Schools are increasingly turning to Public Finance Initiatives to finance large building projects. Mark Blois looks at how it works

Anyone who works in schools and colleges will know that much of the country’s infrastructure of education sector buildings is dilapidated after long-term public sector under-investment. Yet the education sector is also the subject of various ambitious improvement schemes, many of them derived from the Every Child Matters agenda.

With a growing awareness that there is a correlation between children’s welfare, academic progress and the school environment, the need for wholesale revitalisation of school buildings has become a priority.

How to solve the problem

There are various ways of undertaking building works at schools. Traditional procurement is still the most common solution for small and medium-size projects. Either the school or the local authority will commission consultants to prepare designs and specifications for the works, which are then constructed by a contractor engaged separately.

The contractor is likely to engage sub-contractors for construction on site. Once the building contract is finished, the consultants and contractor have limited long-term responsibility for the subsequent performance of the building.

Public Private Partnership

‘Public Private Partnership’ (PPP) is increasingly the main form of procurement for large projects in  schools. In the context of building, PPP refers to any aspect of private involvement in the provision of public sector buildings or services.

 ‘Private Finance Initiative’ (PFI) is a particular type of PPP, and there are different types of PFI contract. The most common is ‘Design, Build, Finance and Operation’ (DBFO) of new premises by a private contractor.

Although still a relatively new form of procurement within the education sector, the application of PPP is developing rapidly, and school leaders need to understand the basics of PFI and the law that arises.

Why PFI?

The PFI was launched in 1992 by the then Conservative government. It was developed to provide financial support for partnerships between the public and private sectors. PFI was a procurement instrument that financed the growing need for capital investment in the social infrastructure, which could not come from government capital finance.

PFI was also a useful accounting device to limit public borrowing, to avoid breaching the limits on borrowing and debt set by the Maastricht Treaty. Somewhat controversially, PFI contracts can be treated as ‘off balance sheet’. As such, any money invested through PFI does not show up on the national debt.

‘Income, efficiency, value’
In 1997, Partnerships UK was set up in the Treasury to promote and extend the PFI at home and overseas. Since then, PFI has become a major alternative income stream for public expenditure. More recently, the Government’s further rationale behind the promotion of PFI projects has been service efficiency and value for money.

PFI is very important in education. There are 845 schools involved in 107 PFI projects in England, and roughly half the Government’s flagship Building Schools for the Future scheme will be paid for using the private finance initiative.

The legal framework

Under PFI, a private sector consortium, usually including a building firm, a bank and a facilities management company, establishes an independent legal company called a ‘special purpose vehicle’ (SPV), which enables the organisations to work together under one umbrella.

The SPV bids for a single contract, which will be awarded by the local authority or school that wants to undertake a building project. The SPV then designs and builds the project in line with the client’s specifications.

How do we get started?

Once you have agreed outcomes for your school project, and the local authority has satisfied the school governing bodies that PFI would give best value for money, the local authority must seek support from DCSF for the project.

If the DCSF has given provisional support, the local authority then takes the lead in delivering the project through a partnership with the private sector consortium.

If there is to be reorganisation amongst the schools involved as part of a PFI scheme, such as mergers or changes of category, then the local authority will be required to adhere to the normal requirements for the publication of statutory proposals.

This area of law applies to PFI projects as it would to a traditional project. There are, however, two
key differences between PFI and conventional ways of providing public services (see box, below).

How is PFI funded?

The private sector consortium raises money to meet the cost initially. The local authority will then provide both capital and revenue funding. Grant support for the capital element of local authority PFI is available from central government.

Once a PFI contract is signed, the project receives financial support from the Government to help with the cost of building and maintaining the premises.

The promise of support is given in the form of a letter, which sets out a level of ‘PFI credits’ issued for that project. PFI credits are a measure of the private sector investment that will be supported, and they act as a promise that a PFI grant can be claimed once the project starts. The level of grant is then based on the level of PFI credits issued.

The school budget
These funds contribute the capital repayment element of the unitary charge paid to the private sector provider annually in return for the availability of the school building, rather like a mortgage. Additionally, the school’s governing body must agree to pay the local authority an annual amount, usually the part of the unitary charge that relates to the facilities management content of the contract.

The PFI contract has the first call on the school’s budget. This will be reflected in a revised delegated budget for the length of the contract. The local authority must have written approval from a governing body to use its delegated budget in any way, so the governing body will be required to sign a ‘governing body agreement’ early in the PFI process.

PFI vs conventional provision

1.  Ownership
In a PFI project the public does not own the building asset arising from the project. The local authority, governing body or trustees, depending on the type of school, would normally hold the freehold of the relevant site.

The private sector contractor would then have a lease or a licence to occupy the site, and go on to invest money in its redevelopment. The private sector partner then provides, pays for and operates the new-build school over the period of the contract, usually between 25 and 30 years, during which period the school or local authority effectively lease the building back.

That lease commitment is not regarded as a debt and so does not need to be included in balance sheets. At the end of the contract the whole school reverts to the local authority, or trustees for VA schools, and when the building is handed over it must be ‘fit for purpose’ for a period beyond the end of the contract.

2.  Facilities management
Another significant part of PFI is that the private sector consortium will also provide other services such as catering, cleaning and grounds maintenance.

It provides these services for an annual fee (just like rent), with the contract also typically lasting 25-30 years. This sometimes results in the school’s technical and support staff being transferred under TUPE (Transfer of Undertakings Protection of Employment) Regulations 1981 to the private sector consortium.

Once the scope of projects and the range of services to be provided by the PFI contractor have been determined, agreement has to be reached about which staff should be transferred and on what basis.

Voluntary aided schools

There are some important differences to highlight in relation to PFI in voluntary aided (VA) schools. Governing bodies and dioceses for VA schools can put forward proposals to their local authority or the DCSF for using PFI to improve the quality of their school buildings and its management. Local authorities can also bring VA schools into any grouped PFI proposal.

Governors will be the signatories because of their responsibility for providing premises and equipment for VA schools. Trustees may also be signatories because of their ownership of voluntary aided school sites.

The DCFS advises that the local authority should also be a signatory, or be otherwise involved in the PFI contract. Involvement of the local authority reflects its responsibility for a significant part of the revenue costs.

Position of the trustees
As for the position of the trustees, for most PFI projects they may need to seek the agreement of the Charity Commission — for example, where land deals, leases or use by a third party are proposed.

The relationship between the governors and the trustees may depend on the terms of the trust deed. A VA governing body needs to ensure that it has sufficient rights over the premises to enter a long-term commitment with the PFI private sector partner, and may need to enter a formal agreement with the trustees.

VA schools’ PFI projects are funded through PFI credits and a VA grant from the DCFS. The DCFS normally contributes 90 per cent of the capital element, and governors make a 10-per-cent contribution, as they would under traditional procurement.

Trust schools

The key issue to consider here is how the capital funding will work where a trust school is to benefit from new premises under a PFI scheme.

It is expected that the Government will fully fund capital costs under PFI, even though it only provides 90 per cent capital funding for VA schools, since capital costs for other foundation schools are fully funded and it seems nonsensical to differentiate between trust and other foundation schools on this basis.

Once the private sector partner has been selected, the trust school and its foundation must then contract with the local authority by entering into a governing body agreement to surrender the delegated budget to the local authority to fund the PFI.

Three problematic issues have dogged the use of PFI in schools (see box, below). Despite these, and despite criticism by trade union UNISON and others, PFI looks set to play a significant role in the education in the years ahead.

Find out more
The TeacherNet site includes a PFI application toolkit, as well as useful links and answers to FAQs.

PFI in schools: problematic issues

1.  Legacy issues in existing PFI contracts
School PFI projects are more complex than those in other sectors, owing to the contracting parties’ separation from those with responsibility for the running of schools. The PFI contract is with the local authority, while the interface is at school level.

One of the supposed selling points of PFI is that, in theory, where PFI provides a service or package of services to a school, the burden on school management can be eased considerably. The school can concentrate on delivering the curriculum, and on raising educational achievement.

The evidence is, however, that the earliest PFI projects in education have left unattractive legacy issues, with heads shouldering the burden of contractual problems. There is a significant difference between a school’s understanding of accountability and that of PFI companies.

The PFI contractor is accountable to its shareholders and not to the school or local authority as its customer. The PFI contractor will resist improvements or changes that might have financial implications unless obligated to provide them.

In some early PFI projects, design and quality may not have been as good as might now be desired — a consequence of poorly specified projects and inexperienced clients.

This is now less of a problem. Contracts are clearer and costings  are more generous, giving schools more room for manoeuvre.

2.  Value for money?
Does PFI give value for money? This is assessed by comparing what the project would have cost through traditional procurement.

In 2003, the Audit Commission produced a damning report, ‘PFI in schools’, and the House of Commons Public Accounts Committee has also produced critical reports.

In ‘Managing the relationship to secure successful partnerships in PFI projects’ the committee said: ‘Value for money needs to be maintained over the life of these long-term contracts. We are very concerned that over one in five authorities consider that the value for money from their PFI contracts has diminished, with high prices for additional services an area of concern.’

Most recently there has been a critical report from the National Audit Office. It found that in 2007, £180 million was spent on changing existing PFI contracts. It recommended mandatory tendering with three companies for larger contracts and the renegotiation of existing contracts to eliminate private sector fees.

3.  Closure of PFI schools 
School closures on account of falling pupil numbers or poor standards of attainment are common. Allocation of pupils to school places will be the responsibility of the local authority, which will bear the risk if demand for places is different to forecasts in any PFI project.

This can be expensive for the local authority because it must effectively compensate the private sector partner for the loss of revenue post-closure. A school building is unlikely to have a significant value, as it will have limited scope for redevelopment for other purposes.

The Commons Education Select Committee has on this basis voiced concerns about the scale of private funding in new schools, hich it considers represents a ‘risk’ to the taxpayer.

Mark Blois is an associate at Browne Jacobson solicitors