Schools cost 40% more to build under PFI, watchdog reveals

CREDIT: This story was first seen in Tes

National Audit Office report also highlights ‘operational inflexibility’ of PFI contracts and the huge fees involved, Tes reports.

Schools can cost 40% more to build and maintain under the private finance initiative (PFI) than if the government simply borrowed the money, a damning new report from the official public spending watchdog reveals.

The National Audit Office (NAO) findings are particularly concerning because they relate to a reformed version of PFI, known as PF2, which the government claims offers ‘better value for money’ than the original.

But the NAO’s report, which says that taxpayers owe £199bn for all PFI projects even if no new deals are struck, says schools could be built for much less.

“The Department for Education has estimated the expected spend on PF2 schools compared with a public sector comparator (PSC),” the report states.

“Our analysis of these data for one group of schools shows that PF2 costs are around 40% higher than the costs of a project financed by government borrowing.”

The chair of the influential House of Commons Public Accounts Committee, Meg Hillier, said that PF2 amounted to little more than a rebranding of an ‘exorbitantly expensive’ scheme.

Under both the PFI and PF2 systems, private consortiums, rather than government, raise funding to build public facilities like schools, in return for regular payments over several decades.

The report outlines the huge additional expense involved in getting any extra work done once a PFI contract – which will usually involve the maintenance as well as the building of a school – has begun.

“The PFI structure means that changes in contracts can be expensive, with lenders and investors charging administrative and management fees,” it says.

“For example, additional capital works of approximately £60,000 in a local authority PFI school increased to over £100,000 once fees were factored in – the local authority challenged this and the [PFI consortium] agreed to reduce some of the management and approval fees, although bank fees of £20,000 will still have to be paid.”

Last year a Tes investigation revealed how PFI deals were forcing schools to pay thousands of pounds extra for everyday items, such as £8,000 for a blind and £2,000 for a tap.

The NAO also describes the “operational inflexibility” of PFI contracts as a “drawback”, noting that they often last more than 25 years. The Treasury, it says, would not normally allow other public contracts to last more than seven years.

The report says that 716 deals – across all sectors – are currently operational under PFI and its successor PF2, with annual charges amounting to £10.3 billion in 2016-17 and contracts due to stretch into the 2040s.

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It says there has not yet been a “robust evaluation” of whether the extra costs of PFI were offset, as supporters claim, by benefits such as reduced risk to the taxpayer and higher-quality facilities.

The report was compiled before the collapse of contractor Carillion. But its release came as the construction giant’s failure sparked furious debate about the future of a system that Labour leader Jeremy Corbyn denounced as a “costly racket”.

Mr Corbyn told Theresa May at Prime Minister’s Questions: “These corporations need to be shown the door. We need our public services provided by public employees with a public service ethos and a strong public oversight.”

And one union said that the scale of payments revealed by the NAO should mean the “game is up” for PFI.

Ms Hillier, said that, 25 years after it was launched under John Major, there was “little evidence” that PFI was delivering value for money.

“Many local bodies are now shackled to inflexible PFI contracts that are exorbitantly expensive to change,” the Labour MP said.

“I am concerned that the Treasury has relaunched PFI under new branding, without doing anything about most of its underlying problems.

“We need more investment in our schools and hospitals but if we get the contracts wrong, taxpayers pay the price.”

Rehana Azam, national secretary of the GMB union, said the report showed PFI to be “a catastrophic waste of taxpayers’ money”.

“Nothing can hide the chronic failure that it has proven to be over decades,” she said.

“Carillion is just the latest example of how bad things go wrong when public services are left in the hands of profit-hungry companies.

“This report should mean that the game is up for PFI.”

A government spokesman said: “Many vital infrastructure projects like roads, schools and hospitals are paid for by PFI and PF2, stimulating our economy, creating jobs and delivering better public services.

“We have reformed how we manage PFI contracts, and through PF2 have created a model which improves transparency and offers better value for money.

“Taxpayer money is protected through PFI and PF2 as the risks of construction and long-term maintenance of a project are transferred to the private sector.”

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