Oversights in building contracts could put financial squeeze on local councils

4th February 2011 at 00:00
Flaws in initial negotiation of PFIPPP projects will leave many committed to above-inflation payments, report claims

Local authorities in Scotland could face a severe financial squeeze because of oversights in the way PFI and PPP contracts for school projects were negotiated, according to a new report.

The study, by economists Jim and Margaret Cuthbert of Strathclyde University's Public Interest Research Network, identifies flaws including gaps in funding when financial support from central government ends, and over-optimism about proceeds from land sales.

Most strikingly, it also reveals local authorities failing to make allowances for inflation being higher than anticipated when the contracts were drawn up under the Private Finance Initiative, which later became the Public Private Partnership funding model under the LabourLibDem Scottish Executive.

The result will be that many are committed to increases significantly above the rate of inflation in the PPPPFI contributions that they will need to make, the report claims.

Writing in the journal Public Finance, the researchers said: "Overall, the findings paint a worrying picture of the squeeze which is going to be imposed on other local authority services because of PFI contractual commitments, as the financial pressures on local authorities intensify.

"In particular, if we now hit the combination of relatively high inflation combined with real-terms cuts in the support local authorities get from central government, the problems faced by many local authorities with PFI commitments are likely to be severe."

The report, which draws on data from 37 schools projects in Scotland delivered through PFI, comes at a time of immense pressure on school budgets and expectations of increased efficiency.

A spokesman for the Educational Institute of Scotland said that, while PFIPPP projects had delivered many new and refurbished schools at a time when they were desperately needed, many people - including the EIS - had warned at the time of the heavy, long-term cost to the public purse of these contracts.

A union spokesman said: "Taking the `credit-card' approach to financing new schools, rather than investing public money directly, was always going to lead to a much larger cost in the long term. PFIPPP projects also shifted much of the risk and ongoing maintenance costs to the taxpayer, with ongoing costs and the resulting profits to private contractors often very large."

As education budgets are squeezed and school funding is reduced in the years ahead, it would become an even greater burden to pay the PFIPPP costs, he predicted.

However, John Stodter, general secretary of the Association of Directors of Education in Scotland, downplayed the findings, suggesting they needed to be looked at in a wider context of longer-term fluctuations in the economy.

"These contracts would all include a forecast on inflation," he said. "They were based on long-term government forecasts of around 2.5 per cent. But in some years inflation was significantly below 2.5 per cent. And we've just come out of a period when inflation was at zero and councils were able to negotiate from that.

"So the reality is that, in some years, you're going to win and in others you're going to lose. The important consideration is that you're looking at it over 20-25 years."

Even if councils were not using this particular funding mechanism, any new borrowing would still be subject to fluctuation in the market relating to the interest rate, Mr Stodter said.

"So it's not as if councillors could have avoided rises, because you're still subject to an increase," he said.

l Scottish Labour leader Iain Gray has said that a Labour-led administration at Holyrood would scrap the Scottish Futures Trust (SFT) in its current form and bring its function "in-house".

The SFT was set up by the SNP Government as an independent company to deliver value for money for public infrastructure projects. Its benefits statement for 2009-10 said it had saved pound;69 million through its role in the construction of new schools by pooling the expertise and buying power of Scotland's 32 local authorities and prioritising essential over desirable features in new buildings.

chris.small@tes.co.uk.

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