The Department for Education has agreed a deal with Leeds City Council aimed at protecting other education services from increasing costs on its Private Finance Initiative (PFI) schools contracts.
A report to members of the authority’s children & families scrutiny board said significant differences have emerged between the original assumptions in the financial models and experience so far with its 29 PFI schools, which represent 11% of its stock.
The council has agreed a one-off payment of £1m this financial year to address “increasing and significant funding issues” projected for coming years, with the department making up the rest through future grant payments.
Deputy city council leader and executive member for resources James Lewis told Room 151 the authority had entered into talks with DfE when it became clear that funding of PFI school contracts would be an issue in future years – with some contracts having another 17 years left to run.
“DfE came up with a number of potential options, some of which were not appropriate or available to address the specific issues in Leeds,” he said.
“I got the impression that the issue of the affordability of school PFI contracts had been raised by a small number of other local authorities.
“Leeds does have a large number of schools – 29 – funded through PFI, so the issues we have identified may not be such a problem in other local authorities.”
The difference between the cost of the PFI contract and the combined income from the PFI grant and school-budget contributions is known as the “affordability gap”
Scrutiny committee members were last week told that in 2019/20 the authority will fund PFI schools with an additional £1m to address Leeds’ gap, and that the deal struck with DfE will re-baseline the new funding level as part of its grant from next year.
The committee report, from the head of finance at Leeds’ children & families directorate, said “variables such as the rate of inflation, the rate of overall increase of the unitary charge payments, lettings income and the available funding to meet the payments” were core issues in the increasing gap.
PFI schools pay the affordability gap contribution with additional “PFI Factor” funding through the schools block of Dedicated Schools Grant (DSG) that the government allocates to local authorities.
The council report said that in return for the council’s £1m one-off contribution, the DfE will increase the PFI Factor to meet the affordability gap, leading to “an equivalent increase in total schools funding for the PFI Factor for each subsequent year whilst the PFI contracts are still operating”.
Some of the PFI contracts are due to run until 2036/37.
According to the council, the deal struck with the department will protect non-PFI schools from contributing to the increased costs of PFI contracts, and provides more certainty about meeting cost pressures from the PFI schools.
Leeds said its main concern had been addressing how increasing costs of PFI contracts would be funded in the future and that it had sought to find a solution that avoided having to take more funding from the “schools block” of its DSG.
Councillors were told remodelling of the financial position for each of the city’s PFI schools schemes showed “increasing and significant funding issues over the remaining lifetime of the schemes”, particularly against a backdrop of increasing inflation.
“The options to meet this growing funding gap are limited as most of the funding is fixed or based on previous year spend with an annual uplift for RPIX,” the report said, adding that the deal the with DfE would provide “some financial certainty over the next few years”.
Councillors were told that the total cost of funding the city’s PFI schools had been £52.1m in 2018/19, met through a combination of PFI credits grant from DfE, contributions from schools through a school budget contribution, and a school affordability gap contribution.
Figures provided to councillors said Leeds’ DSG for 2019/20 was £516.32m, up from £498.97m the previous year.
The city’s £1m contribution to the PFI schools funding gap will come from the children & families department’s net managed budget of £121.75m for the current year.
In October last year, Chancellor Philip Hammond announced that the government would not support new PFI and PF2 agreements, arguing that the system had become “inflexible and overly complex” and represented a “source of financial risk” to government.
Shadow chancellor John McDonnell previously floated the idea that a future Labour government would take PFI contracts back into the public sector, prompting concerns that such a move would not represent value for money.
In April this year, Birmingham City Council announced it was reviewing a £2.7bn highways PFI deal with construction firm Amey, with a view to ending it early.
