Bids move may lure private investors

5th January 1996 at 00:00
Lawyers advising colleges on securing private-sector investment may ask the Government to simplify the bidding process to encourage reluctant backers.

The complexity and cost of the current system is known to be putting off many potential investors in college projects - no definite plan has yet got off the ground.

The lack of interest from lenders is alarming colleges, particularly as the Government has signalled it wants the Private Finance Initiative to bail out the cash-strapped further education sector.

In last November's Budget, the Government announced Pounds 100 million cuts in colleges' capital budgets over three years, and said the shortfall should be made up through private cash. But college principals and even members of the Further Education Funding Council are known to be highly sceptical of the possibility of making up for the cuts.

Legal consultants Eversheds may call on ministers to streamline the initial bidding process and reduce costs to pave the way for deals between colleges and investors.

The expense of the procedure is believed to hamper colleges because their PFI schemes are generally of relatively low value compared with those in other sectors, such as the health service.

If Eversheds, which also advises other sectors on PFI, concludes a change would benefit FE, lawyers will make representations to the Department for Education and Employment.

John Hall, head of the firm's education law department, said: "PFI embraces everything from the Channel Tunnel and the Northern Line to colleges' residential accommodation blocks. I think the regulations need a bit of fine-tuning."

The firm has already called for a change to the current so-called "ultra vires" rule under which transactions between lenders and statutory corporations - including colleges - can become void if the borrower is shown not to have had authority to enter the deal.

If, for example, a college did not have FEFC consent for a transaction the deal could become unenforceable, with the lender potentially suffering losses.

But while lawyers may succeed in securing changes to the mechanics of PFI, they can do nothing to overcome uncertainty among lenders over the nature of further education funding.

Backers seeking a secure return on their cash are known to be wary of a funding process tied to student numbers, with inevitable year-on-year fluctuations in individual college's incomes.

As a result, according to John Hall, no single amendment to the PFI rules is likely to "open the floodgates" for privately-funded projects. "PFI will be a slow starter in education, with many more limitations than in other sectors, " he added.

Guidelines on private finance schemes, issued by Eversheds to colleges and universities, acknowledges that the definition of PFI projects may need to be broadened if the initiative is to take off in the sector.

A "pure" PFI project, according to original Treasury guidance, involves an assumption of risk by the private-sector partner - a step few investors would take unless they could be sure of a proper return. However, aside from accommodation and catering, colleges have few facilities guaranteeing a regular income.

As a result, lawyers are advising colleges to aim for less ambitious PFI projects, and predict straightforward loans are likely to be the commonest products of the initiative.

The advice comes after leading bankers and industrialists expressed reservations over PFI's capacity to provide the cash needed to repair and replace the country's crumbling school and colleges' buildings.

The chairman of leading educational entrepreneurs Nord Anglia predicted in The TES (Friday, December 8) that the scheme was unlikely to get beyond "fringe" facilities such as swimming pools or sports halls.

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