Agenda item

The PFI contract was an arrangement where the contractor took the risk of designing, building, financing and operating the three schools’ buildings.  Value for money was recognised as a primary concern, given the length of the contract (30 years from its commencement in 2006) and this was addressed through effective contract management processes. Affordability could in theory be improved by reducing costs but PFI contracts were notoriously inflexible. The buildings were in effect paid for in a similar fashion to a mortgage, and funded by PFI Credits from the DfE, whilst the payments for the facilities management and other operational costs were index linked to inflation.  All payments were consolidated in a Unitary Charge.

As a result, the ongoing cost consideration was the contracting of services. An intensive and tight specification was enforced by SBC, which could also use a deductions mechanism to reduce payments to service providers where services had not been provided in accordance with the contract. The Contract Manager held responsibility for this process. However, the length of the contract and the changes in local government funding which had occurred in that period could raise their own difficulties, especially given the relative absence of flexibility in the contract. One method of counteracting this was using the Council’s procurement purchasing power to obtain economies of scale in, for example, the purchase of utilities supplies which would reduce the unitary charge. Thus far, SBC had pursued the relatively easier savings and was now moving to the more challenging methods of reducing costs which would require difficult negotiations with the contractor; the contractor had protections in the contract that could limit these opportunities. The contractual process had caused SBC to pursue, initially at least, a less formal route as the best method of creating the environment for negotiating savings. Initial discussions had been held with equity holders as part of this process, and SBC would take an iterative approach to secure better terms.

In terms of refinancing, the overall cost of designing and building the 3 schools was approximately £45 million. Around 90% of this (£40 million) had been funded by the contractor as a bank loan at a fixed rate of interest. Given that the contract had been taken out prior to the credit crunch, traditional refinancing was not an option as the terms of lending were now more expensive. The debt could in theory be replaced with a Public Works Loan Board arrangement, but this had been investigated and the potential for savings was not deemed worth pursuing. Lower annual payments could be secured by extending the contract of the loan, but this would ultimately make the deal more expensive.

The Panel raised the following points in discussion:

• Top slicing from schools had been discussed, and would be a matter for SBC’s Finance Team. However, such a move would require permission from the Schools Forum, who had yet to be asked to consent to this. The Schools Forum had agreed to a request for £200,000 to cover 2015 – 16’s short fall in funding, but had concerns that this should not become a standard procedure.
• Should any of the 3 schools in question (Beechwood, Penn Wood and Arbour Vale) become academies, the schools would continue to make payments towards the Unitary Charge and terms would need to be agreed and reflected in a new legal document, a Schools Agreement, which would replace the current Governing Body Agreement. In particular, the school’s contribution to contract management services would require clarification.
• The PFI arrangement involved a number of companies, and members expressed concerns that each of these would seek to make a profit and thus add costs to the process. The problems with the PFI model were acknowledged, hence its discontinuation in recent years for public building works.
• Changes to the contract (e.g. an increase in student numbers at one of the schools leading to a need for additional accommodation) would cause the contract to be varied in accordance with an agreed contractual mechanism. The cost would be negotiated at the time of the variation, so the Council would not be tied to the costs of the initial PFI deal, allowing the Council to deal with the potential issue of multiple layers of profit.
• SBC could propose a change of services in the contract, but the provider could veto such suggestions in certain circumstances. As a result, interests had to be balanced and relationships with partners had to be maintained.
• The PFI arrangements had passed over risks to the contractor and SBC would only need to put in place risk management strategies were it to take any of these risks back.
• Contractual obligations would remain with contractors (who would have to ensure the buildings met the same quality standards for the entirety of the contract) until 2036. A comprehensive specification existed in the contract, which was linked to the payment mechanism for non-delivery or unsatisfactory delivery of services.
• Schools bore the costs of energy consumption rather than SBC, and thus should be encouraged to ensure energy efficiency. SBC worked with schools to bring down such costs.
• Every 5 years a benchmarking process took place which could also market test services in certain circumstances. This would occur in the first half of 2017, and would return to the Panel at such a time as the Panel could have an impact on the process.

Resolved: that

1.  The ECS Scrutiny Panel would receive a financial statement on schools and any possible top slicing of funding to cover short falls in PFI funding.

2.  The ECS Scrutiny Panel receive a report on the benchmarking of services in 2016 – 17.

3.  The ECS Scrutiny Panel’s support for increased value for money in PFI contractual arrangements be noted.