Great value or costly folly? Yorkshire counts the cost of council PFI deals

It's been described as '˜the only game in town' for local council leaders wanting to pay for ambitious infrastructure projects in the years after Labour seized power in 1997.

By The Newsroom
Saturday, 29th July 2017, 3:11 am
Updated Monday, 11th September 2017, 12:26 pm
East Ardsley Primary School owes its existence to PFI
East Ardsley Primary School owes its existence to PFI

But the private finance initiative scheme, or PFI, now has a disastrous reputation, damaged in the public consciousness by a succession of negative headlines and eye-watering costs to the taxpayer.

Across Yorkshire, the fruits of such ‘enjoy today, pay tomorrow’ contracts taken out by local councils are there for all to see.

Dozens of new school buildings around the region owe their existence to PFI, as do leisure centres, health centres, hundreds of council homes and several major waste recycling centres, built to end the expensive process of sending rubbish to landfill.

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But analysis of the contracts by The Yorkshire Post reveals that there is a hefty bill to pay for this spending, even if some of it is borne by central rather than local government. All told, PFI contracts drawn up by Yorkshire’s town halls will see more than £13bn paid out to the private firms that finance them, a total several times higher than the capital value of the projects.

Fourteen local councils have signed such contracts, where private firms are paid to build and often manage or maintain the facilities before leasing them back at the end of 25 years or so, with the costs, crucially, remaining ‘off balance-sheet’, meaning they don’t show up as part of the national debt.

Concerns about the terms of the deals, which have made billions of pounds in profits for private contractors, have been emerging for years.

As well as committing public authorities to expensive repayments well into the 2030s and beyond, many involved exorbitant catering, cleaning and maintenance agreements.

When asked about the use of PFI contracts, council leaders in Yorkshire are often less than enthusiastic about having to take this approach, but suggest they were left with no choice.

And though many of the contracts are subsidised by central government in the form of PFI credits, local officials question the value for money they represent for the public purse.

Officials in Leeds, where the city council has signed contracts worth £3bn, £2bn of which comes from government credits, cite a number of examples of benefits from its 14 PFI projects.

A long-delayed housing scheme for the Little London, Beeston Hill and Holbeck areas saw the construction of 400 new homes, the refurbishment of hundreds more and their maintenance, to a high standard, over two decades.

Neil Evans, Director of Resources and Housing at Leeds City Council, said: “The alternative for us is that we would have had to have borrowed, and we would have had to find all that money to manage it over that period. For the council tax-payer it has been an incredibly good deal.

“There is a separate question about whether the funding of PFI nationally is always the most sensible thing to do.”

Stewart Golton, leader of Leeds’ Liberal Democrat group, is less positive. “PFI was the only game in town under Blair and Brown,” he said. “If you didn’t join in you didn’t get any funding. councils had restrictions on what they could do with their finances.

“It looked good on government debt spreadsheets because it was spread over 30 years, and Number 10 could roll out new hospitals, roads and streetlights.

“They were warned that PFI was enjoy today, pay tomorrow, and unsustainable. Now councils can borrow on historically low interest rates to invest in infrastructure, the folly of the PFI is laid bare as that debt is locked in just at the time when councils are struggling to keep services going.”

PFI expert Dexter Whitfield, director of the European Services Strategy Unit think tank, says arguments made for why PFI represented best value for money were often flimsy. He says the process is costlier than public debt, with interest paid at twice the rate. “If you take that over 25 years it will ratchet up on a large scale,” he said.

In 2012, PFI underwent a review which aimed to address some of the widespread concerns about value for money and transparency.

Its successor, PF2, saw a number of changes, including a bigger role for central government in the investment process and a maximum length to the tendering period.

In March 2016 there were 716 PFI and PF2 projects ongoing, with a capital value of £59.4 billion. The number of projects embarked upon peaked in 2006, just before the downturn, and has since declined rapidly.

But 2017 is thought to be the year when PFI payments are at their highest, with an estimated £10bn leaving public coffers. This includes deals struck by NHS trusts and police forces, which will be reported on in The Yorkshire Post next month.

A Treasury spokeswoman said: “All public sector projects are subject to a value for money assessment before they go ahead, and this includes those financed through PFI and PF2.

“Funding for infrastructure projects through PF2 schemes continues to be available to local authorities.”

Carl Les, leader of North Yorkshire County Council, was involved in the negotiation of the 2002 PFI deal which provided replacement primary schools at Barlby, Brotherton & Byram, Kirby Hill and Ripon Cathedral.

Construction of the schools cost £6.6m, with finance provided by Nationwide Building Society. Over the course of 25 years, interest payments and service costs mean the total public expenditure will be £27.7m.

Reflecting on the contract, Coun Les said: “If we wanted new schools we had to go down the PFI route. It does look to be expensive but borrowing money is more expensive than paying out of your reserves.

“What we did well was, we didn’t end up with an expensive PFI contract for the management of the schools as well as the building. That is where you get into horror stories about things like charging £87 to change a lightbulb.

“We had a number of schools in the county built in Victorian times, they were no longer fit for purpose. We had to build new schools. It seems like a lot of money but in the context of where we were then it is reasonable.”

North Yorkshire, in partnership with City of York Council, has since embarked upon a much more expensive - and more controversial - PFI contract for the energy-from-waste Allerton Waste Recovery Park, just off the A1 between Knaresborough and Easingwold.

In total £1.4bn will be paid out as part of the contract for the site, which is expected to be operational by next year and will dramatically cut the amount of waste going to landfill.

In 2013, the Government withdrew funding credits, meaning the burden fell on local tax-payers. But council officials argued that by doing nothing, the cost of dealing with the waste would have been £300 million higher.

Coun Les said: “We have a huge bill to pay but we would have a huge bill to pay anyway.”