The Council is under pressure to make savings and Mayor Steve Bullock has stated an estimated £40m in further savings are likely to be needed in the next two years (source: letter to residents Lewisham Life Winter 2012).
As budgets are squeezed and the Council faces reduced funding (or below inflation rate increases) from central government further cuts to services are likely to be exacerbated by increasing annual interest charge payments and overall payments due to PFI contractors over the next fifteen years. The Council currently has in place PFI contracts to the value of £1.2 billion.
Interest payable on these PFI contracts is stated in Lewisham Council’s annual accounts for 2011/12 as being £23m due in 2012/13. Total payments, including interest charges, due on PFI contracts in 2012/13 are projected to come in at £44m.
The Council currently has an annual total budget of approx. £280m.
From the Council’s own figures and projections the next few years will see its overall budget pressurised by increasing PFI costs. See table below.
From a total annual payment to PFI Contractors of £44m in 2012/13, annual payments will escalate to nearly £54m a year within the next 6-10 years and peak at £58m per annum in the early 2020s.
Interest payments are due to increase from £23m in 2012/13 to £26.5m per annum by 2014/15 and will stay at over £20m per annum until the early 2020s.
Total forecast accumulated interest charges for the duration of current PFI contracts is £452,925,000. The interest payments alone come to 36.5% of the total PFI contract liabilities.
The Council has been placed in the unenviable position of having to fund school building refurbishment, expansion or new schools through the Building Schools for the Future (BSF) programme. With the Council’s ability to borrow limited by central government it is faced with the stark choice of either signing up to BSF/PFI contracts or severely curtailing its schools programme.
The Council may be between a rock and a hard place come funding school regeneration and building, but it’s PFI contract for Downham Lifestyles leisure centre looks enormously expensive at a total cost of £68m over thirty years of which interest payments of £40m alone make up almost 2/3 thirds of the contract.
Lewisham’s PFI contract with Skanska for street lighting replacement and maintenance runs for twenty-five years at a total cost of £93m of which interest payments of £24m make up almost 25% of the contract.
There also arises the affordability of the current level of PFI liabilities. The requirement for budget cuts would seem to be, in part at least, a consequence of not only negligible annual increases in income (or even declining in real terms), but the escalating annual costs of servicing PFI liabilities. The Council has an annual income of approx. £280m yet has taken on PFI liabilities in excess of £1.2bn, an income-to-debt ratio of 4.5. Historically for a mortgage an individual would expect a lender to allow borrowing of 3.5 times annual income.
PFI contracts are widely viewed as poor value to the taxpayer and in Lewisham we are about to experience the strain these financial instruments will place on budgets for front line services in the coming years.