Agenda item

Resolved: that the report be noted. It was also agreed that officers would provide a short briefing detailing the costs of the schools PFIs.

5.1      Selwyn Thompson (Head of Financial Services) and Katherine Nidd (Service Group Manager, Commercial and Investment Delivery) introduced the report. The following key points were noted:

·         At the time the Council entered into private finance initiative (PFI) arrangements, they were one of the only options available for funding new projects.

·         Risk transfer and management of costs were primary reasons for local authorities to take up PFIs.

·         Lewisham was part of the earlier phases of the building schools for the future PFI programme.

·         The schools built under the PFI programme had some of the best facilities and were some of the best quality in London.

·         There were opportunities over the 25 years of the PFI contracts for the public sector to drive efficiencies and improve value.

·         A number of standard mechanisms existed in the contracts that could be used to increase efficiency and value.

·         Benchmarking of costs took place every five years but there were regular meetings between the Council and operators.

·         There were best value indicators for economy, efficiency and effectiveness.

·         There were opportunities to make deductions for poor performance and the Council did so.

·         Work had also taken place with the Chartered Institute of Public Finance and Accountancy to review the Contract and determine whether savings could be made.

·         One of the key issues identified by CIPFA related to PFI lifecycle and hand back criteria whereby the Council was considering options for limiting operator responsibilities once PFIs were handed back to the Council in order to reduce costs. Due diligence was currently taking place to determine whether this was a good option.

·         Assets would still have to be handed back to the Council in good condition. Condition surveys and due diligence would take place to ensure that this was the case.

·         It was hoped that efficiencies could be made on insurances. The insurance market had reduced in cost over the PFI period – so work was taking place to determine whether further savings could be made in addition to the agreed sharing mechanism. Discussions about transferring costs between balance sheets had taken place with the Department for Education.

·         There was money set aside in PFI contracts to pay for building changes due to changes in legislation – it was unlikely that this funding would be required. It was intended to transfer this risk to the Council in order to release this contingency to reduce costs.

5.2      Selwyn Thompson and Katherine Nidd responded to questions from the Committee, the following key points were noted:

·         The capital costs and financing costs for PFIs were supposed to be funded from central government.

·         At the outset, the government calculated the level of PFI credits awarded for schemes by calculating the estimated capital cost of delivering the new asset with a multiplier for financing costs.

·         The net cost to the Council was only supposed to be the operational costs of the new asset.

·         Problems arose because credits were awarded at a set point in the procurement process, which differed from the time at which the deal for delivering the scheme was finally struck, potentially resulting in an ‘affordability gap’.

·         There was an affordability gap on the group schools PFI but not for the building schools for the future programme.

·         The term ‘affordability gap’ was also used locally to describe the scenario in which a school found that it could not meet the expense of the ongoing maintenance of a PFI building.

·         £674m (referenced in the report) was provided originally by government for Lewisham schools PFIs, £218m was an estimated cost for the Council and schools over the life of the PFI programme.

·         The full cost of the schools PFI programme (£892m) was for building, operating, maintaining, running and financing these schools for 25 years.

·         Schools paid for maintenance from the dedicated schools grant (DSG).

·         Costs for individual schools were capped at 10%. Any additional costs for schools were distributed across the DSG equally. The additional cost was relatively small.

·         Schools that were not part of a PFI also had operational and maintenance costs, that were typically around 10%.

·         In time, estates costs for schools would increase as a proportion of their budgets, unless they grew pupil numbers. This was the case for schools in PFIs and those which were not.

·         The annual cost of the PFI programme was dependent on inflation. Build and financing costs were fixed over 25 years. Servicing costs were subject to inflation.

·         The overall estimated cost of the PFI programme was based on the assumption that it would run for 25 years – with an annual rate of inflation of 2.5%.

·         Work had taken place with contractors to manage the schedule of rates for use of school buildings out of hours. This had been received positively and proactively by schools.

5.3      Resolved: that the report be noted. It was also agreed that officers would provide a short briefing detailing the costs of the schools PFIs.