A Black Country council has been forced to take the Government to court after a PFI funding crisis left it with a £9 million-a-year shortfall.

Dudley Council won its legal battle after a judge ruled that the Treasury must provide funding for the on-going costs of a £50 million education scheme.

It comes as there is increasing concern that hospitals are facing PFI bills they simply cannot afford to pay.

Health Secretary Andrew Lansley has warned South London Healthcare NHS Trust, which runs three hospitals, that it is likely to be named an “unsustainable provider”, which could lead to it being taken over by administrators.

The trust is expected to lose between £30 and £75 million a year for the next five years, partly as a result of two PFI deals that are now costing £61 million a year in interest. In September last year the Government named 22 NHS trusts that were struggling to meet PFI payments including University Hospitals Coventry and Warwickshire; University Hospitals of North Staffordshire; Walsall and Sandwell and West Birmingham.

Private Finance Initiative schemes were first introduced by previous Conservative government in the 1990s but their use was massively expanded by Labour, which used PFI schemes pay for new infrastructure such as schools and hospitals.

They involved private sector partners paying all or most of the cost of new projects in return for payments and management contracts which could stretch 30 years or longer into the future.

Critics said the policy placed huge debts on the public services, although it is possible that major projects such as the rebuilt Queen Elizabeth Hospital in Birmingham could not have been afforded any other way.

Dudley’s legal fight concerned a £50 million project called Dudley Grid for Learning, in which private sector partners provided schools with computers, software, network infrastructure, training, and technical support.

Government officials wrote to the council last year to say it was changing the way grants would be provided to pay off the contract, resulting in what the council says is a shortfall of more than £9 million.

Judge Mr Justice Singh has now ruled that government’s decision was “unlawful” because the council was not properly consulted before the changes were made.

A court heard the £51.5 million contract was made to provide IT facilities in schools throughout the borough, with the money due to be paid off long after the ten-year agreement had run its course. Until last year, the Government’s grant to the council to pay off the contract was paid on a “declining balance” basis.

However, following the election of the coalition government, the council was informed that this would be changed to an “annuity” basis.

The Government expressed concern that grants would have to be paid “in theory ad infinitum due to the reducing nature of the annual declining balance payments”.

And the council was told that it was “not sustainable to continue with such never ending financial commitments, especially in the current fiscal climate.”

But that decision brought about a rapid response from then-council leader, Anne Millward, who said the proposed change in the way the grant was paid would leave the council with a huge funding gap.

The council brought a claim for judicial review earlier this year, arguing the Government’s decision was unfair and “unlawful”, having been reached without adequate consultation with the local authority.

Mr Justice Singh ruled in Dudley’s favour, finding: “It is clear from the evidence before the court that the [Secretary of State] did not consult the [council] at a formative stage of the decision-making process.”

The judge ordered that a fresh consultation be carried out, and suggested the Government and the council get around the table in a bid to resolve the dispute.