BUILDING schools using private finance may be more costly, the long-awaited probe by Audit Scotland warns.

Its carefully balanced report for the Accounts Commission says that despite real benefits from the use of the private finance initiative (PFI) for renewing schools, “these advantages come at a cost”. It urges the Scottish Executive to allow authorities a wider choice of options.

The thrust of the report is that PFI need not be “the only game in town”, as many councils claim. This will be seized on by opposition politicians, particularly the SNP whose local authorities have been calling for an examination of non-profit making public trusts.

While the Executive is planning to build or renew another 100 schools over the lifetime of the next Parliament, Andy Kerr, Finance Minister, has been at pains to insist that he does not regard PFI as the only option, citing conventional public borrowing and other specific rebuilding programmes.

So far the Executive has given the go-ahead to 12 PFI projects for 80 schools with a forecast lifetime cost of more than pound;2 billion.

Mr Kerr said that ministers agreed with the report’s key recommendations on what he described as the “evolving landscape” of PFI. This will include working with authorities to reform controls on capital spending.

But his statement showed no signs of a climbdown on the use of PFI, pointing out the “extremely significant” advantage of such schemes - contractors not only build schools but take responsibility for long-term maintenance, services “and all the risk that entails”.

Alastair MacNish, chairman of the Accounts Commission, commented: “The benefits available from PFI are not necessarily unique to PFI and we believe there is a need for a real choice of procurement options for future projects.”

The report itself notes: “The recent emphasis on PFI means that evidence of the outcome and effectiveness of large-scale schools procured by traditional methods is rare. The danger is that decisions in favour of PFI procurement may be driven by stereotypes of poorly performing alternatives rather than good evidence of demonstrable benefit.”

Among the added costs of PFI schemes noted by the audit review are set-up and advisers’ charges which totalled pound;31 million for the six projects, involving 65 schools, that Audit Scotland examined in detail (representing 7 per cent of construction costs). This ranged from pound;1 million in the Highland project to pound;12 million in Glasgow. Being the largest PFI contract, however, Glasgow had the lowest set-up bill at 5 per cent of construction costs.

Another potential drawback, the report states, is the long-term financial commitment over 25-30 years. The Commission says this may affect future spending decisions and curtail flexibility.

“In all cases, councils have only contracted for part of their education estate to be covered by PFI,” the report notes. “There is a risk that more intensive budgetary pressures will fall on the remaining part of the education budget or on other council services.”

The audit found that Glasgow had to pay out almost a quarter of its entire non-staffing education spending last year on PFI charges.

There are benefits from PFI, however, including a clear focus on service from “output-focused” contracts, better risk management and strong financial controls. But the report found that many of the claimed advantages could be achieved by other means, for example, setting maximum prices in contracts or using performance bonds.

The Accounts Commission is also calling on the Executive to give a lead to establish a clearer consensus on specifications in school contracts. This would involve guide-lines on classroom sizes and the efficient use of space, which was a widely criticised aspect of the Glasgow project.

The audit of the six projects examined found that PFI costs per pupil varied from pound;1,000 in Glasgow to pound;3,700 in Highland.

The PFI phenomenon, Platform, page 19