‘Better rate from private sector than States bond’

When government borrowed £330m. to spend on capital projects, one of the arguments in favour was it would be able to lend the money to States-run bodies at favourable rates, ending the private deals they had done.

But the States has struggled to do that or find projects to fund. As of the 2019 Budget, only £140m. had been loaned on.

Guernsey Electricity plans to replace the link with Jersey at a cost of £30m., but only half of this will come from the bond.

Further details of the deals were revealed after written questions by Jennifer Merrett to the States’ Trading Supervisory Board, which has political responsibility for the company.

‘The third party lending has been agreed over a 10-year period, but at a rate which the lender has asked be kept confidential,’ said STSB president Peter Ferbrache.

‘However, I can confirm that the rate of interest is significantly less than that available through the bond. GEL has been unable to secure third party loans at this rate for any more than a 10-year period. So, whilst this loan does not match the length of the life of the cable, this is offset by the fact that there will be substantial savings in interest payments compared to the bond rate for GEL and its customers.’

At the time of answering the questions, the indicative rate available to GEL to borrow from the bond was 3.625%, fixed for 25 years.

The third party lender has not asked the States to guarantee the loan it is providing to GEL.

Deputy Merrett wanted to know if consideration had been given to paying for the project from the States capital reserves instead.

But Deputy Ferbrache said it had not. ‘There is no policy within the States allowing incorporated trading assets to access funding from the capital reserve, which is funded by all taxpayers and usually set aside for general revenue projects.’

‘The STSB’s belief is that its trading assets should seek to fund their own capital requirements where the business itself has a clear need for making such investments for the direct benefit of its customers and to sustain and develop its normal operational activities.

‘Such funding should be sourced in the most commercially effective manner and can include the use of cash reserves, loans or a mixture thereof. In this manner, the true cost of operating the business – including the use of capital – is transparent and properly reflected in customer charges. Borrowing for this purpose is a well established practice.’

Deputy Merrett asked whether the president agreed with her that when possible capital projects should be funded from capital reserves and by doing so ensure that the cost of the capital project does not incur any additional costs associated with the borrowing of the funds.

As well as it not being within policy for GEL to do this, Deputy Ferbrache highlighted the clear historic expectation that it should fund its capital investments through borrowing.

He also warned using the reserve for the electricity company could be considered anti-competitive.

‘I believe the States would be mistaken in assuming that there is no additional cost to the taxpayer in providing funding from the capital reserve to GEL for the GJ1 cable project. The prime intended purpose of the capital reserve is to fund capital investment to support the delivery and transformation of general revenue services.

‘Funding used elsewhere would necessitate a need either to replace those funds with alternative sources of revenue or a re-prioritisation of planned spending.

‘In addition, whilst such funding could be provided “freely” to the project, there is nevertheless an indirect cost to the taxpayer arising from the investment returns that would be foregone as a result. Those returns have averaged 7% per annum over the last three years, substantially more than the costs of borrowing currently available to GEL.’