South East London PFI scheme

Report: 17a
Date: 20 February 2001
By: Treasurer

Summary

This report considers the financial implications of the proposals relating to the S.E. London PFI scheme, taking into account the broader context within which a decision has to be made and the requirement for an opinion from the external auditor for off balance sheet accounting treatment. It also proposes that a review of the lessons learned from the three PFI projects that members have considered be undertaken before commencing any further PFI procurements.

A. Recommendations

1. Members note the financial context and financial considerations set out in this report in reaching a decision on this project, taking into account the conclusion that the financial implications of acceptance are considered manageable.

2. Members note that treatment off balance sheet will be dependent on the opinion of the Authority’s external auditor, District Audit.

3. Members agree that the Treasurer initiate a review of the lessons to be learned from the MPA/MPS experience of PFI before any future PFI procurement is commenced.

B. Supporting information

Affordability

1. The proposals in relation to the S.E. London PFI, as set out in Report 17 and Report 24 on this agenda, identify a requirement for an additional £9.66m per year over existing budget provision from 2003/04 for the 25 year duration of the contract.

2. In the context of current information about available resources (SR2000) and the pressures on these resources that have been identified in the medium term (for example the projected increase in pension costs set out in Report 10), the issue of affordability is key to consideration and acceptance of this scheme.

3. However, there are a number of factors that members will wish to take into account in considering affordability:

• since C3i is no longer being pursued as a PFI project, the essential replacement of the current systems will inevitably consume available capital resources to the extent that schemes to modernise the operational estate, such as the S.E. London proposals, could not be financed through a conventional capital route;
• ‘PFI credits’ may be available through the Home Office to offset the revenue consequences of the proposed contract under consideration. Prior to the establishment of the MPA a decision had been taken to limit application for ‘PFI credits’ to C3i. Whilst such credits are not transferable, the Home Office has been approached in regard of ‘PFI credits’ for this project now that the credits for C3i are no longer applicable. ‘PFI credits’ provide a stream of revenue over the life of the contract through SSA, estimated in this case to be an average of £5m per year. This would reduce the affordability gap to an average of £4.66m per year;
• significant resources would be required to upgrade the existing premises that are due to be replaced as a result of this contract should it not proceed;
• withdrawal is likely to result in a claim from the preferred supplier of several million pounds for abortive bid costs. Whilst affordability is recognised as a legitimate reason for terminating negotiations, Report 17 on this agenda accepts that it could be argued that this was not done within a reasonable period of this having become apparent to the MPS. Indeed if the bid for ‘PFI credits’ is successful the affordability gap would be less than when the MPS gave the supplier preferred bidder status;
• the additional budgetary provision is not required until 2003/04. This allows a further two years to bridge the affordability gap, offset by the revenue from PFI credits should they be awarded. The MPA and the MPS are committed through the Efficiency and Effectiveness Programme and Best Value to identify opportunities for the more effective use of resources. In addition, the aim of the Efficiency and Effectiveness programme is to focus opportunities for the more effective allocation of resources to support direct service provision. Adequate facilities are an important element of this.

4. In conclusion, whilst the additional budgetary provision does present a difficulty that will need to be resolved by 2003/04, it is considered manageable in the light of the initiatives that are now under way and in the context of the other financial considerations discussed above, especially the change to the strategic capital context as a result of the recent decision regarding C3i.

5. This does not preclude points of concern other than affordability having a legitimate role in members’ consideration of this project.

Audit opinion

6. The definition of this project as PFI with its consequent accounting treatment off balance sheet and the potential for PFI credits is dependent on the opinion of the Authority’s external auditor, District Audit. This opinion will not be formally given until the completion of negotiations when the contract has been agreed. However, we are given to understand that the current proposals meet the criteria for definition as PFI which will allow treatment off balance sheet.

Review of PFI projects

7. This is the third PFI project that members have considered in a short space of time, C3i and the Firearms Training Centre being the other two. All have raised similar issues, including that of affordability. Given the outlook in respect of available capital resources, PFI must remain an option for future procurements.

8. However, it is now appropriate for the Authority, in collaboration with the MPS, to review and analyse the lessons that can be learned from these three projects before any further PFI procurement is commenced. This review should include dialogue with other authorities that have successfully completed PFI procurements.

C. Financial implications

There are no direct financial implications in the current financial year. The revenue consequences of approval to proceed will commence in 2003/04.

D. Background papers

None

E. Contact details

The author of this report is Colin Balkman, Deputy Treasurer.

For information contact:

MPA general: 020 7202 0202
Media enquiries: 020 7202 0217/18

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