R Dudley Metropolitan Borough Council v Secretary of State for Communities and Local Government
| Jurisdiction | England & Wales |
| Judge | Mr Justice Singh |
| Judgment Date | 25 June 2012 |
| Neutral Citation | [2012] EWHC 1729 (Admin) |
| Docket Number | Case No: CO/6906/2011 |
| Court | Queen's Bench Division (Administrative Court) |
| Date | 25 June 2012 |
[2012] EWHC 1729 (Admin)
IN THE HIGH COURT OF JUSTICE
QUEEN'S BENCH DIVISION
ADMINISTRATIVE COURT
Royal Courts of Justice
Strand, London, WC2A 2LL
The Honourable Mr Justice Singh
Case No: CO/6906/2011
Peter Oldham QC (instructed by The Solicitor, Dudley Metropolitan Borough Council) for the Claimant
Paul Nicholls QC (instructed by The Treasury Solicitor) for the Defendant
Hearing dates: 9 and 10 May 2012
Introduction
By this claim for judicial review the claimant local authority seeks to challenge the defendant's decision of 19 April 2011, which is described in the claim form as the "withdrawal of the claimant's declining balance PFI [i.e. Public Finance Initiative] grant." The defendant is now the Secretary of State for Communities and Local Government but, during the relevant period, his title, and that of his department, has changed from time to time. Since nothing turns on those changes, I will, for convenience, refer to "the Secretary of State" or "the defendant's department."
Permission to bring this claim for judicial review was granted on 6 September 2011 by HH Judge David Cooke (sitting as a Judge of the High Court).
The challenge relates to the decision by the defendant to change the way in which he would make payments under the PFI scheme in respect of a project for information communication technology (ICT) in schools in the claimant's administrative area, known as Dudley Grid For Learning (DGFL). From 1999 until 2011 the claimant's grant was paid on what is known as the "declining balance" basis. The decision under challenge changed that to an "annuity" basis.
By the time of the hearing before me the claimant advanced the following five grounds in support of its challenge (although they were presented in a slightly different order):
(1) Breach of the duty to consult, alternatively the procedural expectation of consultation.
(2) Breach of a substantive legitimate expectation.
(3) Application of a rigid and inflexible policy.
(4) Failure to take relevant facts into account/error of fact.
(5) Breach of section 149 of the Equality Act 2010, sometimes known as the Public Sector Equality Duty.
Factual Background
By a letter dated 5 June 1998 the defendant's department notified the claimant authority that it would receive a special grant under the PFI scheme. The letter enclosed a copy of Special Grant Report (Number 35), which was laid before the House of Commons on 21 May 1998 and was to be debated in the House on 18 June. That report was made by the Secretary of State under section 88B of the Local Government Finance Act 1998 (which I will set out later). The purpose of the Special Grant was:
"To assist local authorities in England to meet that part of their expenditure incurred under transactions under the Private Finance Initiative which is attributable to the capital element of project costs and is defrayed (on or before 12 March 1999) in the Financial Year 1998/99." (paragraph 4)
Annex A to the report set out a list of the authorities to which the grants were to be paid, which included the claimant authority. Annex B set out the method by which the amount of the grants payable to authorities would be calculated. It is unnecessary to go into the details of the formula used at paragraphs 4 and 5 of that Annex but it is common ground that the formula led in essence to the declining balance basis. At the risk of over-simplification, this means that the capital cost associated with a project, which is paid by a local authority during the term of a contract with a third party (e.g. the private entity which builds a school or installs ICT), is defrayed by the Secretary of State not by annual payments during the term of the contract, but over a much longer timeframe, in theory extending to 100 years or even longer. In the short term, this means that the local authority has to find the funds to make up any shortfall in a given year during the term of the contract but, in the longer term, it continues to receive funds from the Secretary of State for many years after the end of that contractual term.
The way in which the PFI grant was payable to the claimant in respect of the DGFL project is described in the following way by Iain Newman, employed by the claimant as its Treasurer, in his first witness statement, at paras. 9–10:
"9. Under a PFI arrangement, revenue support grant is receivable from Central Government by way of a series of annual revenue payments to meet the capital debt agreed for PFI funding, rather than the capital debt being funded up front by the Government in one or two grant payments at the start of the project. This means that capital funding is required up front to meet initial outlay, and in recognition of this process the Government makes annual payments to the Council to cover the capital debt agreed for PFI funding (referred to as principal repayments) and also an element of interest to cover the financing of the initial outlay.
10. Although the DGFL contract required payments to be made to the contractor of £51.5m over a 10 year term, the payment flows from Government were to be over a much longer period, in theory ad infinitum due to the reducing nature of the annual declining balance payments. In broad terms the arrangements were as follows:—
i. The ODPM [Office of the Deputy Prime Minister, as the defendant's department was known at that time] approval was for PFI funding to pay capital costs of £29.5m.
ii. The payment flows in respect of the £29.5m were by the declining balance basis at a standard rate of interest, where the interest is fixed at the point of contract signing, thus removing from the Council the risk of changing interest rates.
iii. The declining balance basis equates to annual repayments of principal based on 4% of the debt outstanding at the beginning of the financial year. Thus a reducing balance each year means a reduced annual repayment if the percentage applied is fixed. This provides for annual repayments which actually extend for over hundreds of years, though in practice people often think in terms of a 100 year period since after that date the sums involved are small. For example to repay £29.5m debt to the Council, the principal repayments commenced in 1999/2000 at £1.2m pa, by 2005/06 were £0.9m pa, by 2010/11 were £0.7m pa, by 2017/18 would have been £0.6m pa, by 2099/2100 would have been £0.020m pa with debt still outstanding at that point of £0.5m, and by the year 2199 just £380 pa but with debt still outstanding of £9,000 etc."
In a witness statement filed on behalf of the defendant by John Garrity (Head of the Central PFI Unit at the defendant's department), the difference between the declining balance basis and the annuity basis is explained as follows, at paras. 27–31:
"27. Both the declining balance and annuity grant mechanisms use the PFI credit as the basis for generating payments. Under the declining balance system, payments have been calculated based on paying each year a percentage of the PFI credit, as determined by the Government, and a figure for interest on the PFI credit. The interest rate is set each year by the Government for projects approved in that year.
28. Under the annuity system, payments are generated based on the credits issued in order to pay for the supported capital element of the charge paid by the authority to the private sector provider. Under the annuity system, the Government pays for the supported capital element of the authority's payments over the duration of the contract. Therefore if the authority has entered into a 10 year contract, the Government will pay a sum equal to the full supported amount of the authority's payments for the private sector provider's investment in the capital asset over the duration of the contract. Under the annuity system, the period of time over which the Government makes payment of PFI special grant is the same as the period of time over which the authority pays its unitary charge to the private sector provider.
29. This reflects an important difference between the annuity system and the declining balance system. Under the annuity based system of payment, the Government makes payment for the authority's supported capital payments over the lifetime of the contract.
30. Under the declining balance system of payment, payments made by Government do not provide PFI grant which is co-extensive with the authority's obligation to contribute to capital investment over the period of the contract. The Government's contribution does pay towards the capital element sum, but over a longer period. This means that where the declining balance system of payment is used, the authority will have to identify other additional sources of funding for part of the capital element of the charge it pays over the contract period, as well as for the service element (which is not, in any event, paid for by means of payments under the PFI grant system).
31. Both the declining balance system and the annuity system are methods of achieving the same result, namely the provision by Government to cover the supported costs of capital investment."
Returning to the chronology of events, in a letter dated 17 June 1998 the Chief Finance Officer of the claimant authority wrote to the Treasury, pointing out that the then current system of funding PFI projects might be sustainable in relation to long contracts of a building nature but was not, in the author's view, sustainable in relation to short...
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