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Positive equity

The private sector is taking over the building of new schools. If a local authority has empty coffers, there are plenty of firms out there willing to stump up the cash. Phil Revell reports

Highlands is an unusual school. For a start, how many others have an address at World's End? The place is eerily empty right now - only Year 7 pupils rattle around brand-new corridors and classrooms that are well designed and finished, a cut above the average.

"This is a brilliant building - fantastic!" says Monica Cross, the new school's proud headteacher. "The quality is extremely good. The space is big. A lot of schools suffer from poor infrastructure, the corridors aren't wide enough. This has a real feel of spaciousness."

Highlands will be officially opened this month: it received its first 11-year-olds in September, but eventually more than 1,200 children in Enfield, north London, will attend.

What also marks it out is that Highlands was built with pound;16.4 million of private money so that the local authority does not own the school - it leases it back from the landlord at a cost of pound;60m over the next 25 years - and no one seems opposed to the idea. Could this be the future of new school building everywhere?

Five years ago, it was a very different story. Enfield was facing rising pupil numbers and a barely concealed sense of panic. Schools were full, but the council's coffers were empty. Assets had been sold off through the 1980s and 1990s and Whitehall looked extremely unlikely to come up with the 100 per cent capital grant the authority would need to build a new school.

"We would have waited a very long time," says Liz Graham, Enfield's director of education. "The normal funding arrangements would not have given us enough to build a new school."

Enfield's answer was to explore the relatively new concept of a private finance initiative (PFI). The idea of private money for public projects was introduced by the Conservatives in the mid-1990s and in 1997 was adopted enthusiastically by the incoming Labour administration. Two deals, in Pimlico and Blackburn, the Conservatives believed, offered a chance to break new ground in education.

In 1996, Philippa Roe at the Private Finance Panel, the quango that administered PFIs under the Conservatives, declared: "Once the first PFI building contract has been signed, I think many more schools will sit up and take notice." But, like the concept of grant-maintained schools before it, the idea didn't take off as expected, partly because of the change of government and partly because of fears about the cost and the anticipated delays while complex contractual arrangements were sorted out.

But today, as the first schools are open - Highlands is the third PFI school in the country to admit pupils - the concept is catching on: companies are queuing up to tender for them and local education authorities see them as the answer to their building problems. But there is a ceiling on the national cash figure since PFI money is counted as part of the Public Sector Borrowing Requirement.

PFI involves a complex web of arrangements in which a private company, usually a consortium specifically set up for the deal, contracts to manage a service over a period of years. Sometimes this involves new buildings, in which case the managing agent will contract out to builders. Local authorities pay a contract fee, similar to a lease, for the period of the contract. In most cases, the assets revert back to the local authority at the end. It is similar to a mortgage.

"In some ways it's better than a mortgage," says councillor Brian Grayston, Enfield's cabinet member for education. "Not only is the funding being provided for a brand new school, but we also have the support of facility managers for the next 25 years. And at the end of that time, the property will return to the local authority. In the meantime, if classrooms go out of use we get compensation."

In Enfield, the contract was won by Laing-Hyder, acompany jointly created by the building firm Laing and the Welsh water company Hyder, which had experience in facilities management. Laing has built the school and Laing-Hyder will manage the building, an arrangement that puts the headteacher, in an unusual position.

"We have another layer," says Ms Cross. "Laing-Hyder are the landlords, the local authority is leasing the school from them and sub-letting it to us. For most schools with delegated budgets, especially after Fair Funding, the LEA is at arm's length. Here we have an entirely different relationship. It's interesting - there's a lot of potential for quarrels."

But overall, Ms Cross is happy with the way those relationships are turning out. She has an LEA officer on site to monitor the deal, and most disputes with the contractor have been amicably resolved. Laing had plenty of experience with information technology, but little familiarity with the requirements of schools.

"They didn't understand educational ICT needs - nobody put in specialist equipment for science, for data-logging," says Ms Cross.

The contract stipulates that after four years Laing-Hyder will spend pound;50,000 a year on keeping the school's systems up to date. That and the provision of networked ICT is a very tempting deal for local authorities. But the headteacher is not advising other would-be PFIs to go down the same route. "It's very tempting because there's so much money involved," she says. "But our advice to others is don't put ICT into the contract."

There were also misunderstandings about the kind of furniture and equipment schools needed. As the Enfield contract stipulated output specifications, this meant that the local authority and the school could ask for only X number of chairs, desks, tables and could not specify a supplier.

"All we could say was, 'Will you get equipment or furniture that will do this or that' (output specification) - some of it has been less than we would like."

And in one area, the school has had serious problems: "We all sat down and had a very frank exchange," says Ms Cross. "We've worked with each other for a long time and we agreed that there was no point shouting at each other. We ended up deciding that we would seek more information, then split the costs between us. This is a big project, there were always going to be glitches."

If things can't be sorted out, Enfield has the option of referral back to the contract. Laing-Hyder is subject to a financial penalty if parts of the new school aren't available to the head. There is also a provision for arbitration on disputes about technicalities. This means that Monica Cross has in some ways found herself back in the 1980s, with a close relationship with the authority and no direct finanical control over the running of large parts of her school.

Her previous headship was in Solihull and coincided with the early development of delegated budgets. "Solihull prided itself on delegating as much as possible," she recalls. "I'd become used to managing the whole budget - including the facilities management side - and I developed a lot of expertise."

She became used to writing bids for funding, reading architects' drawings and finding her way around complex health and safety legislation.

One of the downsides she anticipated at Highlands was the loss of control. "I came here with a lot of cynicism about sharing it with other people," she says. "But I've realised that one of the benefits is that I don't have to oversee the facilities management. There is a very clear contract. They know what they're doing. They get on with it - and we can hold them to account if they don't. There's a great relief in having someone else accountable in school other than yourself."

That accountable person is Richard Weston, managing director of Laing-Hyder, who, while not in the school every day, is ultimately responsible for the delivery of the service.

Laing-Hyder's decision to bid for the Enfield PFI was "business led"'. "This is obviously a significant market," says Mr Weston. "And one where we have the skills to contribute."

While the company recognises it still has a lot to learn about the demands of education, there is a conviction that PFIs represent a necessary approach to an intractable problem.

"Pupils are influenced by their surroundings," says Mr Weston. "PFIs will put a stop to generations of children being educated in badly built or dilapidated facilities."

The company is interested in future education PFIs, but the contract arrangements would have to be right - and on many deals they are not. The difficulties are those identified since the funding initiative was first launched: contract cost andviability.

"If PFI is to continue, we need to move very quickly to standardised contracts," says Mr Weston. He would like to see larger contracts, either authority-wide or bundles of schools with facilities management and capital projects being run by the same contractor.

It is a view shared by Mike Sparrow, chief executive of Chartwells, which runs a catering PFI in Lewisham, south-east London. Chartwells is part of the Compass group, the largest single contract caterer working in education, with a pound;150m turnover. A merger between Granada and Compass brought in another schools caterer, Fairfields, which, coincidentally, is sub-contracted to run the catering at Highlands.

"Look at the state of the infrastructure in education," says Mr Sparrow. "The backlog represents a spend of pound;13bn. A pound;2bn government windfall isn't going to touch it. PFIs are going to be the future for the educationmarketplace."

He also argues that the scheme represents a chance to break the cycle of price-based tendering (pressure to take the lowest bid), which was, he says, "driving quality down".

In Lewisham, Chartwells is committed to a pound;4.3m capital investment, a programme that is two-thirds complete. Catering facilities across the authority have been upgraded. The contract is for 10 years. The fee is based on the take-up of meals in schools - "as numbers increase, the price to the authority decreases".

Chartwells wants to bid for more education PFIs and would like to expand beyond catering into facilities management, but the company is not interested in single-site deals such as the one at Enfield.

"We've come to the conclusion that we don't want to do them," says Mr Sparrow. "The transaction cost is enormous. If we did a really stunning job we might make pound;30,000 - and to bear the risk of millions for that reward is ridiculous."

Like Laing-Hyder, Mr Sparrow is looking for bundled deals across a range of schools. He recognises that delegated budgets make the setting up of such deals problematic: "It's made it difficult to hold a critical mass of schools together."

But he isn't concerned about heads who might want to hold on to hard-won control over all aspects of running their schools.

"We talk to heads who are under immense pressure to drive standards. Devolved budgets drop a lot of additional responsibility on to their desks. Our managers have spent the last 18 months equipping themselves with precisely those skills. It makes sense for heads to concentrate on the teaching."

Back at Highlands, Monica Cross muses about the future: "I don't know if our private-sector partner realises that a school isn't like an office block or a shopping mall," she says. "This school will need to change and alter: we'll want walls knocking down and alterations made and that will be interesting. How will Laing-Hyder react when we ask for those changes?

"It's a learning process, they're a facilities-management company. They haven't had a school before, but they'll learn. I suspect they'll go native."

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