Work has started to ensure the smooth transition of several Private Finance Initiative (PFI) contracts, which have funded and maintained key hospital and school projects in Nottinghamshire, back into public ownership – even if they do not expire for ten years.
Recently, a number of government agencies, such as the National Audit Office (NAO), have expressed concerns that expiration of contracts should be prepared at least five to seven years in advance to ensure that assets do not return to the public sector in a bad state.
PFI projects were particularly popular during the period of Labor governments from 1997 to 2010 as a way to pay for large-scale contracts, but were originally introduced by Conservative Prime Minister John Major in 1992.
They involved private companies tasked with building and then managing public projects such as schools, hospitals, waste management contracts, lighting and, in Nottingham’s case, the tram system.
PFI contracts, typically for 25-30 years, are owned by a number of investors such as a construction company, a service provider and often a bank.
The cost of the project and maintenance contract is spread with interest over the life of the contract, often resulting in a huge difference between the initial cost and the final cost.
One of the best illustrations of this is the rebuilding of King’s Mill Hospital in Sutton-in-Ashfield under a 32-year deal with the Sherwood Forest Hospitals Trust, initially costing $ 326 million. pound sterling.
By the time the contract comes to an end in 2042-2043, it will have cost the taxpayer £ 2,382.3million, or around £ 1million per week.
At the end of a PFI contract, buildings and management revert to the public sector such as local authorities and health trusts and preparation for this and the condition and continuity of services are the concerns of the audit office.
Ironically, the National Audit Office said in 2003 that PFIs were overall good value for money, but now warns that “there is a risk of increased costs and disruption of services if authorities fail to act. not prepare sufficiently in advance for the expiration of the contract.
And also “some authorities have insufficient knowledge of the state of assets, which risks returning them to the public sector in poorer quality than expected.”
Nottinghamshire County Council is involved in one of the first PFI contracts to end in the county and says discussions are already underway with East Leake Schools Limited (ELSL) on reverting provisions of the original contract which had a financial close. in 2002 and was engaged for 25 years.
The contract, with major shareholder NIBC Bank, covered the construction and operation of Lantern Lane Primary School, East Leake Academy and East Leake Leisure Center.
The total investment costs for the construction were £ 19.6million, but by the end of the contract the project will have cost the taxpayer just under £ 77million with an average repayment cost of ‘around £ 3.07million per year.
Mick Allen, head of commissioning for the county council group, said discussions were already underway with East Leake Schools Limited (ELSL) over the contract’s on-lending provisions.
He said the issue had also been raised with another Nottinghamshire school project – Transform Schools Bassetlaw Limited (TSBL).
This involved the construction of five new secondary schools, which are now academies, a new special school, two new centers for post-16 education in Retford and Worksop and two new recreation centers for the Bassetlaw District Council, with shareholders Balfour Beatty and Innisfree.
The contract was entered into in 2005 for a period of 27 years at an initial cost of £ 150.9 million. It is expected to end in 2032, by which time it will have cost around £ 530million at an annual cost of around £ 19.6million per year.
Mr. Allen said: “We have entered into discussions with ELSL to ensure that buildings and operating systems such as heating and lighting are returned to the academy board or trust which manages them in a condition that complies with contractual obligations, this includes ensuring that all life cycle maintenance work is undertaken. .
“Both contracts contain detailed requirements on the minimum life span of particular building elements after handover, and a survey conducted 30 months prior to expiration is used to verify the condition of assets and any maintenance required to bring them up to date. at the level.
“The ELSL contract expires on July 31, 2027, with a detailed investigation to be completed in 2025, and although the TSBL contract does not expire until July 31, 2032, we have already started an early dialogue on the process.”
Another PFI project which is expected to be completed in the next few years is a project run by the Nottinghamshire Police and where early planning is underway.
Originally, the force implemented two 25-year PFI projects in 2001 for vehicle services and accommodation with total investment costs reported by the government at £ 21.4million, leading to a overall final cost at expiration of £ 101 million.
But in the years that followed, contracts were changed and a Nottinghamshire Police spokesperson said: ‘Many PFI programs in the public sector were established some time ago, often in political and political times. different financial.
“Nottinghamshire Police continue to actively manage a single remaining program which includes an office building and garage in an industrial estate.
“It ends in 2026 and the force has already put in place a number of measures to ensure value for money and business continuity. We have a proven track record of working with the Home Office to maximize the PFI value for public money.
“Strategically, the force continues to actively manage the contract with particular attention to change control, service delivery, condition investigations, controls and avoidance of decay costs.
“The asset has been maintained at a very high standard and we have maintained a professionally intrusive approach to its operation. The General Manager and the Estates team have extensive experience in managing, challenging and closing programs. PFI across the police and force remains optimistic about the business opportunity that the 2026 transition will present due to its early planning. ”
Other PFI contracts in Nottinghamshire end at different times, including the Greater Nottingham LIFT Company, which has developed six NHS buildings in the region, established in 2005 for 25 years; The Nottinghamshire Waste contract, put in place in 2006 for a period of 26 years for an initial investment cost of £ 180 million and an aggregate final value of £ 850 million; Nottingham University Hospital NHS Trust has a 35 year PFI contract which started in 2001 with an initial investment cost of £ 16.6million and is expected to be around £ 121million when completed; Nottingham Street Lighting, started in 2010 with initial investment costs of £ 59.2million rising to £ 182.1million in 2035.
The first phase of the PFI contract for the Nottingham express line was financially closed in 2000 and was expected to last 26.5 years.
But when the tram network expanded in 2011, the terms of the PFI contract changed to phase two and it now only ends in 2033 with another 12 years to run. The latest PFI contract started with investment costs of £ 536million, but is expected to cost around £ 767.5million when it expires. The city council confirmed that it was already considering the expiration of the contract.
Nationally, the Public Accounts Committee (PAC) also commented and said that there are 700 PFI contracts across the country, representing public infrastructure assets worth around £ 60bn. and future costs of around £ 170 billion.
A spokesperson for PAC said: “The first contracts have expired and around 200 will expire over the next 10 years.
“Lack of attention on the part of the public authorities responsible for managing contracts could also leave the public sector paying large works bills, which PFI companies have already been paid to do.
“What is certain is that action must be taken now to prevent this from becoming a huge salary for the consultants.”