1.20 In our 2017 survey departments reported that operational inflexibility was a drawback of PFI (five out of six departments able to provide an answer to our survey question considered operational flexibility worse under PFI). HM Treasury does not normally allow departments to enter contracts lasting longer than seven years; however, PFI contracts often last over 25 years. The PFI structure means that changes in contracts can be expensive with lenders and investors charging administrative and management fees. For example, additional capital works of approximately £60,000 in a local authority PFI school increased to over £100,000 once fees were factored in - the local authority challenged this and the SPV agreed to reduce some of the management and approval fees although bank fees of £20,000 will still have to be paid.
1.21 Department of Health and Social Care papers similarly highlight that some trusts with PFI facilities have to use alternative forms of procurement for capital variations. Government can also be locked into paying for services it no longer requires: for example, Liverpool City Council is paying around £4 million each year for Parklands High School which is now empty. Between 2017-18 and the contract end in 2027-28, it will pay an estimated £47 million, which includes interest, debt and facilities management payments, if no changes are made to the contract.23 The school cost an estimated £24 million to build.
1.22 Some of these problems have been taken into consideration for new PF2 deals. The PSBP PF2 deals include a variation mechanism that aims to reduce the cost and complexity of variations. New PSBP PF2 deals also include a partial termination mechanism to address the risk that schools will not be needed during the contract term - compensation paid to investors under partial termination would be at a slightly lower level than compensation paid in a full termination scenario.
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23 HM Treasury, Private Finance Initiative and Private Finance 2 projects: 2016 summary data, December 2016.