COULD this be the Railtrack model of education privatisation? It is well known that ministers may hand Britain’s ailing rail network over to a “public interest” company. It has not yet been so widely reported that they have similar plans for huge swathes of the education system.

Already, under the current Education Bill, schools will have the freedom to set up their own not-for-profit firms. But new proposals being considered under a Cabinet Office review of the voluntary sector would go much further, allowing some state schools to set themselves up as companies.

Among the education bodies which might like to become public interest companies are City Technology Colleges, some of which already run spin-off enterprises offering such things as vocational GCSE courses or consultancy. Foundation schools might also be attracted by the idea of having greater freedom to sell a wide range of services to parents.

At a glance the move, which would allow the new public interest companies (PICs) to pay dividends to their directors and shareholders, might look relatively uncontroversial.

It would allow education bodies to enjoy the tax-free status of charities while also having the commercial freedoms of private companies. This would encourage “social entrepreneurship” and bring the best of the private sector into public and voluntary institutions, enthusiasts say.

After all, advocates of the change argue, the old lines dividing public, private and voluntary organisations have long since broken down. Education organisations already operate in a free market, competing with one another for business.

Often there are benefits from this increasing commercialisation. Look at the Universities and Colleges Admissions Service, for example. It is a charity but its commercial arm, UCAS Enterprises, donated profits worth pound;1.9 million back to its parent body last year.

Or take the Kingshurst CTC. Its spin-off company, 3Es, won a contract to take over a failing school in Surrey. It donated pound;300,000 of its profits to the college last year. Perhaps more unusually, it also bought goods worth pound;70,000 from Innovations International, a company run by the husband of its chief executive, the former Kingshurst headteacher Valerie Bragg.

Other education bodies are unashamedly set up to make money, such as Nord Anglia, which runs schools, consultancy and inspection services, and which made a proft of more than pound;5m last year.

Nord Anglia is a company, while its competitor CfBT is a charity. CfBT, like most charitable bodies in education, has dual registration as both a company and a charity, but it cannot pay dividends to shareholders. And under charity law its paid chief executive, Neil Mackintosh, cannot be a full trustee of its charitable arm.

Now some experts wonder whether the new PICs might not level the playing field between organisations such as these two. If CfBT can have the tax advantages of being a charity, why not Nord Anglia too?

Professor Paul Palmer, head of the Centre for Charity and Trust Research at South Bank University, points out that under the current system a philanthropist with a brilliant idea cannot even be paid for developing it if he or she is a trustee of the charity concerned, let alone profit from it.

PICs could solve the problem, he says. He sees no need to be over-fastidious about the prospect of these organisations making a profit out of education.

“People are getting rich on the back of the public sector anyway,” he says. “Let’s start with Accenture and work our way up. I don’t think it’s an issue. There would have to be some form of regulation in there, but at least it would be clear and transparent.”

Mary Tetlow, executive director of the Public Management Foundation which is campaigning for the move, believes the new PICs should be non-profit-making bodies. But they should be able to issue fixed-interest bonds to investors to raise finance, she says. And as long as they are open and accountable, they should be able to pay their executives as much as they like.

“There’s no conflict between acting in the public interest and being entrepreneurial,” she says. “The main purpose is to give institutions some freedom.”

But the move is causing disquiet in some sections of the educational world. It would, some comentators believe, take major parts of the state system into the private sector.

Ted Wragg, professor of education at the University of Exeter, even disputes the notion underlying the proposal - that private-sector methods are more efficient and profitable than public-sector ones. Some of the private companies running education services at the moment are downright useless, he argues.

He also opposes the idea that new groups of shareholders might be given the opportunity to take profits out of education, and is concerned about how the PICs would be held accountable to parents and the public.

“I think this cuts across all kinds of existing legislation,” he says. “School governing bodies, the involvement of parents, are governed by the 1986 and 1988 Education Acts.

“You can’t have it all ways. In publicly-run services, the people responsible are democratically elected. That is being breached because the private companies already running local authorities and schools aren’t accountable, and this will go further.”

Although the current review of the voluntary sector, being undertaken by the Cabinet Office’s Performance and Innovation Unit, is not expected to be completed until later this month, most experts believe PICs are on the way - and a number of educational bodies which are at present charities might decide they would be better off as companies.

Whether or not this would make them more or less accountable is not yet clear. The unit’s review highlights problems with existing charities law. In a background note, the review points out that the Government has become increasingly reliant on Britain’s 185,000 charities for the delivery of public services.

But while more and more public money is spent through voluntary organisations, it adds, there is a feeling that the law governing charities may not have kept pace with the modern world. There may also be a lack of clarity about how these bodies can be held accountable, it says.

A closer look at the world of education illustrates the point. Take the exam boards, for example. Three of them, the Assessment and Qualifications Alliance (AQA), Edexcel Foundation and the City amp; Guilds of London Institute, are among the top 100 charities in terms of income.

All are registered both as charities and as companies. But while AQA and Edexcel file accounts at Companies House, City amp; Guilds is not required to do so because it was set up in 1900 by Royal Charter.

Similarly, many education institutions are excused from the task of publishing full accounts because they have been allowed to become “exempt charities”. These bodies, which include most universities, Oxford and Cambridge colleges and Eton and Winchester public schools, register with the Charity Commission but do not have to file accounts.

An explanation of this on the Charity Commission website does not say why these bodies are exempt, merely noting that they were given the privilege under the 1993 Charities Act.

This can lead to a lack of transparency. Charities are meant to disclose the pay of their highest-paid employees, but some which are part-charitypart-company have complicated chains of ownership which muddy the waters. Try to discover the salary of the highest-paid executive at the inspection company Mill Wharf, for example, and you will not find it in the accounts.

Mill Wharf is owned by the West Midlands Examinations Board, which in turn is owned by the Oxford, Cambridge and RSA exam board. Oxford, Cambridge and RSA pays Mill Wharf’s staff, but because it is an exempt charity it does not have to file accounts with the Charity Commission. It does, however, reveal at Companies House that its highest-paid employee receives between pound;90,000 and pound;100,000 per year.

The ultimate owner of all these organisations is the University of Cambridge, which is also an exempt charity. Because it is not registered as a company, it does not have to publish accounts at all.

But while the current system can be opaque and labyrinthine, Professor Wragg fears the latest reform plans will not improve matters.

“What happens if a school goes bankrupt?” he asks. “Do the kids get kicked out on to the streets? I don’t think anybody has the answers. The people who want these changes would say there would be no problem, but they haven’t got the answers because it hasn’t happened yet.”