The £ 400,000,000 Question

New Hospital Funding – The Options

Probably the most important States Assembly debate in 2017

This note has been prepared following my appearance on BBC Radio Jersey on Thursday, 13th April, 2017 when they asked me to come into the studio to discuss hospital funding. The Jersey Action Group requested that I put my thoughts on paper, albeit I am not a Member of JAG. As a former Health Minister, former Chairman of the Public Accounts Committee, an Investment Manager with 38 years experience, and the owner of an Investment Management Business I am probably better qualified to review the funding options than any of the expensive Treasury advisors. Futhermore I am a Jerseyman and well placed to understand the unique problems of a small island jurisdiction. I have included a note on the current state of the finances of Bermuda at the end of the piece. This is a very real warning about the legacy we may leave future generations and the dangers of debt.



The funding required for the new Hospital is approx £400 million and the anticipated interest rate is between 2.6% and 3%.

 There are, in fact, three options available in respect of the funding of the new hospital. These are:


  1. The Treasury Option
  2. The Scrutiny Option
  3. The Sensible Option


  1. The Treasury Option

Interest rates are at historically low levels and we have enjoyed a long bull market in equities. The bull market in U.S. stocks was eight years old on Thursday, March 9 – the second longest bull market in history. The current bull market, defined by prices that continue rising without being interrupted by the 20% decline that would signify a bear market, began for the S&P 500 in the depths of the recession in 2009. Since then, the benchmark index has gained around 250%, with just four official corrections—defined as a decline of 10% or more.

The strategic reserve has benefitted from the strong performance of investment markets. Following criticism of its conservative, largely cash,  investment mandate whilst I was Chairman of the Public Accounts Committee (2008-2011) the investment of our reserves was re-organised under the guidance of Senator Philip Ozouf (credit where credit due!).  Hence the impressive  returns achieved in recent years which is to the benefit of all Islanders.

 The assumption of the Treasury paid consultants asked to examine the hospital funding issue is that, based on previous performance, the returns on the strategic return will exceed the cost of the debt and the taxpayer will be better off. Fairly straightforward you would think.

 But what of the risk? And, as everyone knows, past performance is not a guarantee of future performance.

I wonder how many readers of this article remember the Endowment Mortgage scandal and the huge levels of negative equity that resulted. At one time, mid 1980’s to the 1990s, endowment policies used to be by far the most popular mortgage repayment vehicle.  Their attraction was that the monthly mortgage cost was little or no higher but there was a realistic prospect of a large ‘bonus’ over and above what was needed to pay-off the mortgage at the end of its term. In other words don’t pay off your debt – put it in the stock market because historic returns will leave you with a large bonus at the end. Sound familiar?

Changing economic conditions and a stock market crash changed this equation substantially against the borrower.  Many endowments policies matured well below their target value leaving homeowners with hard decisions to make about what to do. You could argue, quite legitimately,  the £400 million we are borrowing is being used to play the stock market – safe in the knowledge that if it goes wrong it is our children and grand-children who will have to clear up our mess.

Treasury may be right, but in truth they don’t know what will happen in respect of investment returns, so should they gamble with our money?

  1. The Scrutiny Option

There seems little point in re-writing scrutiny’s report so I’ll copy/paste from it:

The Panel’s principal concerns relate to other scenarios considered by the Treasury Department. These are scenarios which consider what happens when there is a permanent change in certain circumstances. The Panel has seen evidence that should investment returns fall by as little as 1.5% from those assumed by the TreasuryDepartment, there will be a significant impact on outcomes. This is particularly the case if another event was to occur at the same time(for example a cost over run on the project). This evidence further suggests that a structural fall in overall States revenues of as little as 3.5% would result in very little remaining of the Strategic Reserve. In the event that there was a structural fall in revenue of between 4% and 5% (approximately) this would wipe out the Strategic Reserve within 25years, and would create a deficit of £1,356,220,000 (£1.356 billion) within 40 years Given that a favourable outcome (from issuing a bond) could be reversed by a relatively small permanent changes in income forecasts or returns on investment, the Panel therefore considers that an alternative should be available to States Members for debate on 18th April 2017.


The choice being presented is therefore to borrow £400,000,000 externally from the markets; or to use our own funds. This avoids having to repay £400,000,000 of capital AND over £400,000,000 in interest over the period, but requires a commitment to a small annual payment in order to top up the capital balance. The Panel considers this to be a more far-sighted and prudent strategy, which acknowledges the inherent dangers of borrowing large sums of money, exacerbated by the uncertain economic climate in which we find ourselves. We therefore offer this amendment to Members, to give them a valid option to funding the future hospital.


  1. The Sensible Option

When I moved house in 2005, and re-arranged our mortgage I felt that interest rates would move lower but, aware no one can see into the future, decided to fix half the mortgage, and take out a base rate tracker on the other half. In that way if interest rates went up I would have the protection of the fixed element, and if interest rates moved lower I would benefit from lower interest rates on the base rate tracker. On hindsight the base rate tracker only would have been the best option but I was comfortable with my choice – especially as previously I had been tied 100% to a fixed rate mortgage.

This, in my opinion, is the approach we should take to funding the hospital – £200 million from the strategic reserve / £200 million borrowing.

There are a number of advantages of this approach:


  1. Funds will be “as required” during the long build phase (as invoiced). With a £400 million bond a substantial amount would have to be held on cash deposit, at a significantly lower interest rate than we are paying on the bond, for a considerable period. It cannot be invested for the long term as it is short term money.
  2. We won’t have to “max our credit card”. Issuing a bond for £400 million will take us right up to our credit limit (which is why Government had to admit that Long Term Care is a tax). As a Government we cannot have borrowings above our total annual tax take. Surely it makes sense to leave an emergency borrowing buffer rather than borrow to the limit – albeit we could always change our finance law to allow more borrowing and watch our credit rating go through the floor, and borrowing costs go through the roof. Always arrange your credit facilities when the sun is shining.
  3. If stock markets continue to perform as the London experts expect we have only reduced the strategic reserve by £200 million – so it is still substantial and we benefit accordingly from the investment returns.
  4. If investment returns are much lower than the London experts suggest then at least our ‘endowment trap’ is only limited to £200 million. We don’t end up in a hole like so many endowment policy holders – albeit most got funds back by claiming “mis-selling”. Perhaps we could claim from the current Council of Ministers? J
  5. Scrutiny talks of rebuilding the strategic reserve – the cost of this will be halved – putting less strain on taxpayers. However a strategic reserve that is never utilised is as useful as a chocolate teapot.
  6. Interest costs will be halved to £6 million per annum approx from £12 million.


Sadly with collective responsibility the London Advisers will probably sell us a £400 bond we don’t need and they will pick up their substantial fees as a result. It was London Advisors that said not to sell the Andium Homes bond to local investors. The £250 million bond issued to pay for housing had an interest rate at 3.75% which Treasury’s experts said at the time was extremely attractive. Those bonds now have a fixed funding level 1% above what could be achieved today – and the bonds trade at a 32% capital profit for the institutions ( at the time of issue we suggested selling to locals who would have locked in a 3.75% interest rate). 1% interest on a £250 million bond over 40 years is substantial. Local advisers did say at the time that interest rates may move lower, London advisers disagreed.

My preference would be Option 3, the least attractive option is Option 1.


Ben Shenton Chartered FCSI



Background Notes – Other Small Island Jurisdictions – Lessons to be learned

Daily Telegraph – 2009

Bankrupt Cayman Islands to get £38m bail-out

The offshore centre of choice for the world’s hedge funds has admitted it may have to begin a new life – as a tax haven with taxes.

After lengthy wrangling, the British overseas territory on Wednesday confirmed that it has finally secured permission from the UK to obtain a CI$50m (£38m) bail-out loan to plug a 35pc-40pc collapse in revenue this year.

The island’s government has also signalled that it is ready to cave into UK conditions on slashing government expenditure
and an independent report on reform of its tax system that could see it start to impose direct levies to obtain further loans worth CI$229m.

Richard Parchment, an adviser to the government in George Town, said a letter would be sent to Britain with a formal agreement this week. Its severe shortage of cash meant it was days away from being unable to pay its civil service.

The Cayman Islands authorities claim that the UK has backtracked on stricter original proposals that insisted on direct taxes.

“There will be no community enhancement fee now, no income tax now, no property tax now, no death tax now,” said William McKeeva Bush, leader of government business, in a live television address. But he added that this could change, suggesting the islands have already begun to consider new ways of raising tax revenue.

Bermuda Royal Gazette – 2016

Budget 2016: scaling a dangerous debt mountain

Bob Richards yesterday spelt out the danger to the country of failing to tackle the Government’s debt mountain, while announcing an annual budget that will add to it.

The finance minister said the debt burden “undermines our ability to support the needs of the Bermudian people”, as he revealed that debt-servicing costs alone in the year ahead would total more than $187 million — not far short of the total spent on health, seniors and the environment, the largest ministry.

The gross debt outstanding at March 31, 2017 is projected to be $2.44 billion — equivalent to about $49,000 per Bermudian.

“There is no doubt that the biggest threat to the future prospects of the way of life we enjoy in Bermuda today is the problem of the government deficit and public debt,” Mr Richards told MPs in the House of Assembly yesterday.

“If left unchecked, it threatens the job security of Bermudians in both the public and private sectors. It threatens seniors, whose pension incomes come from the Government. It threatens the quality of healthcare received by Bermuda residents, as very substantial government subsidies support the hospital.

“It threatens those on financial assistance, a government-funded support service. And finally it threatens our children who depend on public education.”

Mr Richards’s budget lays out plans for spending exceeding revenue by $199 million. This deficit is lower than the $212 million shortfall in the current fiscal year, which ends on March 31. However, it makes limited progress towards the stated aim of eliminating the deficit by 2019. Increases in payroll tax, fuel duty and fees for many government services will boost revenue by 7 per cent to $996.3 million. However, spending will increase by 1 per cent, fuelled by rising debt-servicing costs.

Before debt servicing and capital spending, Government’s current account will have a surplus of $75.2 million. The Government will need to borrow an additional $150 million in the 2016-17 fiscal year to fund itself. “Debt service has become the second-largest ‘ministry’ in Government,” Mr Richards said. “It is stealing from the future of our children and their children. It is constricting our ability to respond to people’s needs.

“It is weakening our ability to maintain the infrastructure that supports everyday life. It is threatening our solvency and, with that, our financial independence.

“So we must get to grips with the deficit and debt problem because they stand between us and a secure future.”

Only once the deficit is under control can debt reduction begin, Mr Richards said. He referred to government’s daunting debt maturity schedule, which involves the island’s creditors being paid back $2.385 billion over the next eight years. Most of that debt will be rolled over, most likely at a higher rate of interest.

This is one reason why Bermuda’s credit rating is so important, Mr Richards said. But the consequence of ratings downgrades would go further than higher interest payments on government debt. “Bluntly put, if the Bermuda Government is downgraded, many of our international business partners get downgraded too,” the finance minister said.

“So the linkages are clear: deteriorating creditworthiness of the Bermuda Government not only threatens the job security of public servants, it threatens the job security of those people employed in international business and the job security of all those companies and individuals employed in providing services to international business.

“This constitutes most of the Bermuda economy.”

Credit ratings are especially important to Bermuda’s international insurance companies. A downgrade for them means reduced opportunities for writing some kinds of business, as well as increasing their cost of capital. This year, Mr Richards said Government will draw from the sinking fund, where it sets aside money to pay off long-term debt, to pay back $90 million due to creditors.

The Government’s net debt has skyrocketed by more than 1,130 per cent over the past decade and is expected to total $2.37 billion by the end of March next year. In March 2007, net debt was just $196 million, barely more than the coming year’s debt servicing costs. The rate of year-over-year increase in the net debt has slowed, Mr Richards pointed out. It will increase 10 per cent in 2016-17, a far cry from the 74 per cent spike in 2009 and the seven successive years of 20 per cent or more increases between 2008 and 2014.

Mr Richards’s projections for the next two years offer some hope. The Government will need to borrow another $98 million in 2017-18, falling to zero the next year when no budget deficit is expected.



bshentonThe £ 400,000,000 Question