Guidance

Private finance initiative (PFI) factor in the schools national funding formula (NFF) guidance

Updated 28 November 2024

Applies to England

1. What does this private finance initiative (PFI) funding guidance cover?

This guidance is for mainstream schools with pupils aged 5 to 16, and local authorities, to understand the operation of the private finance initiative (PFI) factor in the schools national funding formula (NFF), and the equivalent local authority funding formulae.  

This guidance does not cover early years, high needs or 16 to 19 providers, which are funded in different ways.

2. What is the schools national funding formula (NFF)?

The schools NFF is used to distribute core funding for 5 to 16 year old pupils (reception to key stage 4) in mainstream schools.  

The formula determines the funding each local authority receives. Local authorities then set their own local formulae (subject to constraints) to distribute that funding across maintained schools and academies in their area. 

Both the NFF and the local formulae use a number of different pupil-led and school-led factors to distribute funding. One of those factors is the PFI factor. 

You can find further details about the schools national funding formula and read more information about the equivalent local authority formulae in the pre-16 schools funding: local authority guidance.

3. What is PFI?

A PFI contract is a long-term contractual arrangement between a public sector entity and a private sector provider to finance, build and maintain public sector assets (schools).  

Under a PFI contract a private sector company builds schools and provides facilities management (FM) services. These services could include hard FM (planned preventative maintenance of the asset), life cycle works (replacement of major items of building fabric, or mechanical and electrical plants as those reach the end of their economic life) and/or soft FM (such as, catering, cleaning, grounds maintenance and security). In return, the public sector makes monthly payments across the lifetime of the contract to cover the build costs, services received and an element of profit for the private sector provider. The monthly payment is called a unitary charge (UC).  

PFI contracts in the English school sector were entered into between 1998 and 2016. These contracts typically last 25 to 30 years and expire between 2023 and 2042. You can find out more information on PFI.

4. How are PFI contracts funded?

The local authority that entered into the contract (known as the Project Agreement) makes monthly UC payments to the private sector provider ^{[footnote 1]}. This is funded by a combination of: 

1. Revenue support grant (RSG, also referred to as PFI credits) from the Department for Education (DfE), which funds the capital element of the project. The amount of RSG is agreed at the outset of the contract, for the lifetime of the contract, between the department and the local authority.  

2. School contributions via the budget share. These typically cover items such as FM, utilities and other associated services provided by the contractor. These will be set out in the governing body agreement (GBA) for maintained schools or the school agreement (SA) for academies. In some cases, the schools could also have agreed to make an additional contribution, for example where the school wanted an upgrade to certain building specification not part of the original specification agreed with the department through the RSG. 

3. Local authority contributions agreed by the local authority’s chief finance officer prior to contract signature (section 151 officer). In some cases, this will have come from the education budget, whereas in other cases local authorities made a commitment at the start of the contract to make contributions from their general funds. That could, for example, be linked to land sales or where the contract includes buildings and/ or services that are not directly linked to school provision. 

4. In some cases, additional funding (since 2018) from the department through the PFI factor in the NFF.

5. What is the local authority affordability gap?

For the purpose of this guidance, the ‘affordability gap’ is the difference between the local authority’s PFI UC obligations under the PFI contract, and funding from: 

• the PFI RSG grant funding (provided by the department to local authorities)

• school contributions via the budget share 

• local authority contributions from its general funds

• any other income (for example, contractual penalties)  

The local authority is contractually responsible for managing the affordability gap. However, in some cases, the gap can be met (or partly met) with funds from within the dedicated schools grant (DSG). Where the local authority is funding the affordability gap from the DSG, it should be routed through the PFI factor in its local funding formula, as set out in the next section on the PFI factor.  

The local authority is required to provide sound financial management for each PFI contract over the (typically 25 to 30 years) contract period. It is important that the affordability gap is considered over the whole of a PFI scheme’s lifespan. Part of the UC typically increases in line with the Retail Price Index excluding mortgage interest payments (RPIX) measure of inflation ^{[footnote 2]} while the PFI RSG payments are paid as a flat annuity rate over the contract period. As a result, a local authority may be overfunded in the early years of the contract, receiving more funding from the RSG and school contributions than required to meet its UC obligations. The position will then typically be reversed in the latter years of the contract, with the UC obligations exceeding the RSG and school contributions. Most local authorities manage this by setting the overfunding from the early years of the contract aside in a PFI reserve or sinking fund.

6. What is the PFI factor in the schools NFF and local authority formulae?

The NFF PFI factor was introduced as a new, separate, funding stream in 2018. The NFF PFI factor is used to distribute funding for PFI from the department to local authorities. The PFI factor in the local authority’s own formula is then used to pass that funding onto schools.  

The PFI factor is typically used to cover situations where DfE is providing additional support to local authorities for the PFI affordability gap. In those cases, the funding is passed on from the department to schools via the NFF and local authority PFI factors, and schools then pay that back to the local authority. It can also cover situations where schools face unavoidable extra premises costs related to the PFI contracts – over and above what non-PFI schools face.

The introduction of the PFI factor does not change any of the contractual obligations local authorities hold under the PFI contract. It is a discretionary additional payment provided by the government to support local authorities with certain costs. Local authorities are still responsible for meeting all obligations taken on when signing the PFI contract. This means that local authorities maintain overall responsibility for funding the affordability gap, including bearing financial risks related to inflation increases.

Each local authority is responsible for setting the PFI factor in its local formula, subject to certain constraints. The NFF factor in the schools NFF is then set in reference to the local authority’s PFI factor in the previous year, as detailed in how does the department calculate the amount of PFI funding a local authority receives section below.

For each PFI project where there is a PFI factor, local authorities are expected to have an affordability model covering the whole term of the PFI scheme (typically 25 to 30 years) to substantiate the amount of funding allocated through the PFI factor. The department reserves the right to ask to see and review these models.  

The department has prepared an affordability model template for local authorities to use.

7. What costs does the PFI factor cover?

The PFI factor is typically used to cover situations where funding for the PFI affordability gap is passed through to schools, and where schools then pay it back to the local authority.  

The PFI factor can also cover situations where schools face unavoidable extra premises costs related to the PFI contracts – over and above what non-PFI schools face. This would typically regard specific additional PFI costs related to the school buildings themselves.  

FM and energy costs are not unique to PFI schools and are costs that all schools face. These costs are covered by the school funding received from the other formula factors in the local authority’s funding formula, and would not normally constitute a valid reason for additional funding through the PFI factor.  

Likewise, increases in revenue costs for items such as FM and energy are not unique to PFI contracts. Furthermore, these costs within PFI contracts are typically reviewed every 5 years to ensure they are in line with market pricing. Increasing revenue costs would therefore also not normally constitute a valid reason for additional funding through the PFI factor. 

In extreme cases, where it can be shown that revenue costs such as FM and energy costs are excessively high and cannot be renegotiated, the department may on a case-by-case basis consider limited exceptional funding. 

Any historic commitment related to school and local authority contributions should continue to be honoured until the end of the PFI contract, and will not be covered by any additional government funding. Such commitments should therefore not be funded through the PFI factor.

8. How does the department calculate the amount of PFI funding a local authority receives?

In 2018 when the NFF was introduced, PFI factor funding for PFI costs was allocated based on local authority spend on their local PFI factor in 2017 to 2018. In each subsequent year, the PFI factor has been allocated at a local authority level based on the actual PFI factor spend in the local authority local formulae, in the previous financial year, uprated by the RPIX measure of inflation. 

This is illustrated in table 1 below. It shows 2 theoretical examples, both of which started with a local formula factor of £100,000 in 2018 to 2019.  

• in local authority 1, the local authority has paid out the same amount of PFI funding through its local formula as it has received from the NFF in every year. As a result, the NFF PFI funding has increased in line with RPIX in every year 

• in local authority 2, the local authority passed on a lower amount (£90,000) than it received (£103,360) through the PFI factor in 2019 to 2020. The 2020 to 2021 NFF PFI funding was therefore lower than the 2019 to 2020 NFF PFI funding, since it was calculated based on the local formula allocations in 2019 to 2020.

8.1 Table 1: examples of NFF PFI funding calculations

	RPIX uplift	Local authority 1	Local authority 2
Local authority PFI funding 2018 to 2019		£100,000	£100,000
NFF PFI funding 2019 to 2020	3.36%	£103,360	£103,360
Local authority PFI funding 2019 to 2020		£103,360	£90,000
NFF PFI funding 2020 to 2021	3.03%	£106,492	£92,727

From 2025 to 2026, the PFI factor value in the NFF will be calculated as the lower of: 

• the previous year’s PFI factor allocation in the NFF, uprated with RPIX 

• the previous year’s PFI factor allocation in the local formula, uprated with RPIX 

Local authorities can apply for additional PFI factor funding above these levels. Such requests must be accompanied by a valid affordability model and will be assessed on a case-by-case basis, based on the evidence submitted.  

In the final year of a PFI contract, the funding will be provided on a pro-rata basis based on the final PFI contract expiry date. Details of this are set out in section ‘What will happen to funding through the PFI factor when a school’s PFI contract ends?’ below. 

Any surplus PFI factor funding remaining at the end date of the PFI contract must be repaid to the department in full.

9. What evidence must local authorities provide when applying for increased funding through the PFI factor? 

Where a local authority wishes to receive an increase in PFI funding in the NFF above RPIX (or where they wish to start using a PFI factor for the first time), they need to submit an application to the department along with an affordability model covering the lifetime of the contract.  

This should include information on school and local authority contributions agreed at the start of the PFI contract, as well as details of any sinking fund or PFI reserve for the contract.  

The department has prepared an affordability model template for local authorities to use. This contains all the separate elements the department needs to see to assess any funding application.  

The application should be sent to: [email protected].

The deadline for an application to be considered for the following year’s NFF is 1 May. As such, applications for funding through the 2026 to 2027 NFF need to be submitted by 1 May 2025. If a local authority wishes to obtain confirmation of whether any above-inflation funding increase added to the PFI factor in the local formula will be funded through the NFF the following year, an affordability model will need to be submitted by November.

10. What should be included in a local authority’s methodology for the PFI factor? 

The local authority must have an objective and clear methodology for the distribution of funding through the PFI factor in its local formula. 

If a PFI factor is used, all PFI schools within the same contract should receive PFI factor funding; there may be different arrangements between contracts but, within a contract, all PFI schools should receive funding on an equivalent basis. 

For the reasons set out in the section on ‘What costs does the PFI factor cover?’ above, the department would not expect utility or facility management costs to be covered by the local authority’s PFI factor. 

Agreements can refer to proportions or elements of the school’s budget share, which, due to changes in funding arrangements, may subsequently have changed significantly. Where this situation occurs, we would expect schools and local authorities to work together to agree an alternative arrangement, so that neither party is significantly disadvantaged.

11. What will happen to PFI factor funding when a school’s PFI contract expires? 

Funding through the PFI factor in the schools NFF will cease on the date that the PFI contract ends, since the costs associated with the PFI contract will cease. In the final year of the PFI contract funding will therefore be provided on a pro rata basis based on the final contract expiry date. 

This is illustrated in table 2 below. For simplicity, the example assumes that RPIX will be 2% in each year ^{[footnote 3]}, and that the local authority exactly passes on the amount funded through the NFF in each year.

11.1 Table 2: example of funding calculations for when a school’s PFI contract expires

	Contract 1: PFI end date 31 March 2026	Contract 2: PFI end date 31 Aug 2026
PFI value in local authority formula in 2024 to 2025	£200,000	£200,000
NFF PFI funding in 2025 to 2026 (RPIX uplift of 2%)	£204,000	£204,000
PFI value in local authority formula in 2025 to 2026	£204,000	£204,000
NFF PFI funding in 2026 to 2027 (RPIX uplift of 2%)	£0	£86,700
PFI value in local authority formula in 2026 to 2027	£0	£86,700
NFF PFI funding in 2027 to 2028 (RPIX uplift of 2%)	£0	£0
PFI value in local authority formula in 2027 to 2028	£0	£0

In the example above: 

• contract 1 ends at the end of the financial year 2025 to 2026. As such, a full year’s PFI funding is provided in 2025 to 2026, and no PFI funding is provided in 2026 to 2027  

• contract 2 ends on 31 August 2026, 5 months into the 2026 to 2027 financial year. As such, funding through the NFF in that year is calculated as last year’s funding uplifted by RPIX, and then pro-rated for 5 months of the year: £204,000 × 1.02 × 5 ÷ 12 = £86,700

12. How will the funding work for academies when the contract expires, given that they are funded on an academic year basis? 

Local authorities are responsible for setting the PFI factor in their local formulae. That includes setting up arrangements for managing the accounting difference stemming from maintained schools being funded on a financial year basis, and academies being funded on an academic year basis.  

For both maintained schools and academies, the PFI funding the department provides in respect of a given period is intended to cover the costs incurred in that period. (The different accounting periods does not mean that academies are funded 5 months ‘in arrears’). The department will therefore provide PFI funding through the NFF up until the end of the PFI contract, whether the school in question is an academy or a maintained school.  

As an example, if a PFI contract ends on 30 September 2025, the funding will be provided up until that date. This means that: 

• maintained schools will attract 6 months pro-rata PFI funding for the period 1 April to 30 September in the 2025 to 2026 financial year 

• academies will receive 1-month pro-rata funding through the general annual grant (GAG) for the period 1 to 30 September in the 2025 to 2026 academic year

13. What happens to services provided by the PFI contractor when the PFI contract ends?  

In the lead up to the expiry of a PFI contract, schools will need to consider alternative ways of procuring services that were previously provided by the PFI contractor, such as FM or energy. These will all be paid for using ‘normal’ school NFF funding allocations (the school’s budget share) in the same way as it is done for schools which do not have any PFI contracts. 

The department recommends that schools prepare themselves well ahead of the expiry of the contract for this change and consider how they will procure these services and what they are likely to have to pay for them. Resources to help schools buy goods and services can be found in buying for schools.

The local authority (as the public sector counterparty under the PFI contract) will separately be managing the expiry of the PFI contract and the handover of the assets to the public sector, ensuring that those assets have been maintained and are in the condition required under the PFI contract. The department recommends that schools work with their local authority in advance of expiry to understand the local authority’s expiry plans and at what stages the schools will be involved in that process.  

Separately, the department’s private finance team will be working with each local authority in the years leading up to expiry with the aim of assisting the public sector parties involved in the expiry process. 

14. How will a school know when its PFI contract, and therefore funding through the PFI factor, will cease? 

It is the responsibility of the local authority and the school to ensure that the terms and length of the PFI contract are understood. This includes the expiry date for the PFI contract and necessary arrangements following its cessation. 

The department will contact each local authority in the year prior to their final year of the PFI contract to confirm funding arrangements for the final year of the contract. The department will also contact academy trusts in the year before any of their academies’ contracts expire. 

15. Why is there no PFI factor in the high needs NFF? 

The PFI factor is part of the mainstream schools national and local funding formulae. It is not a factor in the national high needs funding arrangements for allocating funding for special schools or alternative provision (AP) – which operates in a significantly different way from the schools NFF. 

Local authorities have discretion over how they use their high needs budget to reflect any unavoidable additional costs of operating a special or AP school with a PFI contract. They can either enhance the top-up funding they allocate in respect of individual pupils, or allocate funding using a central high needs budget. See paragraph 38 of Schedule 2 of The School and Early Years Finance and Childcare Regulations 2024. 

16. Contacts for queries 

If you have questions regarding the PFI factor, you can contact: [email protected].

If you have more general concerns relating to your PFI contract, you can contact: [email protected].

17. Definitions of terms

17.1 Table 3: definition of terms used within this guide

Term used	Definition of term
FM	FM is included in the vast majority of PFI contracts. Examples of FM include: cleaning, catering, security, grounds maintenance reactive maintenance of the buildings
Life cycle	Life cycle costs are included in the vast majority of PFI contracts. Life cycle includes: the replacement of major elements of the building fabric and mechanical and electrical systems as they reach the end of their expected life span
NFF	The schools NFF distributes core funding for mainstream schools, from reception to key stage 4. The formula is used to allocate funding to local authorities, who then use their own local formulae to pass on the funding to schools
PFI	PFI is a form of partnership between the public and private sector to provide public services. It allows the public sector to contract with the private sector to provide assets and associated services on a long-term basis, typically 25 to 30 years. The private sector partner has the responsibility for designing, financing, providing, maintaining and operating the asset. The public sector typically pays for the project through a series of payments based on performance that cover both service delivery and the private sector’s return on its investment
PF2	Private finance 2 projects (PF2) - the approach to public private partnerships which was introduced in 2012
PFI factor	The PFI factor forms part of both the schools NFF, which distributes funding from the department to local authorities, and local authorities’ local funding formulae, which distribute funding from local authorities to individual schools. It is typically used to cover situations where the department is providing additional support to local authorities for the PFI affordability gap. In those cases, the funding is passed on from the department to schools via the NFF and local authority PFI factors, and schools then pay that back to the local authority. It can also cover situations where schools face unavoidable extra premises costs related to the PFI contracts – over and above what non-PFI schools face
RSG	PFI revenue support grant is DfE part funding towards the cost of a PFI contract which is to be attributed to the capital investment undertaken by a local authority as the contracting counterparty. The PFI RSG is calculated on an annuity basis and is paid to the relevant local authority on an annual basis in quarterly payments. It is supplemented by other sources of funding by the local authority
UC	The UC is a monthly fee paid to the private sector provider from the start of the operational period until the expiry of the PFI contract. This payment covers all the costs of construction, financing costs, life cycle replacement expenditure and hard and soft FM services as agreed

1. In PF2 contracts under the Priority Schools Building Programme Private Finance (PSBP PF) projects, the department, rather than local authorities, entered into the project agreement. The department therefore makes the UC payment under those contracts. ↩

2. The Retail Price Index excluding mortgage interest payments (RPIX) is the most common measure of inflation used within PFI contracts. ↩

3. The 2% in the example is used for illustrative purposes only. It is not a forecast of what the departmentwe expects the Retail Price Index excluding mortgage interest paymentsRPIX to be. ↩