Tuesday, 18 April 2017

Hospital Funding: The Sensible Option

I saw this piece by Ben Shenton and felt it was worth repeating here. He offers what I think is the most sensible position. While Scrutiny have provided a good alternative, I think when the States debate the matter, someone should also put Ben's option on the table.

The different options are on his blog, which I would also recommend reading in detail. It also contains background news stories of other small island jurisdictions who have borrowed over much and paid a price for lack of prudence.

One has also to consider that it was Alan Maclean as Treasury Minister who has to take at least most of the responsibility for the approach taken by the Medium Term Financial Plan, in which measures were passed - health charge, waste charge - without actually specifying any details - so much for saying he wanted "I wanted long term solutions not short term fixes".

The States in their collective folly passed this against the wisdom of Scrutiny, with a result that the waste charge is still under negotiation for how it is actually implemented, and the health charge fell at the first hurdle. 

Presumably as Treasury Minister Senator Maclean also advised Senator Green that it was a charge like Long Term Care and not a tax, and certainly did not contradict his fellow Senator, before doing a volte face on the Long Term Care charge and asking the Solicitor General to conform that it was in fact, as his critics, had said all along, a tax.

Ignoring his past mistakes as the folly of political youth  (albeit expensive ones) as signing of the £200,000 movie grant, setting up a badly structured Innovation Fund, and signing off loans as Economic Development Minister, his record as Treasury Minister also shows a lack of clarity. His ability to pluck a method out of the air without giving alternatives, and they way he assumed it must be correct and try and rush it through the States reminds me more and more of his predecessor. I hope that wiser heads prevail.

HOSPITAL FUNDING - The Sensible Option
By former Senator Ben Shenton:

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. 
  3. 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.
  4. 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.
  5. 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?
  6. 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.
  7. 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.

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