Hidden PFI charges push Lothian school projects costs up by combined £60 million

Cash-strapped councils in the Lothians are paying millions more for schools built under the controversial private finance initiative (PFI) than originally planned because of rising inflation costs, an investigation by the Evening News can reveal.

Wednesday, 16th October 2019, 5:00 pm
Updated Wednesday, 16th October 2019, 6:10 pm
PFI deals were the preferered method to pay for hundreds of public buildings at the turn of the century, but the funding mechanism has proved controversial

Many of the contracts signed off by local authorities with private firms in the late 1990s and early 2000s – with the aim of replacing crumbling public buildings – were pegged to the retail price index (RPI), a now discredited inflation measure used to calculate rail fare hikes and student loan interest payments.

The governor of the Bank of England, Mark Carney, has admitted there are “known errors” in the RPI system, and last year called for the UK government to stop issuing bonds linked to it.

But that advice has come too late for many local authorities north of the Border, who now face shelling out millions more in costs for schools that were built under public-private schemes.

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Two projects to build schools are now estimated to end up costing City of Edinburgh Council £46.8 million more than originally budgeted, while two schemes overseen by Midlothian Council have seen its predicted costs rise by 16m.

The Scottish Government said the PFI approach used in the past had delivered poor value for money, leaving taxpayers in Scotland liable for a £30 billion legacy of payments between 1997 and 2042.

Scottish Labour leader Richard Leonard has pledged to ban any further public-private finance deals if his party took power.

“Scotland’s historical PFI deals have put unnecessary pressure on our NHS, our local government services and right across the public sector,” he said. “That is why I have been clear that the Scottish Labour government that I lead will introduce a ban on new PFI/PPP/NPD deals.

“We will also take private contracts back in house at the earliest opportunity to save the taxpayer money in the long term.”

A City of Edinburgh Council spokeswoman said: “While these contracts are subject to annual inflationary uplifts, these uplifts are applied at a level considerably below that of the prevailing RPI rate.

“The actual level of payments made is also influenced by a number of other factors not reflected in the original agreements, such as the introduction of free school meals for all P1 to P3 pupils in January 2015.”

A spokeswoman for Midlothian Council said: “A proportion of the annual charge is fixed and the remainder, including the annual service charges are inflated using RPI. This method is the standard used in the Scottish Schools Standard contract.”

They added: “The council budgets factor in inflation at the prevailing rates and, as such, changes from the historic forecasts used at contract close do not have negative impact on local services.”

A Scottish Government spokeswoman said: “The annual PFI repayment bill now exceeds £1 billion – nearly five times more than the Non-Profit Distributing programme which we introduced and is proving far better value to the public purse.

“The funding of public infrastructure has vastly improved since 2007. We are working to ensure PFI contracts which have been inherited provide the best value for money for the taxpayer – and to ensure savings are achieved from existing contracts, wherever possible.”