Public accounts committee chair slams ‘exorbitantly expensive’ PFI contracts

The chair of the parliamentary public accounts committee Meg Hillier has spoken out against costly private finance initiative contracts and warned that the scheme’s relaunch as PF2 is little more than a rebrand.

“Many local bodies are now shackled to inflexible PFI contracts that are exorbitantly expensive to change,” she said, reflecting the situation faced by many schools that have struggled with hefty repayments for new infrastructure, since PFIs were first implemented in the early 90s.

Her comments follow the release of a new report from the National Audit Office, published today, which looks at PFI and its successor PF2, which was introduced in 2012.

PFIs involve private companies paying for new buildings such as schools or hospitals and subsequently taking an equity stake in the site. Occupants then pay back the company (plus interest) over typically 25 to 30 year contracts.

Many local bodies are now shackled to inflexible PFI contracts

In July last year Schools Week reported on one academy that had fallen foul of the scheme. The Kingsway Academy, in Wirral, was forced to close after rising private finance initiative repayments of over £600,000 per year left it “unviable and potentially not able to pay its bills”.

Hillier argued that after 25 years of PFI, there is still little evidence that the scheme is value for money.

“We need more investment in our schools and hospitals but if we get the contracts wrong, taxpayers pay the price,” she said.

The cost of inflexibility with PFI contracts is highlighted in the report, with the well documented Park Lands High School PFI scandal, Liverpool, cited as an example.

According to the report Liverpool City Council is currently paying £4m per year, for a site which the schools vacated in 2014. The site cost around £24m to build, opening in 2004. “Between 2017-18 and the contract end in 2027-28, it will pay an estimated £47 million.”

Hillier also criticised the government for relaunching PFI “under new branding, without doing anything about most of its underlying problems”.

The NAO report highlights problems with PF2, and identifies that there has been “limited use” of the scheme.

“Since the launch of PF2 in 2012, only six PF2 projects have reached financial close … Several projects originally designated for PF2 financing did not proceed,” the report by Amyas Morse, comptroller and auditor general of the NAO, found.

The DfE’s Priority School Building Programme currently has 46 school rebuilding projects being financed through PF2.

The revamped PFI initiative was launched by former chancellor George Osborne and was intended to improve the issues faced by recipients of PFI contracts.

Schools Week reported in 2016 that crippling costs were being passed on to schools when equity stakes were sold on, through a process known as “flipping” – where equity holders sell on the value of their equity in PFI projects to other companies.

In moving to PF2, one change made by the Treasury was for the government to become a minority equity holder in new projects, with a stake of 10 per cent. At the time this was intended to increase financial transparency for the public sector and provide occupants, such as schools, with a voice in decision making.

However, today’s NAO report states that whilst the public sector will now have a seat on the board, this may not be a permanent arrangement.

The government’s stake will be managed by the Infrastructure and Projects Authority, who informed the NAO there is no guarantee these wouldn’t be sold in the future. Under the previous PFI initiative, there were instances of the government holding equity stakes which were later sold to raise money.

The NAO report does acknowledge two principal benefits for the governement of PFI and PF2:

• Results in lower recorded levels of government debt and public spending in
  the short term.
• Allows public bodies to invest in capital projects when they do not have
  sufficient capital budgets

Hillier commented that “decisions that have an impact on taxpayer funded public services for decades need to be thought through”.

“There are lessons to be learnt and these need to be considered in the context of 20 years not just expediency today,” she said.

For further coverage of the NAO report see edition 126 of Schools Week published Friday 19 January 2018.