Wednesday 05 July 2023
General Update
Madam
Aurigny's financial performance has been a recurring theme since the STSB was first formed. When this Assembly agreed to recapitalise the airline in 2021, it came with an assurance that there was a clear strategy and plan to turnaround the airline's fortunes, under a new chair and chief executive. This included a target to break-even within five years.
The airline is delivering on that undertaking. Based on performance during the first half of this year, Aurigny is on track to achieve, if not better, its forecast for a modest operating profit in 2023.
While Jersey and Isle of Man's air connectivity has contracted post-pandemic, the Bailiwick's has seen a significant increase - with Aurigny providing either scheduled or charter flights to 42 destinations last year. Air passenger volumes in the Bailiwick have recovered better than most other ports in the Common Travel Area, and between 2019 and 2022 the average fare increased by just 1.7%, compared to RPI of 12%.
The airline had its highest ever annual turnover last year, and the cost of the Alderney PSO was reduced by 36.3% relative to 2019. Improved fleet utilisation has increased productivity both in terms of staff and aircraft, and last year Aurigny had the best punctuality rate of any UK-based carrier. From an environmental standpoint, last year its aircraft used 1.4 million litres of fuel less than in 2019, reducing its carbon footprint by more than 10%.
This performance is all the more remarkable, coming as it has against the backdrop of all the COVID disruption and the ongoing effect that has had on travel.
Nevertheless, passenger numbers overall at both the harbours and airport were still down by a quarter last year, compared to pre-pandemic levels. The financial impact of that is being keenly felt at Guernsey Ports, at a time when the business is also having to address historic under-investment in its infrastructure.
Guernsey Ports has had to rely on significant financial support from general revenue to cover its trading losses over the past three years. As well as having reduced income, the Ports Holding Account, which traditionally funded routine capital investment, was depleted entirely when travel was suddenly and severely curtailed due to COVID.
While it is expected to be better than budget, Guernsey Ports deficit will again be around £6m in 2023, and could be as high as £7.8 million next year if the target for capital investment is achieved at current income levels.
That situation clearly cannot continue indefinitely. The Ports business must not be a drain on an already very squeezed public purse. Now the pandemic is over, the ports have to adapt to what is, at least for the time being, the new normal. The STSB has therefore initiated a comprehensive review of revenue and expenditure.
It is being done with assistance from officers of Policy & Resources, meaning the review is conducted using the States' own resources, while still having the benefit of robust, independent scrutiny and a fresh perspective.
I stress that this is not all about raising charges. We anticipate the route to financial stability requires a combination of approaches. It will require efficiency savings, as well as exploring new revenue opportunities, and there may be a case for some targeted general revenue support, where a specific requirement is identified.
For example, if we had to raise charges at Guernsey Airport to a level that might deter passenger numbers, there may be an argument for government to provide some level of grant, in recognition of the wider economic benefits. That would be a policy decision for the States, and this review will help to inform that thinking.
However please be under no illusion. If the Ports are to become financially self-sufficient again, they will have to act more commercially, particularly where fees and charges are concerned.
All current tariffs are therefore being reviewed to identify where additional revenues can reasonably be achieved. That is likely to have the most immediate impact in reducing the forecast trading deficit for next year. Efficiencies are also being sought and new revenue opportunities identified, which will be an ongoing process. While those benefits may take longer to realise, they will make a significant contribution to a financially stronger Ports business.
I shall not prejudge the outcome of the review, but if States Members wish to see the Ports on a more sound financial footing, then I hope we will have your support when we return to the Assembly by the end of the year with our proposals for fees and charges.
Likewise for the other States-owned trading operations, which also have financial challenges, including the long-term effects of the pandemic, and inflationary pressures due to Brexit and the war in Ukraine. These events have disrupted markets, impacted supply chains, and driven up the cost of fuel and materials.
For an infrastructure business like Guernsey Water, such disruption has a major impact. It has seen increases in the cost of energy, labour and chemicals, but most of all in capital and asset maintenance projects. This higher than planned expenditure, combined with below inflation tariff rises over the last four years, contributed to a trading deficit in 2022.
Guernsey Dairy also has an ongoing trading deficit. It too has been impacted by the rising cost of materials, at the same time as having to manage the long-term reduction in demand for liquid milk, with the increased cost and inefficiency associated with maintaining an aging facility and equipment that has reached the end of its expected life.
Whatever the current challenges, the trading operations are expected to operate commercially. In the commercial world no business is able to sustain losses indefinitely. With that in mind, in preparing their budget submissions for 2024, each of our businesses has been tasked with identifying how they plan to eliminate any trading deficit and generate sufficient surpluses to meet their long-term funding requirements.
They have been told to seek efficiencies and cost reductions within their operations, ensure charges are fair and reasonable, and consider where services are no longer affordable or essential - such as was demonstrated earlier this year in closing the island's remaining recycling bring banks.
We have tasked each trading business with identifying a scenario where they achieve a breakeven position next year. Alternatively we have also asked them for a plan for recovery over three years, which may be more achievable. These proposals will then be considered by the STSB before finalising the 2024 budgets.
Although not been entirely immune to the financial pressures that have impacted other trading operations, States Works has not been affected to the same extent, and has continued to generate a reasonable surplus. Its greater challenge in recent years has been the extremely tight labour market, which unfortunately has not improved. That has led it to withdraw from some activities, but on a positive note it has provided employment to a number of Rabeys staff after the company went into liquidation.
Moving on to capital projects. Following the decision of the Assembly last December, the design for the Alderney Airport refurbishment has been progressed, and following engagement with potential construction contractors we have a shortlist of five who are being invited to tender. We are on course to appoint a contractor at the start of 2024, and commence work in the spring. It is vital that we meet this timescale, to ensure we do not miss the window to carry out these essential works next year.
On the potential for a new marina in St Peter Port, the concept scheme that has been developed by the project team is very impressive, and received positive feedback when the results of the initial studies were published last November.
If the potential economic benefits that have been identified can be realised, such a development could present a very real opportunity for Guernsey.
We are mindful that such a project would represent a massive investment, over and above what Guernsey Ports can justify based purely on the extra income it would generate from mooring fees. It will require some additional funding, which in the current financial environment we understand is going to be extremely difficult for the States itself to provide.
I would stress it should not be considered in the same category as schools or the hospital, because a new marina would be a significant source of income, to help repay the initial investment over time, and with a potential long-term economic boost to the island as a whole. That said, it is difficult to see how the States could provide the necessary investment at this point.
We are therefore exploring other possible funding options, which could include a mix of private and public funding. The outcome of those investigations will help inform the policy letter that we now propose bringing to the Assembly sometime after the debate on the capital portfolio review.
We also hope to bring a policy letter to the States before the end of this year seeking approval for much-needed repairs to the bridge linking Castle Emplacement to Castle Cornet and the breakwater. The current structure is at the end of its life, and while it provides no operational benefit to the harbour, the bridge clearly does have a wider importance. We therefore hope that with States approval we will be in a position to also carry out these works next year.
On a less positive note, we are still frustrated by the lack of progress in resolving what to do with the island's inert waste. The Longue Hougue land reclamation site is expected to be full around the end of this year, and we are preparing to begin stockpiling material there, potentially for several years.
This will have a visual impact, it will incur millions of pounds in double handling costs, and it will prevent a large area of Longue Hougue from being used for any other activities, for the foreseeable future.
This situation is far from ideal so we would urge E&I and P&R to bring proposals to the States at the earliest opportunity.
Questions have been raised following previous updates about the remuneration of directors of the States-owned trading companies. In January we published full details of pay for the non-executive directors of our incorporated trading companies, who have full fiduciary responsibility, and operate in highly regulated environments. Benchmarked against comparable roles in Jersey and the Isle of Man, their remuneration is considered extremely good value for the States of Guernsey.
I should also acknowledge the contribution of the business advisers who sit on the STSB sub-committees for the unincorporated trading operations, who bring a great deal of commercial experience, pro bono.
We have now consulted the boards of the incorporated companies, to establish how we might also provide greater transparency around the remuneration of their executive directors.
The setting of director remuneration is a matter for the board of each company, but as the shareholder the STSB does receive this information, in confidence. That includes details of bonuses, performance related elements, and the associated targets. Therefore as a matter of course, we already interrogate these arrangements, as is appropriate.
While the STSB is broadly supportive of some greater transparency, it is not as simple as just publishing the pay of each individual. Not least because we all live in a small community, and generally expect some degree of personal privacy. If we want to attract people of the right calibre to take these important and high profile roles, we should expect to afford them that same consideration.
So rather than disclosing the detailed pay arrangements for individuals, we propose that in future the STSB will publish an annual report outlining the governance arrangements of each of the incorporated companies, and include in that banded remuneration for all the executive directors. This mirrors the approach adopted in the States of Guernsey Accounts for States employees. We believe this will provide greater transparency, and strikes an appropriate balance between the confidentiality that individual employees should reasonably expect, and any legitimate public interest.
Finally, I would like to acknowledge the contribution that our outgoing Non-States member Stuart Falla has made to the work of the STSB almost since its inception in 2016. He was one of the first two Non-States Members to be appointed by the States, and helped shape what was then a completely new committee. He has since served under three presidents, and has given his time generously and enthusiastically, both in his role on the STSB and also as chair of the Guernsey Ports Board and the Dairy Management Board, in what have been extraordinary times for both those businesses. We have benefitted immensely from his considerable experience, and the same passion he has brought to the many other community roles he has held over the years.
Stuart will stand down when a successor is appointed by the States, which we expect to be in September. I am sure all in the Assembly will join me in thanking him for all his hard work, dedication and commitment to the States-owned trading operations.