Six PFI projects cost £170m more than taxpayer originally agreed

Six of Northern Ireland’s Private Finance Initiatives have cost the taxpayer a total of almost £170m more than it was originally projected, the News Letter can reveal.

Friday, 15th November 2019, 5:33 pm
A IT contract called Classroom 2000 / C2K cost the taxpayer £52 million more than originally agreed.

The figures have been uncovered through Freedom of Information research by the JPI Media Investigations Team.

Leading NI economist Esmond Birnie said the flaw appeared to be that “government underestimated what future inflation would be” and said the private contractors should have shouldered more of the risk.

• A schools IT infrastructure called Classroom 2000 turned out to be £52m above the original estimate, partly due to the fact that it extended from a five-year to a seven year deal, ending this year. The Education Authority responded that the project, C2K, provides “infrastructure and services to support the enhanced use of ICT in grant-aided schools across Northern Ireland”. The contract was extended to ensure continued provision “in line with the appropriate approvals process” it added.

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• Land Registry entered into a PFI with BT in 2002, dubbed ‘LandWeb’, to make its documents available online. Originally projected to cost £46m, by this year the cost had more than doubled to £98m. The Department of Finance spokeswoman explained that an agreed amount is paid to the contractor for every transaction, but that an unexpected boom in the property market in the 2000s “resulted in higher levels of payments”. A renegotiation for the next two years has seen £1.9m savings, she added. There was no initial capital cost to the contract as all payments were related to transactions, she added.

• A Belfast Health Trust PFI called ‘Managed Equipment Services’ cost £35.7m above the original estimate over 15 years. The trust said the original £97.6m cost was based on 2005 prices but that it was agreed these would be updated annually to account for inflation “as the provider’s costs will rise each year”. The Deparment of Health said the contract was “dependent on market forces and is therefore outside the control of both the Trust and the Department”.

• Laganside Courthouse was £17m above original estimates, rising to £109.7m in total. The NI Courts Service said the increase relates to increases in the Retail Price Index and also Gross Domestic Product rates from the Office of ational Statistics. “At the outset in 2001 such indices could only be estimated,” it said.

• Two college PFIs with the South West College have come out £6.5m above the original cost, Dungannon £1.5m and Omagh £5.1m above estimates. The Department for the Economy said that given the scale and the lifetime of the projects are over 30 years, the overall cost variances of 1.2% and 4.2% against the initial projections are “within the expected parameters”. There will be “no impact on overall college budgets” it added.

• An IT project for the Department for the Economy (DFE) was some £3.69m above original cost. The predecessor organisation (The Department of Economic Development) had a PFI Contract in place with International Computers Limited (now Fujitsu Services). The original contract ran for 10 years from 1 April 1998 to 31 March 2008, with a further extension being signed to 31 March 2009.

The projected whole life cost of the scheme when it was first agreed was £45 million but the actual whole life cost of the scheme was £48.69 million. The DFE said the difference was due to the contract being extended by 12 months from 1 April 2008 to 31 March 2009, which was agreed on 22 March 2007.

‘Private sector should have shouldered more of the risk’

Leading economist Esmond Birnie says that the reason six NI Private Finance Initiatives (PFI) cost £170m more than initially agreed was due to underestimates for future inflation.

“It looks to me that a frequent pattern across these contracts is that often government underestimated what future inflation would be,” he told the News Letter.

“This in turn meant that the actual scale of the interest payments - or unitary charges - was larger than projected as these were uplifted in line with inflation.

“It would have been better if the initial contract had put more of the burden of risk on to the private sector providers of the funding.”

He imagines Stormont Departments would reply that the private sector would not be willing to lend on these terms, he said: “But I wonder?” There is some is some evidence of cost savings being achieved “but not that much” he added.

In 2014 the NI Audit Office charged the Office of First and Deputy First Minister, now the Executive Office (TEO), with starting a strategic programme to regularly report to the assembly on PFI efficiency savings. TEO says that its Strategic Investment Board wrote to departments offering support with reviews of PFI contracts and that it had supported market testing and sharing of good practice in contract management.

A report on this work is provided to the NI Audit Office on request, TEO said, with the last report submitted in 2018. Whilst reporting PFI data to the Assembly is “not possible” in the absence of the Executive, TEO argued, the NI data is included in UK-wide reporting overseen by HM Treasury. The Audit Office responded that it has “yet to conduct an in-depth analysis and validation of” TEO’s response to its recommendation.

‘Borrowing from the government would have been much cheaper’

Former economic consultant Donal O’Cofaigh says the total cost of Northern Ireland’s PFIs will finally be around £7bn.

“By comparison the initial capital costs for all the projects put out to PFI contracts was only £2 billion approximately,” the Fermanagh Labour councillor said.

“This presents an immediate question about the £5 billion gap. While it is clear that costs might include unavoidable maintenance and management costs wrapped into the contracts, even allowing for these there seems to have been a huge and avoidable cost to the public purse from the use of PFI.”

If the money had been borrowed from government instead, he said, the cost would have been “considerably less”.

Government struck over 30 PFIs in NI between 1995 and 2010. Essentially huge mortgages, they were used to raise finance for projects such as schools, hospitals and roads.