Council wins judicial review against DCLG over PFI payment changes

Dudley Council has won a judicial review over the Department for Communities and Local Government’s changes to payment of a PFI grant that the authority claimed left it with a funding shortfall of almost £10m.

The High Court challenge in Dudley Metropolitan Borough Council, R (on the application of) v Secretary of State for Communities and Local Government [2012] EWHC 1729 related to the Communities Secretary’s decision 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 Dudley, known as Dudley Grid For Learning (DGFL). 

From 1999 until 2011 Dudley’s grant was paid on the "declining balance" basis. As Mr Justice Singh explained in the High Court, this means that the capital cost associated with a project, which is paid by a local authority during the term of a contract with the third party (the supplier that installs the 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.

This arrangement means that a 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 decision under challenge – taking effect from April 2011 – saw payment changed to an "annuity" basis. Under this method of payment, the Government makes payment for the authority’s supported capital payments over the lifetime of the contract.

In a letter on 10 January 2011 the DCLG told Dudley that as a result of the proposed change and because – or so it thought – the Grid for Learning project had ended in January 2009, it would make a one-off final payment at the end of 2010/2011. This was stated in the letter to be £8.3m, although this was subsequently adjusted upwards to £8.9m.

The council’s Leader wrote back to complain about the change, saying that the project had been extended by two years in 2009 and the council had undergone an extensive procurement process for a new contract.

She also claimed that the changes would leave Dudley with a shortfall in funding for the contract of £11.1m.

But on 19 April 2011 the DCLG wrote to the council confirming the decision to end PFI grant payments on a declining balance basis, saying they were unsustainable, “especially in the current fiscal climate”.

It said the Department was prepared to meet the costs incurred in the run-up to agreeing a new PFI contract.

Dudley advanced five grounds in support of its challenge:

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, also sometimes known as the Public Sector Equality Duty.

It also calculated that there was a shortfall of £9.2m principal.

The DCLG rejected the challenges and also denied that there had been any adverse financial consequences for Dudley.

Mr Justice Singh ruled in favour of the council this week, but only on the ground of challenge based on procedural fairness.

The judge said that the DCLG’s decision fundamentally altered the nature of the commitment which had previously been made by the Secretary of State to fund capital projects.

Mr Justice Singh: “To make the decision abruptly without consultation would, in the circumstances of the case, be so unfair as to amount to an abuse of power.... Accordingly, in my view, the defendant did owe a duty to act fairly, and in particular to consult the claimant, before he made the decision under challenge in this case.”

The judge rejected the DCLG’s contention that it had discharged the duty to act fairly. “In my judgement, it is clear from the evidence before the Court that the defendant did not consult the claimant at a formative stage of the decision-making process, even having regard to the authorities to which I have referred to the effect that a decision-maker is entitled to have a provisional view or preferred option before embarking on consultation.”

He added that the crucial question in this case was whether the change in policy should apply even to the claimant in spite of the particular history of this case going back to 1998 and including the choice (whether to stay with the declining basis for payments) that had been offered, and taken up, by the claimant in 2004.

Mr Justice Singh said: “The letter of 10 January 2011 announced that it had been decided that it would. Although, towards the end, that letter did offer to consider any representations that the claimant might wish to make, when read fairly and as a whole, the letter was inviting representations as to how the impact of the decision might be mitigated in the claimant's case, but not about the principle of the decision itself.

“Furthermore, although the evidence indicates that there was then 'consultation' as referred to by the defendant in the period until 10 February 2011, this was not, in my judgement, at a formative stage.”

However, the judge dismissed the other four grounds of challenge. He said:

• It was impossible to “spell out of the evidence” the substantive legitimate expectation that the claimant needed to support the second ground;
• The defendant department was prepared to consider the council’s representations and consider making an exception to the policy;
• As regards the error of fact – that the project had ended in 2009, things did not remain static. The council had informed the DCLG of this error and so the department was aware of the true state of affaiirs before the final decision was made;
• The DCLG was not required to have regard to the matters set out in s. 149 of the Equality Act. This was for two reasons: the suggested impact was a contingent and indirect one; and the department was entitled to take the view that the detrimental consequences which the council suggested would flow from the decision were not only contingent but lay some years ahead in the future.

Mr Justice Singh said that he would consider the parties’ submissions as to the appropriate remedy.

Councillor Gaye Partridge, cabinet member for human resources, law and governance at Dudley, said: "We are pleased the High Court has ruled in our favour, and quashed the government's original decision over PFI funding. The ruling means we will now enter into proper consultation with the government over future funding for Dudley Grid for Learning." 

A DCLG spokesman said: “This is a ruling on a technical point of law on a programme from the last Administration. We will consider any representations on whether an exception should be made in the case of Dudley.”

“However, more broadly, PFI schemes need to offer value for money for taxpayers, and it is unreasonable to expect central government funding to continue well after a project has ended and for an authority to receive windfall gains from the public purse.”

Philip Hoult