Sunday, 2 December 2012
What is £10 million between friends?
If anyone had any doubts that our economy was struggling, multiple items of recent news should have clarified matters. In no particular order, Funds on deposit in Guernsey down 15% last year. Yes their economy is not a direct parallel of ours, but is is a clear indicator that things are not wonderful. The dropping of £75 million development in Bath street is not a good omen either. Ostensibly concerns of the planning department approach are cited. There may be some credibility in that given the difficulties the Coop had over their plans, but no one I know would drop such a scheme just on that basis. - there's too much potential and sunk costs. It is much more likely to be shelved because the outlook for selling/letting space is too low to make the project attractive, possibly even non-viable. A third strand - we hear that passenger numbers between Jersey and the Isle of Man airports are down a lot, and the operator of the direct route is to drop it. That is not a tourist route, the overwhelming proportion of the passengers are people in finance and support industries, like IT. Then there is the leaked news from the UK Government that they intend to introduce FACTA type obligation, coupled with the emergency meeting response of our government. In theory it is a pointless move -all those UK investors declare their taxable income to the Inland Revenue, like good subjects. As a 'well regulated' finance centre we do the KYC checks, and we don't open accounts for people who would not dutifully declare their income, surely. The knee jerk response rather suggest otherwise, and if that is the case, a chunk of our primary industry is likely to be heading far to the East.
It is hardly surprising therefore that some people think the millions it will cost us to buy Plémont is too high a price. It is certainly true the handling of the whole Plémont saga by the States has been woeful. In fact he States of Jersey has 'form' when it comes to projects around the £10 million mark. There was Les Pas holdings States vote for Les Pas deal , The Millennium Town Park, and most recently the redemption of preference shares in JT.
In the recent debate in the States on the MTFP, there was a disagreement over the redemption of preference shares in JT. The core of the issue was that JT have them on their books valued at almost £30 million, whereas the States we looking to redeem for £20 million (par value I think). The shares produce dividends of 1.8 million a year for the States, which will disappear on redemption , of course. So did we lose £10 million on the deal? It certainly looks like a good deal for JT - they pay out £20million in cash, eliminate a book debt of £30million , and remove an ongoing obligation to pay out £1.8 million annually.
It is important to recognise that these shares are not tradable. There is no market in them. The value of the shares is whatever price at which the buyer and seller are both prepared to do the deal. The Treasury Minister argued that since we own 100% of the equity of JT , it makes no difference to us - the value of the remaining shares adjusts to reflect that extra £10million on the JT books. That is true at the point the deal is done, but of course hard cash today is different from a book value tomorrow. It only needs JT to lose a court case, or be totally out manoeuvred by a competitor to potentially lose a lot of value.
So why was the Treasury Minister working so hard to sell us a deal that, on paper, looks rather poor for the tax payer? The truth is he had little choice. In order to balance his income and expenditure he had to raise that £20million. Without it there would be no money to set up the innovation fund, and some other new schemes. By implication the Treasury Minister must be expecting the return on that fund to be somewhat more than the 9% dividend the prefs pay us. Experienced business angels can achieve returns in the order of 20%, but even so a third of their investments crash valueless.
One other observation about the sale of those preference shares. The special and non tradable nature of the pref shares and the States relationship to JT over them would complicate any possibility for JT taking on other investors. This arrangement now means the States only hold ordinary shares in JT. In three years time the Treasury will need to raise some cash again. Now it is not a monopoly local provider and with all the money pumped into Gigabit, and the nicely segued net £10 million on the books, a ready fattened JT will be an obvious privatisation prospect. It might even happen sooner if we do go ahead with a new hospital.
What confuses and disappoints me is that the issue of the purchase of Plémont attracts so much comment , despite not being an economic proposition, when the redemption of the JT shares, and the arguable loss of £10 million to the tax payer attracts so little comment. The value on Plémont is not directly economic, it is for the ecology, the space and future generations. As with the JT shares valuation, the price of the deal is what is the issue, but that is a different matter from the value. In granting planning permission, the Environment Minister has considerably shifted the valuation in the perspective of the sellers, and probably in the view of any independent valuer who might assess it.
Like the JT shares redemption, buying Plémont is a one off deal. Unlike the JT share deal it does not carry a £1.8 million a year loss of income - the maintenance once cleared is minimal. If the land is retained in ownership of the States, albeit perhaps on loan or managed by the National Trust for Jersey, it is an asset on the books. Contrast that with the JT shares which is actually a reduction of assets.
Finally, if the economic outlook really is a bad as the indicators I mentioned at the outset suggest, that development at Plémont is a very high risk. The very people who might be able and interested in buying those properties are the ones at the front line of the economic decline that is heading our way. You need no such wealth or high pay to appreciate or partake of open public space. At a MTFP consultation I asked the Treasury Minister what was plan B if in the three years of the plan something happened to throw the estimates and assumptions off. His response was that we would not do austerity, he would look to create economic stimulus, borrowing if necessary. Clearly if we can contemplate borrowing to spend we can certainly afford to buy a one off asset.