Every education authority has a pet building project. Some are even essential. The problem now, in addition to diminishing borrowing consent for capital expenditure from the Scottish Office, is the complex hurdle of submitting applications under the Government’s private finance initiative.

The Scottish Office has been forced to share some of the authorities’ scepticism over the PFI, bowing to the inevitable unsuitability of such funding for a combined primary, secondary and community school costing up to Pounds 5.8 million in the Lochs area on the island of Lewis (TESS, September 27).That effectively kills the Western Isles Council’s ambitious exploration of the PFI to fund the Lochs scheme and two others in Lewis, costing up to Pounds 15 million in all.

It was a frustrating end to an exhaustive process in which the council had to draw up a 37-page business plan that was then sent to three banks and three contractors with PFI experience. Officials were soon made aware of a potent snag : the three projects would have added Pounds 2 million a year to the council’s revenue budget in payments to the consortium that would design, build, own and operate the schools and leisure facilities.

“The simple fact of the matter is that borrowing money privately is more expensive than borrowing it publicly,” Neil Galbraith, the Western Isles’s director of education, observes. Repayments are over 20-25 years compared with 60 years on traditional local government borrowing terms. Yet David Crawley, head of the Scottish Office private finance unit, told a conference earlier this year that the cost difference between the two should be no more than 2-3 per cent which could be reduced further through “efficiencies”.

Councils seem trapped between expensive schemes which attract developers but add to education authority running costs and more modest projects which make less of a claim on education budgets but are unlikely to be profitable enough to tempt the private sector.

The Western Isles may be a specific case, not least because of low land values which will not provide private operators with sufficiently appreciating assets or any incentive to develop spare sites released by a school relocation (there would have been nine surplus school buildings if the package had not unravelled).

All authorities are none the less being forced down the PFI route at the behest of the Scottish Office and their own desperation. “It is the only game in town,” Alan Steele, head of educational resources in Falkirk Council, says. “Our capital budgets are under such pressure that the alternative is to do nothing and that is not an option.”

Falkirk, with a capital programme for education of less than Pounds 2 million, is exploring the use of the PFI for Pounds 20 million worth of refurbishment at Bo’ness Academy, Graeme High, Woodlands High and Larbert High, while a new Pounds 12 million secondary in the Braes area of the town is a long-standing ambition.

Highland is under parental and teacher pressure to replace secondary schools in Portree, Fortrose and Glenurquhart. Stirling is investigating the use of private capital for Balfron High and East Renfrewshire is preparing an Pounds 8 million package for an extended St Ninian’s High and a new primary at Newton Mearns.

Shetland wants to replace what the council’s convener described as “a barrack block on a peninsula” - the six-year Anderson High in Lerwick - with a new school and halls of residence costing Pounds 33 million.

Canon Lewis Smith, the convener, said in a radio interview last month: “I think the private finance initiative, as long as the present Government is in power, will be the only way we can finance a new Anderson High School. I suspect if there is a change of government it will still be the only way. ”

Leading Labour figures have confirmed that suspicion, basing their opposition on practice not principle. Alistair Darling, Labour’s chief spokesman on public spending, supported joint investment when he addressed businessmen in Edinburgh in May. He even suggested that Labour councils had pioneered the idea.

Labour wants to see evidence of a more strategic approach to priorities, Mr Darling said. “The Government has to decide whether or not upgrading the west coast main railway line is more important than tarmacking the hospital car park at Eastbourne.”

David Green, vice-convener of Highland Council, agrees that the PFI is a threat to sensible planning. “If, say, the Ardnamurchan High School project was on year two of our capital programme and Inverness High was on year 10, a private firm might come in and say, ‘we will submit a tender for Inverness but not for Ardnamurchan because that’s in the middle of nowhere’. This could lead to a distortion of the capital programme.”

Mr Darling’s main objection was that the PFI is not a genuine partnership because the Government regards it as “an alternative, and probably more expensive, source of funding . . . something that is either totally or at least substantially in private hands”. The Scottish Office’s Public Services and Private Finance brochure implicitly accepts the charge, stating that “there must be effective private sector control. The public sector must not have the dominant influence in joint ventures.”

There must be “sufficient transfer of risk to the private sector”, the Scottish Office states. This balance appears to have been struck in the cases of roads, sewage and health, the happy union that has formed the bulk of projects so far. Allocation of risk is one of the key features in any contract, which must be settled at the outset. The level of demand for the PFI-funded facility is crucial in fixing the repayments, for example, so councils will be expected to do nothing such as tampering with catchment areas.

The Scottish Office guidance is clear that “if the level of usage falls below the expected level, the concessionaire (private sector partner) will not receive the full payment”. Paul Brewer, an associate director of the Coopers and Lybrand consultancy, adviser on a number of schemes including Livingston and Balfron, said: “The building is the contractor’s under PFI and any problems will be his problems and not, as now, a drain on education authority resources. ”

One consequence, Mr Brewer confirmed, is that all staff required to run services provided by the new “facilities management”, including janitors, cleaners and caterers, will transfer to the private sector payroll. This will not, however, apply to teachers since the local authorities will continue to provide education under contract to the operator.

“It is a question of balance,” Mr Steele says in Falkirk. “Any council that commits itself to PFI will have to be content with the arrangements for the allocation of responsibilities between the local authority and the private sector.”

The Government expects contracts to be affordable, deliver value for money and realise educational objectives. For example, partners should develop “additional revenue streams” such as commercial development of surplus buildings or charging for holiday and evening use of school facilities, which would in turn reduce the repayments for the local authority.

There is, however, a stumbling block in that repayments are a charge on council revenue not capital budgets, thereby helping to push up expenditure and falling foul of the Government’s capping limits. Traditional loan charges, on the other hand, attract debt relief. Talks between the Scottish Office and the local authorities are close to agreement on “a more level playing field”. In the meantime, the Scottish Office contends: “No educational project has gone far enough to allow us to reach the conclusion that the PFI is not viable as far as education is concerned.”

Projects that made the grade

* “Under negotiation” are a Pounds 42m relocation of Edinburgh University’s medical school, Falkirk College’s Pounds 3.6m centre in Stirling and the Pounds 10m development of an FE college in Livingston by West Lothian College.

* “Potential” projects include a Pounds 5m rationalisation of premises at Edinburgh’s Telford College and a development of John Wheatley College’s Easterhouse site in Glasgow worth Pounds 5m.

* Scottish schools have not yet made it on to any of these lists. Two “pathfinder” projects in England are closest to obtaining funding: an Pounds 18m replacement for Pimlico School in Westminster and a Pounds 10m investment in the 900-pupil Colfox School in Bridport.

Fifteen English schools are said to be considering redevelopment. The Government’s Private Finance Panel said in April that interest is increasing “at an exponential rate”.