Perverse & absurd, but KCC keep paying their offshore PFI contractors

Back in 2013, Peter Read, who runs the Kent Independent Education Advice website, uncovered a financial scandal relating to academies. In his article published on 22 Sept 2013 he made it clear that Kent County Council were being forced to pay more than £100 million to Private Finance Initiative (PFI) companies who were running schools that have become academies, over the length of their contracts. This figure was likely to rise even further, and perhaps double as more schools convert. By 2018, Peter Read’s prediction of payments doubling came true in 2018. And as of March 31st 2021, the figure has risen again to a little over £325 million.

In 2020/21 KCC paid £43m to their six PFI contractors most of who are registered offshore in tax havens.

KCC do not just have school PFIs, they have housing, and healthcare PFIs as well.

Kent’s schools got their last taste of the business world when government tried to introduce a market to the education system via the private finance initiative (PFI). In the mid-2000s it stopped paying for new schools, instead inviting private financiers to fund most of its infrastructure programme. In PFI, a group of companies signs a contract with a public body to build a school, the contractors get a bank loan to pay for it and the council agrees to rent the building back for the next 30 years to pay off the debt.

The private bank loan to fund the construction at the heart of a PFI is inherently more expensive than public funding, due to a higher interest rate, onto which you add swaps, hedges, management, advisory fees and more. PFIs advantage is that it is offbook, ie it does show on your balance sheet.

In 2012, KCC had just five PFI contracts. The capital costs for all these were £291m and the total liability to pay back including interest, service charges, and lifecycle costs was £985.6m. Meaning those PFI contract would be 70% more expensive.

The costs of projects funded by PFI have been much higher than those funded through government borrowing – the Department for Education (DoE), expected spend on PF2-financed schools – KCCs schools are part of PF2 –  to be “around 40 per cent higher than the costs of a project financed by government borrowing (in 2018)”. But the latest DoE estimates predict KCC PF2 schools will cost about 70% more than if they’d used non-PFI borrowing.

At the 2018 Budget, the Chancellor Philip Hammond announced the use of private finance initiatives (PFI) for future building projects will be abolished.

According to KCCs recent estimates in their latest accounts 2020/21 show £210m outstanding loan agreements with PFI contractors, onto which £166.5m of extra interest charges will accrue between now and 2040, plus £156.3 million in service charges and £70.7m in lifecycle costs, meaning the estimated cost to repay all KCC PFI contracts was £603m.

As the chart above shows KCC paid their PFI contractors £43.1m in 2020/21, but just 18% or £7.9m was to pay of the outstanding loan arrangements. The other £35.2m, or 82%, was for interest payments, service charges and lifecycle costs.

The extra interest charges and higher total cost of private financing was understood by KCC when they entered into these deals. But they needed schools and it was government policy, so there was no alternative. KCC found themselves in the position of having to sign a 30-year contract containing an in-built ‘affordability gap’ set to drain its other budgets.

In the latest KCC budget consultation, you will not find KCC budgets for PFIs being cut because of the ironclad contracts with the PFI companies. Even the most drastic cut, closing a school, will leave the council being charged for cleaning the empty corridors and still repaying the loan, which is just free money for the offshore companies, based in those not so lovely offshore tax havens of Guernsey, Jersey & Luxembourg.

Nineteen years since the first KCC contract was signed, the affordability gap has become our problem – putting massive PFI repayments in direct competition with having more teachers and better education. With the financial appendices of the original plans redacted for members of the public, it is unclear what the exact cause of the affordability gap is, but what’s obvious is that it exists, that it’s big and that it’s growing.

Peter Read’s excellent article from 2013 makes this evidently clear, when he states:

The PFI money comes out of the pot available to KCC maintained schools, so every school that is not an academy contributes to this totally unjust payment. The size of the pot depends on the number of schools that are not academies and so shrinks every time one converts. However, the sum payable to the PFI companies remains constant (and is index linked) so each school remaining with KCC receives a smaller budget. To take it to the extreme, if all but a few schools became academies, as the government would like, those few would have no budget at all – the total school fund going to meet the PFI bill.  This injustice can only increase the pressure on schools to change status, supporting a vicious circle that already operates because of other fixed costs faced by the county.

KCC’s decisions to enter into all its PFI contracts from 2002 onwards was flawed. From 2010 onwards – given the evidence by then available about the long-term outcomes for PFI projects – KCC’s decisions to continue engaging in them were so flawed as to be “Wednesbury unreasonable” – the term denotes behaviour on the part of a public authority that is particularly perverse or absurd.

PFI loans require KCC to “analyse and be satisfied that future costs [are] affordable over the life of a contract (25-30 years)”, which is not feasible given that the Treasury only provides certainty about budgets up to five years in advance.

KCC has failed to subject the consequences of those flawed decisions to proper scrutiny with a view to minimising the ongoing damage. KCC Auditor – Grant Thornton – seems to believe that, so long as KCC followed proper procedures when entering the contracts – which, any rational person would dispute – it is entitled to continue treating the contracts as representing value for money for the rest of their 16 – 20 year life cycle. The public interest demands that KCC subjects its financial arrangements to detailed, ongoing scrutiny and, where necessary, adjustment. But of course they don’t and won’t.

One could argue that KCC could refinance the PFI loan to try and reduce the cost, but this would be false comfort. Yearly payments would be reduced, but debt pile gets pushed a decade or two further into the future and still grows at approximately £20 plus million each year. It’s the kind of short-term thinking that got us into this mess to start with.

The only real option for dealing with this affordability gap is to to keep paying, and keep paying more. Continuing to pay up at the expense of education isn’t right, but nothing else really works – which makes the contracts a mess better swept under the rug and left for someone else to deal with. ‘Someone else’ in this instance includes the children just starting school, onto whose shoulders all this debt is accruing.

The Shepway Vox Team

Journalism for the People NOT the Powerful

There are legitimate uses for offshore companies and trusts. We do not intend to suggest or imply that any people, companies or other entities included in this blog post have broken the law or otherwise acted improperly, unless found so by a court of law.

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4 Comments on Perverse & absurd, but KCC keep paying their offshore PFI contractors

  1. doggerbank56 // August 24, 2021 at 09:49 // Reply

    PFIs advantage is that it is offbook, ie it does show on your balance sheet.

    If it is “offbook” it does NOT show on your balance sheet as a financial liability.

  2. doggerbank56 // August 24, 2021 at 12:51 // Reply

    I agree that it has to be paid for by somebody, but, the issue has been that both Conservative and Labour politicians supported these PIFI schemes knowing that when the final bills are computed they will have long departed the political stage.

    This is because they enabled investment to take place without either government borrowing or taxation having to increase to reflect this expenditure at the time it occurred. Instead, like a consumer hire purchase agreement the cost would be spread over many years and interest would be charged on top. As the public sector can borrow at very low interest rates, the decision to use PIFI cannot be justified on cost grounds.

    Equally the argument that the private sector could bring greater expertise to procurement and contract management has in many cases proved to be totally specious, Carillion being only one of many examples. The taxpayer will be paying for these schemes for many years to come. Future governments (and local councils) would do better to employ staff who are competent and experienced in managing large contracts.

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