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July 2002
The Audit Scotland Report
Established in 2000 Audit Scotland provides services to the Accounts
Commission and the Auditor General for Scotland. In June 2002 the
Audit Commission reported to the Accounts Commission with its Audit
Review: Taking the initiative: Using PFI contracts to renew council
schools. The study looked in detail at six of the current twelve
PFI schools projects in operation in Scotland. The six projects
are for 65 schools, in Falkirk, Glasgow, Balfron (Stirling), Highland,
Edinburgh and West Lothian.
The Report's Conclusions:
Why PFI?
For local authorities the single most important driver of PFI as
the procurement route has been the opportunity to obtain substantial
additional investment for the renewal of schools. It is noted that
the Scottish Executive has determined the level of investment in
each case, as well as the financing route. Councils have not been
able to use alternative traditionally funded routes because of restrictions
on council borrowing.
Need for options to PFI
Audit Scotland call for a real choice of procurement options for
future projects, to include PFI and non-PFI options. The report
suggests a wider choice of procurement routes could help to improve
value for money in this sector.
Management
Councils have managed PFI processes well so far. However, Audit
Scotland notes that we are at an early stage in the 25-30 year life-span
of PFIs, so it is too early to judge their contribution to education.
Delivery?
To date PFI providers are delivering new schools and associated
services reliably and without significant cost changes for councils.
But the disadvantage with PFI is the reduction in future financial
flexibility and the higher costs associated with the more rigorous
PFI procurement.
Public Sector Comparator
In order to go down the PFI route councils have to prove that this
is cheaper than using public funds. A theoretical Public Sector
Comparator (PSC) figure is arrived at to compare with the PFI option.
The Report found that the cost advantage between PFI and the PSC
was narrow:
- in 5 of the 6 cases the PFI construction costs were higher than
the PSC,
- in all 6 cases the operating costs of the PFI option were higher
than the PSC,
- in most cases the risk adjustment figure tipped the balance
back in favour of the PFI option.
It concluded that the way councils decided on the PSC was "subject
to inherent uncertainty and subjectivity". Audit Scotland also
stated that current approaches to obtaining the PSC did not take
into account the higher costs of private sector borrowing compared
to councils' borrowing.
PSC: Financing Costs
The Report examined the overall financing costs for the private
sector, concluding that its costs in the range of 8-10% a year are
2.5-4% higher than a council would pay if it borrowed money on its
own account for a similar project. This adds costs of between £0.2m
- £0.3m a year for each £10m invested in a project.
Audit Scotland advises that councils and the Executive should assess
how best to reflect the cost of borrowing by councils in the PSC.
Value for money?
Audit Scotland concluded that it was not possible to draw overall
conclusions on value for money as it is difficult to quantify the
benefits associated with PFI.
The Report notes that it is important to the whole integrity of
the PFI process that councils as clients hold the providers to their
contractual commitments.
Unique to PFI?
A crucial point made by Audit Scotland is that the "benefits
available from PFI are not necessarily unique to PFI". This
is a clear indication that given access to alternative funding methods
councils could deliver schools without having to take the PFI route.
Sharing Best Practice
The report notes the significant differences between councils in
the costs of their schools under PFI. It recommends that there is
a need to share best practice and promote value for money to avoid
the variances that are seen in these initial PFI schools schemes.
It is suggested that the Scottish Executive should develop a leadership
role in co-ordinating and sharing best practice.
Guidelines on minimum standards
There are no minimum standards on acceptable size for a school classroom,
or other facilities. It is recommended that the Scottish Executive,
in partnership with local authorities should develop best practice
guidelines on minimum standards for the learning environment.
Costs of PFI
The Report observes there are substantial costs to be paid for entering
into a PFI schools contract. Councils' costs are substantial, and
costs arise for private sector companies during the competition
process. In the 6 cases that Audit Scotland examined the combined
set up and advisers' cost for private and public sectors range between
£1m and £12m (between 5-15% of core construction costs)
and tended to be proportionately greater for smaller projects.
PFI Risks
The transfer of responsibility for many risks to the private contractor
reduces the council's exposure to risk, but there is a price to
be paid for risk transfer, and PFI does not guarantee that councils
achieve the most cost effective balance in this area.
The Report fails to acknowledge that in the OBCs UNISON has seen
if the contract is terminated by company failure or poor performance,
the authority picks up the bill.
Impact on Long Term Spending
In the 6 cases studied local authorities have only contracted for
part of their education estate to be covered by PFI. Audit Scotland
warns councils are tied to the PFI payments, and that there is a
risk that future financial pressures will fall on the remaining
part of the education budget or on other council services.
Latest PPP Schools Round
Despite this report, the Scottish Executive unveiled a new raft
of PPP projects on 25 June 2002. The £1.15 billion package
is to fund around 300 school building projects. Last year councils
were invited to bid for a share of Executive revenue funding to
support school building capital projects under PPPs. Local authorities
could bid in either December 2001, or September 2002, with 15 Councils
entered bids last December. The amounts awarded to individual councils
can be seen at: http://www.scotland.gov.uk/pages/news/2002/06/SEED044.aspx
The Executive is also making up to £150,000 funding available
to councils to assist in preparing Outline Business Cases. In addition
to the PPP funding, £26.7m has been made available for immediate
school repairs under the School Building Improvement Fund. Every
council in Scotland will benefit from this investment.
Issues for UNISON:
* The Public Sector Comparator does not stand up to scrutiny we
need to challenge councils on how they arrive at the PSC.
* If the Executive does take up the point to work with councils
to determine minimum standards for class rooms and other school
facilities, UNISON should ensure that our views are incorporated
when guidelines are established.
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