The PFI phenomenon

It's not a scam but on the evidence given to Audit Scotland it's far from the only game in town, says Judith Gillespie

HEN invited to join an advisory panel set up by Audit Scotland as part of its review of the private finance initiative (PFI), I leapt at the chance to lend my private finance scepticism to this official exercise that was to look at school schemes because education was to be the biggest PFI growth area. In fact it all turned into a huge learning experience which left me with a far better understanding of the good, the bad and the plain misleading.

The starting point was to identify what was specific about PFI. After all, new schools could be delivered by different funding schemes; well-designed schools have been built in conventional ways; and the well-publicised building problems of private finance schemes have occurred under other arrangements.

So surely it was that PFI provides hugely more money than could ever be available under conventional funding mechanisms. Apparently not. During our meetings, there was much reference to "level playing field funding" which I finally discovered meant the Scottish Executive repaying most of the charges on the capital cost.

In other words, just as the Government had always controlled the amount of money that councils could borrow by the amount that it was prepared to pay back annually, so the Executive was controlling the amount of PFI by the amount that it would pay back for the capital costs.

An extra pound;600 million was made available but only if borrowed through private finance schemes. The question is: why could the Executive not make the same amount of money available through conventional funding schemes?

PFI was beginning to look like a scam when I came to understand one significant difference. This was that PFI is based on a 25 or 30-year contract. As was made very clear to us, PFI is not just about new buildings. It is about both the provision and management of buildings. The new build or refurbishment is only part of this longer-term process. It is an important part but its primary purpose is to make the buildings efficient to manage, not to provide students with a lovely new environment - although that comes into it.

With the contract, come a series of constraints. The first is that any new building or refurbishment project has to be within budget. There is an absolute maximum that can be spent and building costs cannot exceed this. Throughout our discussions the new Holyrood building was used as shorthand for what happens when there are no such constraints - the familiar story of public buildings being delivered late or over budget.

This money strait-jacket puts an incredible burden on the authority to get the contract right. Councils had to be certain that their specified requirements were really what were needed now and would still be needed in 30 years' time, as changing specifications was an expensive business. This process was generally seen as good, but not one that has necessarily been done equally well in all cases.

Another benefit of the contract was that the consortium that refurbished the building also had to maintain it, so there was a huge incentive on them to do a good job. However, this does require councils to have proper monitoring systems to hold the private finance providers to their side of the contract.

There has been a lot of publicity about staff being moved from the public to private sector in PFI projects. This aspect did not feature much in Audit Scotland's review partly because there are contract guarantees that protect staff terms and conditions for five years from the transfer.

One significant aspect of the private finance scheme is that schools have their maintenance levels guaranteed for the duration of the contract. No longer will authorities be able to trim maintenance levels to ease pressures on the budget. However, that exposes schools which are not protected by a private finance contract to higher levels of cuts when funding comes under pressure. In these circumstances schemes like Glasgow's that cover a large number of schools will be more equitable than schemes that cover only one or two schools within the authority.

ll of this leaves completely open the question of whether PFI costs more. Bids for private finance funding had to be compared to public sector equivalent using a test called the Public Sector Comparator (PSC) and only went ahead if they proved cheaper. But given there was so little recent experience of building schools and the authorities knew PFI was the only game in town, it is difficult to have complete faith in the rigour of such comparisons.

None failed the PSC test. Moreover, there is a lot of subjectivity and uncertainty in the PSC costings. There is the small fact that the PSC was based on a rate set by the Treasury that is higher than councils would actually have paid for borrowing the equivalent capital. The Audit Scotland report does explain the thinking on this but I remain mystified. Ministers must come up with a simple explanation - it's their policy and they should justify it.

So at the end of the day what do I conclude? PFI is totally a matter of Executive policy. The money could just as easily be provided by traditional routes. The 25 or 30 year contract to provide accommodation to a guaranteed standard is the key difference between the private finance and the traditional approach. While the contract imposes useful disciplines, it does require those who draw it up to be able to see into the future accurately. The relative costs I leave to accountants to determine - and we all know what that means.

Judith Gillespie is development manager with the Scottish Parent Teacher Council. The views are the author's alone.

Log in or register for FREE to continue reading.

It only takes a moment and you'll get access to more news, plus courses, jobs and teaching resources tailored to you