospitals business needs. This section makes the Case for Change and sets out the key issues to be addressed by the project;

The Economic  Sets out the process followed in economically evaluating the agreed Case  Options and confirms the Option that delivers the greatest value for money in the way that it addresses the project investment Objectives;

The Commercial  Sets out the nature of the delivery process and confirms the specific Case  contractual and procurement arrangements to be  put in place to

deliver the Preferred Option. From the Commercial Case onwards the Preferred Option will be is referred the Preferred Scheme;

The Finance Case  Sets out the financial position of the Preferred Scheme relative to the

Project Constraints and the current hospitals revenue profile;

The Management  Details how the delivery of the Preferred Scheme will be managed Case  and sets out specific project control arrangements for the required

Enabling  Works,  transition  and  for  hospital  management  during construction

The Strategic Case sets out the strategic context and the case for change for the project.

In doing so it acknowledges the approval of the Strategic Outline Case (SOC) in 2013 and reflects

on its conclusions updating these where necessary to reflect emerging information including:

• Any changes in strategic direction emerging since endorsement of Health and Social Services Proposition P.82/2012: Health and Social Services - A New Way Forward;
• The Acute Service Strategy and work to redefine patient care pathways emerging from it;
• Continued  work  on  services  integration  particularly  in  developing  seamless  service planning across the acute hospital and out of hospital care;
• Updated population modelling to provide a better understanding of gross future population and forecast changes in age group demographics;
• Updated hospital operational policies developed to embrace future clinical change and emerging from the hospital engagement within the design process;
• Completion of additional site appraisals that concluded in States Assembly endorsement of the existing hospital site as the preferred site for any Future Hospital;
• A review of capital delivery costs to ensure that pricing reflects contemporary information on hospital design and construction costs;
• A stakeholder review of the benefits of each Option in arriving at a Preferred Option; and
• Planning officer engagement and the formal submission of an Outline Planning application for the project.

The Preferred Option established through this process proposes to construct the Future Hospital

adjacent to the existing hospital on a part of the hospital site cleared for this purpose and additional land acquired on Kensington Place.

The Preferred Option also proposes the redevelopment of Westaway Court to support the efficient

operation of the hospitals ambulatory care facilities and to provide a pathology services, linked to the hospital via vacuum tube, to mitigate risks of construction adjacent to vibration sensitive equipment in the existing pathology department.

Together, these facilities provide a General Hospital that is fit for purpose, planned with the

medium / long term in mind and, when combined with the residual site has the necessary resilience to manage future change in demand and expectation.

3. The Strategic Case

Part A – Strategic Context

This section sets out the high-level social, technological, and economic factors that collectively

influence the project. Collectively they provide a unique context for the project, its objectives, and the way it would need to be delivered.

The Island's Healthcare System - overview

In broad terms, the Island's healthcare system reflects that of the UK. Primary care is delivered

though a range of community based services and a network General Practitioners (GP's) with acute secondary care being delivered through the Island's only General Hospital located in St Helier.

Patients with more complex clinical needs, beyond those that can be dealt with at the General

Hospital, are provided for at off-Island locations, usually being the UK NHS. These arrangements are managed by the General Hospital as part of its care for each patient.

The Island has an active private healthcare sector operating both within the hospital and at other

locations on the Island. This reflects a significant interest in private provision with many Islanders understood to carry private healthcare insurance.

Contrary to the UK, GP services are not free at the point of delivery and this potentially contributes

to increased hospital attendance for emergency treatment or for follow up appointments.

Healthcare delivery

While the Health and Social Services Department is the principal provider of health care on Jersey

it does so in the context of a wider primary care system provided by independent GPs, dentists, pharmacists,  and  optometrists,  a  comprehensive  network  of  voluntary  and  community organisations and independent sector providers of health and social care.

Jersey General Hospital and the wider Health and Social Services Department of which it forms

a part are a significant employer on the Island. The Department comprises a broad range of key functions covering the delivery and governance expected within any modern, comprehensive General Hospital.

Services are structured to operate through 6 key groups as indicated overleaf:

Figure 1: Corporate Director Structure 2017

The hospital is a significant employer on the Island with a currently established workforce of some

1,900 Full Time Equivalent staff (FTE) and a combined hospital and ambulance service budget of £126m per annum.

Health and wellbeing General Health

 In 2015, 80% of respondents rated their health to be good' or very good'. Life expectancy at birth

between 2013 and 2015 was 81.1 years for men and 85.3 years for women is similar to the other Channel Islands and is higher than England and Wales.

 For life expectancy at age 65, women can expect that on average to live an additional 23 years if

they have reached 65 and men 20 years.

 Jersey ranks in the top 10% of countries in the world for life expectancy and 85% of Islanders rate

their health as good or better.

Morbidity and disability

 On average, there are 977 malignant cancers diagnosed each year in Jersey (2010-2014). Non-

melanoma skin cancer (NMSC) accounts for around 39% of the annual mean count, with the three most commonly registered cancers after NMSC being prostate, breast and lung cancer. The age- standardised  rate for  head  and  neck  cancer, hepatobiliary  cancer,  lung  cancer,  malignant melanoma, prostate cancer and paediatric cancers in Jersey was higher than in the South West of England and England as a whole. However, death rates are largely similar to those in England.

 It is estimated approximately 13% of the population suffer from hypertension compared to 20% in

the UK. Similarly, obesity levels on Jersey at 8% are lower than the estimated 20% of UK population.

 20% of Jersey residents reported having a longstanding illness, disability, or infirmity that lasted

at least 12 months. This proportion varied significantly between age groups. 49% of individuals above 65 years reported a longstanding issue, which fell to just 7% for individuals aged 35-44 years.

Mental health

 The Short Warwick Edinburgh Mental Wellbeing Scale (WEMWBS) was included in the Jersey

Annual Social Survey in 2013. A score of 7 represents poor mental health and a score of 35 represents the most mentally healthy a person could feel. The average mean score for Jersey in 2013  was  26,  representing  generally  good  mental  health.  In  the  2015,  Health  and  Life Opportunities Survey respondents were asked questions about their satisfaction towards different aspects of their life. 6% responded they were dissatisfied with their life and 35% felt anxious. Between 2013 and 2015 there were approximately 450 discharges from hospital coded as self- harm, comprising around 380 individuals. 57% of these admissions were female, and 33% were under 20 years old.

Infant and child health

 In 2015, the crude birth rate was 10.0 live births per 1000 population, which is a decline from

previous years. The stillbirth rate in Jersey has also decreased over time to a rate of 2.1/1000 births. Between 2013 and 2015, the infant mortality rate was 1.3 per 1000 births, lower than the average  rate  for  England  and  across  the  28  EU  countries.  From  2013-2015  there  were approximately 10 deaths of residents aged 1-17 years. In Jersey, an average of approximately 4000 children under five attended Emergency Department (ED) each year.

 In the Picture of Health Jersey 2014' survey, 52% of respondents aged 12-13 years old and 20%

aged 14-15 had never drank alcohol. Jersey has a rate of 20 per 100,000 population aged under 18 annually admitted to hospital with an alcohol-specific condition. Between 2013 and 2015, there were approximately 400 hospital admissions of 15-23-year olds with a diagnosis related to substance misuse.

 In the Picture of Health Jersey 2015' survey, over 90% of respondents aged 10-13 years and

65% aged 14-15 had never smoked. The survey found that one in ten young people were exposed to second hand smoke in their home. Less than 1% of respondents under 14 years had taken drugs.

 Between 2013 and 2015, 22% of children aged 4-5 were overweight or obese. This rose to 32%

for children between 10 and 11 years old. Approximately 22% of children reported being physically active for an hour a day in a 2014 survey. This was higher in males (27%) than females (16%).

Lifestyle

 In 2015, 12% of adults smoked daily, compared with 19% in 2005. 10% of respondents to the

Jersey Annual Social Survey in 2014 said they never drank alcohol. 45% of 16 to 34-year-old drinkers responded that they drink five or more units when they usually drank; exceeding recommended daily limits. One in five crimes reported between 2013 and 2014 had alcohol involvement and in 2012, almost 500 incidents of domestic violence involved alcohol.

 The population has relatively low levels of ethnic diversity. 46.4% of individuals identify as White

Jersey' and 32.7% identify as White British'. 8.2% of residents were born in Portugal/Madeira. 3.3% of residents are Polish whilst 7.1% of residents are Irish, French and Other White compared with 19% in 2005 (2013 - UK 19%)

Population and demand

 Published data indicates that the Islands population has grown steadily since 2006 now standing

at 104,200. A copy of the full Jersey population projections (2016) can be found in Appendix 3.

Figure 2: Population Growth Data (Source: States of Jersey Statistics Unit)

 Net inward migration is a key contributor to this growth and is expected to continue to have an

impact in future years.

 As inward migration is sensitive to a range of on and off-Island factors, several potential future

population growth scenarios have been published by the States of Jersey Statistics Unit. These are set out below.

Figure 3: Population Growth data. Source: States of Jersey Statistics Unit

 This indicates that, under a net inward migration scenario of +1000 per annum, the hospital will

need to meet the needs of 115,700 inhabitants by 2025 and 128,800 inhabitants by 2035.

 Given these possibilities, the Chief Minister's Office advised that a +700 was the most appropriate

central scenario to use in developing forecasts of future demand, as it was consistent with the Social Security Department's planning assumptions. As future population numbers cannot be predicted  with  certainty  this  business  case  additionally  reviews  the  sensitivity  of  demand assumptions and cost models for population growth of +300, +1000, and +1,500 net inward migration scenarios. These are included as appropriate in the Economic and Finance Cases. As set out below the make-up of the population in terms of age is a major determinant of need for hospital services and the increased demand driven by an aging population is largely unaffected by changes in the scale of migration.

Demographic change within overall population growth

 Alongside the general population growth noted above, material changes have, and are forecast

to continue to occur within the age distribution of the resident population.

 It is recognised that the older the individual the greater their healthcare requirements tend to be

and older patients require extended lengths of stay in hospital compared to patients under 65yrs of age.