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Contract costs rise for county's only PFI school scheme
THE county’s only PFI school scheme is struggling to cover its contractual costs and needs another £125,000 in extra funding.
Herefordshire Council is already paying more to the Whitecross High School & Specialist Sports College scheme than expected as contractual charges rise higher than planned inflation.
PFI (Private Finance Initiative) contracts fund public infrastructure projects with private capital.
The 25 year contract for the school has an overall value of £75m. At the end of the contract the school will transfer to council ownership.
This week, the county’s schools forum will be asked to approve a further financial contributions to the contract totalling £125,000 between 2015/16-2017/18.
The money comes directly from the council and through the county’s direct schools grant – the sum the council gets to run schools.
In July 2001, the council’s cabinet backed the school’s outline PFI business case assuming PFI credits from the Department for Education (DfE) of £19.5m and annual contributions from the Council of between £603,000 and £731,000.
The council is currently contributing £760,811 and has to address the shortfall in contract payments, any move otherwise would not be permitted by the council’s auditors and could not be approved by the chief finance officer.
Cabinet chose Stepnell Ltd as the contractor in March 2004, but, following the tender clarification process, the bid was found to be outside the parameters of the approved outline business case and the DfE imposed new rules on the education revenue budget, making it more difficult to fund the annual payment from the centrally held education
A plan to manage the cost of the annual revenue payments was subsequently backed by cabinet allowing for the DfE to be asked for an uplift to the PFI credit by making the contract operational after April 2006, reducing average annual payment by around £50k per year.
Stepnell was then offered £1m from the sale of the former school site to cut the cost of the new building and the council’s payments.
But the site is still to be sold.
The current financial pressure on the scheme is due to increases in the unitary charge - or revenue payments – being higher
charge being higher than planned inflation of 2.5%.
Since 2006 inflation has been an average 3.6% a year, increasing the PFI payments by an extra £95k in 2013/14.
Investment in the school’s intervention centre added capital costs of £298,000 resulting in further increases in the unitary
If inflation continues at the current 3.6% rate the unitary charge would be £590,000 higher. An increase as low as 1.1% a year would cost an extra £7.4m over the PFI contract period.
A review of the project documentation suggests that inflation risk was not formally addressed within the project.
It was common practice at the time for PFI schemes to assume inflation costs would be met from increased income to the council.
The contract has since been reviewed with the original financial advisors Ernst and Young to identify some £45,000 in savings that could be made in IT, maintenance, insurance costs and reducing after hours use of the school site.
Further savings could not be made with incurring significant cost or breaching the contract. Refinancing is not seen as a cost effective option.
Whitecross became an academy in January last year, the PFI contract is acknowledged as providing a “first class” secondary school currently rated “Good” by Ofsted.
Whitecross head teacher Denise Strutt said the school was “sympathetic” to the fact that the contract was expensive.
Work between the school, its governors, Stepnell and the council was ongoing to keep costs down, she said.
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