Report to Sheffield Schools Forum 15 February 2018

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Paper 4 - For Information

PFI Efficiencies Update

Key Messages Forum members are asked to:

Note progress to date to explore various options.

Consider any policy implications from today’s discussion on our proposal (via the working group if required).

1. Introduction/background Further to the update at the September 2017 Forum, the PFI working group identified three strands of work to explore in more detail and the progress of these are summarised below.

2. Policy discussion

Further to operational discussions, a conference call was held between council officers and the Education and Skills Funding Agency (ESFA) to discuss PFI policy issues, to express our concerns regarding the affordability and to find out more about the DfE's longer-term thinking in relation to NFF. As a result of this conference call, Emily Nunn from the DfE accepted our invitation to attend the Schools Forum to give further context on the national policy.

3. De-scoping

3.1. A workshop was held at Meadowhead School during January 2018 to establish whether there was any scope for identifying elements of the facilities management service, which could be changed in order to drive out some savings. Meadowhead School is one of the four schools from the Sheffield Schools PFI 3 Contract. The school was represented in the workshop together with representatives from Kajima, the Special Purpose Vehicle (SPV); Kier (FM Provider) and the Council’s Finance and Commercial Services and Property and Facilities Management service.

3.2. HM Treasury’s ‘Making Savings in Operational PFI Contracts’ guidance was

used as the basis for the workshop agenda together with a review of the service specification by the Finance and Commercial Services representative.

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3.3. Detailed in this report are the areas of the FM service which could be explored

further to determine feasibility: to implement a change in terms of net financial benefit, maintaining value for money in the short and long-term whilst being acceptable to all stakeholders.

FM Service Proposal

Utilities

Replace existing internal and external lighting with LED lighting.

Install sensors into all rooms which activate the lighting only when the room is occupied.

Schools to actively reduce electricity consumption through having a policy of switching off all stand-by electronic equipment when not in use.

Close the school one hour earlier, closing at 5.30pm rather than 6.30pm thereby saving electricity.

Cleaning

Reduce cleaning staff terms and conditions of employment to 11 months per annum as and when employees leave the organisation.

Programmed lifecycle works would be undertaken during school holidays prior to cleaners being required to bring the school back up to the contractual standards before the school re-opens.

Currently cleaners are in school most of the school holidays trying to clean whilst works are ongoing.

Caretaking Close the school one hour earlier, closing at 5.30pm rather than 6.30pm thereby saving staff time on site.

Flooring Consider using more durable flooring reducing lifecycle expenditure thereby generating a greater share for the Council of any lifecycle fund monies at the end of the contract.

Third Party Use Carve out third party use from the PFI Contract and allow schools to tender this activity to generate income for the schools.

Increase Third Party Use

Is there a scope for the PFI Provider to use the school for Third Party Use during sessions to generate a greater income share?

Is there a scope for the school to generate third party income during the sessions in which they can keep?

Pupil Damage Schools to actively work to reduce pupil damage which will result in the surplus pupil damage fund being refunded.

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Market Testing Stop any further market testing to mitigate the risk of prices increasing which is generally what happens.

Insource Catering Service

The PFI Provider has no issue with this suggestion. The cost of change for a similar exercise carried out on another PFI contract was c. £70k. The cost of the PFI catering service will need to be compared with the cost of the corporate catering contract.

Grounds Maintenance (GM)

Re-scope the service making sports pitches and visitor entrances priority areas with all other GM activities reduced in scope.

Programmed Lifecycle works

PFI provider felt that furniture and decoration specification is ‘gold-plated’ resulting in loose furniture and decorations being renewed before the end of their usefulness. This change would result in a greater Lifecycle Fund Surplus to be shared at the end of the contract term.

3.4 Some elements of the FM service were discounted as feasible savings idea

owing to legislative obligations such as health and safety for example, reducing the winter maintenance element of the specification and/or because of an activity being related to lifecycle maintenance for example, the insourcing of the cleaning service was not acceptable to the PFI Provider.

3.5 It should be noted that the school representative who attended the workshop

was interested to understand how the school could be incentivised to save energy and how any savings resulting from changes to the PFI contract will benefit the school.

3.6 A further consideration which needs to be factored into any proposed

contract change is how the PFI 3 Contract is structured. To implement a contract change it would have to be acceptable to all four schools in the PFI contract in order to generate the level of savings required to net off the cost of change which as yet has not been explored.

4. Exploring other options

4.1. Refinancing - an initial review was undertaken to consider refinancing of the current arrangements to identify if savings can be made for debt repayment. The bank margins are all at or less than 1% and it is extremely unlikely that banks would offer margins that low again. Also, and more importantly, the loans were all fixed at the prevailing underlying interest rate and any change to the finance structure would, similarly to repaying a mortgage early, result in paying break costs based on the difference between those rates and current rates. Financing those costs could erode any margin saving if there was one.

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Comparisons were made to other contracts that have been refinanced and it is not proposed that we undertake any further work on this option as it is not likely to realise any benefits.

4.2. PFI exit implications and costs It is possible to terminate the PFI Contracts but there would be significant payments to be made to compensate the contractors and the banks. The total capital required for early termination of the 5 contracts would be circa £200m. If these termination costs are funded by the Council this could produce savings of around £3m a year compared to the financing costs contained within the contract payments.

However, whilst this level of reduction is attractive, it would be dependent on a number of assumptions which are not guaranteed, namely:

1. That the DfE would continue to pay the PFI grant. 2. That services could be procured at the same price.

This is not recommended because it:

Requires engagement by DfE/ESFA to retaining grant without a PFI contract and would be setting a precedent for other authorities.

Would impact on the Council’s borrowing limits.

Would require a complex arrangement with schools/academies and the DfE to ensure debt obligations are flowed through and protected.

Would require a comprehensive programme of procurement to ensure continuity of service to schools and acceptable levels of performance.

Would require a significant amount of SCC resource to progress as a project.

* See Appendix 1 for indicative values for each contract.

4.3. Reducing a Proportion of Debt Through a Capital Contribution

It is possible to cancel an element of the outstanding debt and replace with a capital contribution funded by the Council. However, because this would still incur break costs for terminating an element of the funding early, then there is a significant additional cost to fund. This means that for PFI1 and PFI2 there would be no savings generated. For PFIs 3-5 there is a very marginal saving but this depends on the level of capital contribution possible. At 30%, which is a figure previously accepted by central government, the saving across the three contracts is around £100k a year. A contribution greater than that would be subject to approval by DfE.

This is not recommended because it:

Would require engagement by DfE/ESFA to a more material level of contribution.

The savings are marginal and will vary with any movement in interest rates.

Would impact on the Council’s borrowing limits.

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Would require a complex arrangement with schools/academies and DfE to ensure debt obligations are flowed through and protected.

Would require a significant amount of SCC resource to progress as a project.

* See Appendix 1 for indicative values for each contract

5. Recommendations

Note progress to date to explore various options.

To consider any policy implications from today’s discussion on our proposal (via the working group if required).

Report to Sheffield Schools Forum 15 February 2018

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Appendix 1

Summary Impact of Cancelling Some Debt (£K)

Total Early

Termination

Costs 30%

Schools PFI Contract

Equity

Return Debt O/s

Break

Costs

Transaction

Costs

Total Capital

Required

Annual

Saving

Contract

Term

Remaining

Total

Contract

Saving

Capital

Contribution Break Costs

Transaction

Costs

Total

Capital

Required

Annual

Saving

PFI1 10,810£ 22,964£ 3,594£ 1,000£ 38,368£ 631 9 5,676 6,889£ 1,078£ £350 8,317£ -£92

PFI2 2,289£ 13,517£ 2,153£ 1,000£ 18,959£ 517 14 7,235 4,055£ 646£ £350 5,051£ -£9

PFI3 4,812£ 30,524£ 4,776£ 1,000£ 41,112£ 788 14 11,035 9,157£ 1,433£ £350 10,940£ £25

PFI4 (BSF Wave 1) 8,547£ 53,921£ 13,729£ 1,000£ 77,197£ 1,060 17 18,017 16,176£ 4,119£ £350 20,645£ £29

PFI5 (BSF - Bradfield) 2,299£ 19,645£ -£ 1,000£ 22,945£ 334 20 6,690 5,894£ -£ £350 6,244£ £73

Total Schools PFI 198,581£ 3,330 48,653

Summary Impact of Terminating PFI Contracts (£K)

Diff between cont current finance &

PWLB over same contract term.

Capital Contribution Saving

Compensation Costs

Impact of Public Financing of

Termination