Last summer’s concrete crisis exposed the escalating costs associated with the school estate. The recent storm surrounding PFI contracts could be another brick in an increasingly expensive wall for education leaders.
Despite PFI being scrapped as a future funding model for public infrastructure by then-chancellor Philip Hammond in 2018, many schools remain tied into these long-term contracts.
They often span 25- to 30-year terms and involve a single ‘unitary charge’ to a private sector partner. This charge covers the cost of funding the original build or refurbishment, but also the ongoing services such as maintenance, catering and cleaning.
The unitary charge payments are generally linked to inflation and as this rises so do the payments. Academies and schools are not party to the PFI itself, so their increasing share is passed down to them under their school or governing body agreement with the local authority.
These PFI arrangements can result in two stress points. First, if the funding body for an academy or school does not increase its funding in line with inflation, a budget gap will arise. Second, the prohibitive costs of early PFI termination means schools are in effect prevented from shopping around for a more attractive option (at least, that is, until the natural expiry date of the PFI).
Challenges of renegotiation
Due to the length of PFI contracts, schools’ requirements are bound to change. An obvious example is the original deals may state that a boiler will be replaced after 15 years when, in fact, the school would now prefer to install a ground-source heat pump.
The contracts do feature a change protocol though. Changes can be requested by the responsible body on behalf of the school, but the process is often complex, cumbersome and costly. For example, there are often three categories of change – low, medium and high value – each with a separate process depending on the value and ramifications of the proposed alterations.
Although the PFI contractor can refuse to implement a change only in limited circumstances, determining the terms on which a change will be implemented is not straightforward. A school may hope to halve grass-cutting services in order to halve its grass-cutting costs. But because the PFI contractor is likely to have invested in equipment and the workforce is likely to work across a number of schools, real savings could turn out to be marginal.
A further challenge arises from the resources required to drive through these changes and negotiate the terms of the amended deal with the contractor and its funders (whose consent may also be required).
Some local authorities have maintained well-resourced, skilled and experienced projects teams. However, and understandably given the end of the active PFI programme and constraints on local government budgets, some may now have fewer resources readily available to devote to this work.
So while changes can be made to a PFI contract, the goal of cutting costs significantly and quickly can prove illusory.
Managing the expiry
As of March 2021, the government reported there were 694 PFI projects with a total capital value of £54.7 billionn. The bulk of these will begin to expire over the next five to ten years.
Guidance from the Infrastructure and Projects Authority advises PFI contract holders to begin preparing for expiry at least seven years prior to the end date, which means many schools with agreements in place should be making plans now.
This should involve not only consideration of the PFI terms, but the school’s future plans for the assets and replacement of services.
PFIs were procured in a very different world, many in the early noughties, long before heat pumps and net zero were common currency.
A school’s requirements may well have changed drastically, so it should think about what the next 20 years may hold before making investment decisions.
In some cases, there may be opportunities to bring contracted services in-house, particularly for multi-academy trusts where efficiencies can be generated across a school estate’s portfolio. In others, a spirit of partnership could endure on more favourable terms.
One thing is certain: Schools should start a conversation now about their post-PFI future.
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