In March 2001 we published a briefing on PFI in Schools (see
P&I Briefing 11) which warned that the Scottish Executive
was promoting the privatisation of Scotland's schools through
the Private Finance Initiative (PFI).
£5m was made available to 21 local authorities for feasibility
studies resulting in bids being made for further Executive subsidies.
A decision on these bids will be made in two tranches (April and
September 2002) which is likely to result in the privatisation
of over 100 Scottish schools.
This update is based on a study of the information provided in
these bids and highlights some of the issues branches will need
to raise locally if schemes in their area are approved.
In June 1999 the Scottish Executive announced that there would
be greater openness and transparency in the PFI process. Indeed
transparency is a key element in the Executive's vision for public
services in Scotland. However, this vision apparently does not
extend to PFI in Schools.
Very few authorities have published the full version of the Outline
Business Case (OBC). Most have published sanitised versions with
essential documents and figures missing. Even councillors making
decisions on the submission of these bids do not realise that
they have not been shown the full OBC. Commercial sensitivity
is often used as an excuse for not publishing PFI documents.
However, even this excuse does not apply at the OBC stage as
no private sector bids have been considered. Transparency is also
vital to the public consultation sessions which councils have
embarked upon. These sessions have only limited value if schools
and parents are shown only part of the picture. In any case unlike
schools built with conventional finance bidders are not limited
to the outline specification.
They can vary the design of a school considerably and the authority
is then debarred from consulting parents because it then becomes
"commercially confidential". This is why many PFI schemes change
significantly between the OBC and FBC (Full Business Case) stages.
If these bids are sound then there is no reason for not publishing
them. Unless of course there is something to hide!
VALUE FOR MONEY
Many councillors are on record as saying that they are using
PFI because it is "The only game in town". Ironically if they
submitted a bid on that basis it would be rejected. All PFI schemes
have to demonstrate value for money by showing that the private
bid is cheaper than the Public Sector Comparator(PSC).
The problem for councils is that the PSC will almost always be
cheaper because they can borrow more cheaply than the private
sector, have fewer fees to pay and of course they don't have to
make a profit. Most of the current bids assume a 16% return on
capital employed. We doubt if many parents are getting a 16% return
on their own investments at present!
Because the PSC is cheaper it has to be "refined" to enable the
project to proceed. We explained some of the methods used in the
last briefing and branches should refer to that paper and other
UNISON guides for more detail.
The favourite is to compare costs by adopting Net Present Value
(NPV) instead of real cash flows. This method favours PFI bids
and the effect is magnified by using high discount rates. Typically
the schools bids are using a rate of 8.5% when independent analysts
have recommended 5%.
Like for Like?:
One of reasons many councils have not published the financial
appendices to their bids is because they have not constructed
the comparisons on a 'like for like' basis. Costs are placed in
the PSC which have no equivalent in the private bid.
If the above methods don't produce the "right" result the bids
rely on putting a notional financial figure to risks allegedly
transferred to the private sector. The best published example
of this is the Glasgow schools scheme which turned a £35m loss
into a £35m saving by producing an entirely notional £70m risk
In practice the only significant risks are at the construction
stage and in conventional schemes these risks can also be covered
by penalty clauses. As the National Audit Office has highlighted
PFI companies have made millions out of these alleged risk factors
by refinancing schemes after the construction stage. In the current
bids authorities rarely justify the very large sums of money allocated
to risk transfer (typically 12.5%) although usually they are the
only financial justification for the bid.
One authority was so convinced that its bid would produce the
'right' risk figure that it presented the OBC to the council before
the figure was produced! One detail councillors are rarely advised
of is the risk transfer if the PFI scheme fails. This is usually
hidden away in an appendix called the "risk allocation matrix".
In the current bids they all require the council to pay compensation
if the project is terminated due to the fault of the private company.
How many parents would pay compensation to a supplier of faulty
goods. The council will have to!
The annual payments made to the private company for the use of
the PFI school is funded out of current revenue and a subsidy
from the Scottish Executive called level playing field payments.
Of course no equivalent subsidy is made available for authorities
which want to build schools using conventional finance. That would
be a real level playing field!
Even after these payments most of the current bids have a substantial
affordability gap. Typically 15% of the cost. Councils are proposing
to bridge this gap by either cutting the space specification,
lowering the quality standards or cutting services elsewhere.
Again this is exactly what happened in the Glasgow schools scheme.
In addition once the contract is signed the PFI money is ring
fenced and if the authority faces budget cuts in future it will
be the non-PFI provision which has to be cut. Remember that the
bankers always get their money!
Branches should also look carefully at the land sales and site
rationalisation plans in many of the current bids. An explanation
of how land sales are used to fund PFI deals is available on the
The current bids are ignoring the revised Treasury rules which
allow PFI schemes without staff transfer, subject to a value for
money test. Most bids do not even undertake a VFM test. They cling
to the old "off-balance sheet" principle which Treasury ministers
discarded in 2000.
The private company which owns the PFI school is called a Special
Purpose Vehicle (SPV). Several authorities are looking at ways
of participating in this company either through a joint venture
or by using a not for profit company. Whilst such mechanisms might
recover some of the windfall refinancing gains it fails to understand
that PFI companies make profits from the services provided to
the SPV. The lenders still get their exorbitant rate of return
and the FM provider profits by cutting the wages and benefits
of the already low paid and predominately female workforce. In
addition due to the perceived lending risk not for profit companies
do not usually directly employ staff.
The Scottish Executive claims its support for PFI schools is
based on the needs of pupils and parents. From this analysis the
only real gainers are consultants, bankers and big business who
profit from the public purse.
@ the P&I Team
14 West Campbell St
Tel 0141-332 0006
Fax 0141-307 2572