Contract costs rise for county's only PFI school scheme

Hereford Times: Former site of Hereford's Whitecross High School - sale of the site was supposed to ease contract costs of the new school Former site of Hereford's Whitecross High School - sale of the site was supposed to ease contract costs of the new school

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
charge.

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.

Comments (4)

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12:39pm Tue 8 Jul 14

yokelyokel says...

And yet the government is willing to spend over £3 million pounds to build the Robert Owen free school, a school which currently has less than 30 pupils (less than half its target in the year group), has just recruited its third headteacher in 12 months (one who resigned from his previous, failing, school) and has taken council property worth over £1 million with no recompense to the council.

Yes, the PFI projects were badly negotiated and the `risk' which was supposed to be shared seems to be all on the public sector and none on the contractor, but the Robert Owen school shows that the government does have funds but is diverting them to Michael Gove's pet projects.

A question though: If the school is an academy, surely all its assets and liabilities are being handled between the school and the DfE and the DfE funds it directly - it is "free from local authority control".

And, does Ernst and Young not have any liability in regard to the advice it originally gave?
And yet the government is willing to spend over £3 million pounds to build the Robert Owen free school, a school which currently has less than 30 pupils (less than half its target in the year group), has just recruited its third headteacher in 12 months (one who resigned from his previous, failing, school) and has taken council property worth over £1 million with no recompense to the council. Yes, the PFI projects were badly negotiated and the `risk' which was supposed to be shared seems to be all on the public sector and none on the contractor, but the Robert Owen school shows that the government does have funds but is diverting them to Michael Gove's pet projects. A question though: If the school is an academy, surely all its assets and liabilities are being handled between the school and the DfE and the DfE funds it directly - it is "free from local authority control". And, does Ernst and Young not have any liability in regard to the advice it originally gave? yokelyokel
  • Score: 15

1:10pm Tue 8 Jul 14

WYSIATI says...

Mystifying - an academy but expects the council (ie us) to bail them out?

While the rest of us "enjoy" lower than inflation pay rises the PFI capital provider appears to have a guaranteed return that protects them against inflation.

Isn't Jesse Norman taking on dreadful and biased PFI contract deals - can't he take an interest in this transfer of public money to private pockets?
Mystifying - an academy but expects the council (ie us) to bail them out? While the rest of us "enjoy" lower than inflation pay rises the PFI capital provider appears to have a guaranteed return that protects them against inflation. Isn't Jesse Norman taking on dreadful and biased PFI contract deals - can't he take an interest in this transfer of public money to private pockets? WYSIATI
  • Score: 11

1:47pm Tue 8 Jul 14

dplcv37 says...

At least the headteacher is sympathetic. Totally agree with yokelyokel, all of the funding should be coming from the Department for Education within the central government, so why are the local authority throwing money at it?

They want to be free from local authority control, but then they expect them to bail them out when they cant afford the running costs.

The "new" Whitecross high school project was heading in this direction right from the word go.
At least the headteacher is sympathetic. Totally agree with yokelyokel, all of the funding should be coming from the Department for Education within the central government, so why are the local authority throwing money at it? They want to be free from local authority control, but then they expect them to bail them out when they cant afford the running costs. The "new" Whitecross high school project was heading in this direction right from the word go. dplcv37
  • Score: 14

7:32pm Wed 9 Jul 14

Rod Williams says...

PFI for building anything is a waste of money, the costs increase every year. Hereford County Hospital did just the same, what idiots decided to do that? I bet the culprits who were on good money are long gone with golden handshakes. IF YOU CAN'T BUY IT DON'T PFI IT. YOU'LL BE SORRY IF YOU TRY IT. A millstone around their neck for years.
PFI for building anything is a waste of money, the costs increase every year. Hereford County Hospital did just the same, what idiots decided to do that? I bet the culprits who were on good money are long gone with golden handshakes. IF YOU CAN'T BUY IT DON'T PFI IT. YOU'LL BE SORRY IF YOU TRY IT. A millstone around their neck for years. Rod Williams
  • Score: 4
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