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The Private Finance Initiative;Cover feature;National Grid for Learning

Instituted by the last Conservative government, PFI is an essential resource as Chris Johnston reports.

In a field where there are already far too many acronyms, the last thing needed is another. Yet PFI - or the Private Finance Initiative - is one that cannot be ignored.

It was instituted by the previous government as a way of getting public facilities such as hospitals and motorways built without having to shell out vast sums of cash. A private company was awarded the contract and received an annual fee from the government to run the facility.

When Labour won the 1997 election, many expected PFI to die a natural death, but the fiscal restraint being exercised by the Government has seen it flower, rather than wither, on the vine. Labour has extended the areas in which PFI is used and has signalled its intention to bring more private sector investment into education. A recent Treasury document stated that the DFEE would use PFI for projects that improve information and communications technology in schools, colleges and universities.

Alan Milburn, chief secretary to the Treasury, last month said that PFI - a key element of the Government's Public Private Partnerships drive - ensured not only better services, but better value for money. He said that information technology projects in schools had delivered savings of up to 30 per cent.

The Government's enthusiasm for PFI is due to the fact that it allows the public sector to specify what it wants but transfer the associated risks to the private sector, an arrangement Milburn described as a "seismic switch" in the way government operates. "We no longer need to buy computers and software - we can instead purchase managed IT services," he said.

Speaking at a conference in June, former schools minister Charles Clarke said public private partnerships give "a bigger bang for our educational buck". One of the ten PFI deals in the schools sector he listed was the Dudley LEA's arrangement to provide ICT equipment and services for its 105 schools. RM won the pound;43 million, ten-year contract and some of its fee will depend on pupils' examination performances improving. Also under way are PFI deals in Northern Ireland for ICT in schools (the Classroom 2000 project, which will equip all the province's schools with computers and Internet connections, is worth pound;250 million) and Glasgow.

However, according to John Warwick, manager of Capita Education Services, all eyes are on Dudley. He regards basing payment on pupil performance as problematic because many other factors are involved that cannot be controlled by the firm providing the ICT services. However, RM "must have felt that it's a risk they are prepared to take on and manage - that's the same for every PFI".

Capita withdrew from bidding for the Northern Ireland contract not so much over concerns about profit, but because the company had doubts about its ability to manage the risk involved. Warwick says if the authority letting the contract retains a significant level of control, the private company may not be able to make necessary changes and so face an unacceptable amount of risk.

These issues have to be resolved and Warwick believes other models of financing such as partnerships could emerge which are better than PFI for all concerned. He says some local authorities are starting to discuss ways of working together with companies so that expertise on both sides can be brought together for mutual benefit.

Tim Costello, of international law firm Eversheds, which specialises in education matters, adopts a different stance. He sees no reason why PFI should not be used for educational ICT, nor why there will not be more deals in the future. "It won't be used if it doesn't offer better value for money than the traditional solution," he comments.

The charge often levelled against PFI by its critics is that it "mortgages the future". Costello says these arrangements do involve a commitment to make payments for a long time, but points out that ordinary borrowing is often done over even lengthier periods. "That argument is a bit emotional - the capital has to come from somewhere," he says. "If it isn't available from central government or the local authority then it has to be borrowed, or the authority has to enter this type of arrangement. For ICT, it's more like hire purchase."

Another advantage PFI arrangements can bring, Costello says, is to specify a level of service over the contract period. Traditional methods of procurement do not take into account the maintenance and upgrading needed with ICT, he adds.

Although he points out that RM has a considerable share of the schools ICT market, the recent advent of managed services will make it easier for schools to choose another provider. The amount of government funding available for the National Grid for Learning and associated projects has also made computer companies not in the education market dip their toes in the water.

The Government recently created Partnerships UK, an agency that will act as project manager for PFI deals and would, Milburn says, give expert advice and implementation skills to public sector organisations, from Whitehall departments to local education authorities. He added that Labour had ironed out the flaws in PFI and said that it was only used "where it is the right thing to do and only where it demonstrates better value for money than using Exchequer capital".

The Institute of Public Policy Research (IPPR) last month launched a commission into public-private partnerships such as PFI. Martin Taylor, the inquiry's chair, said it aimed to "cast a cool eye over arguments for and against the use of partnerships" to develop a set of principles on their future use.

As Taylor notes, the level of debate on the issue has not been sophisticated and public understanding has not been helped by the complexity of current arrangements. But if the zeal with which ministers such as Milburn talk about public-private partnerships, it seems certain they are here to stay - no matter what the IPPR or the public might think. Add PFI under "P" in your glossary of government-speak immediately.

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