Four reasons for private finance

17th February 1995 at 00:00
In his Last Word column on February 3, Professor Wragg amused himself at the expense of a Department for Education brochure on private finance. With that leaden touch for which he is justly famous, Wragg warns schools to beware of falling into the clutches of unscrupulous businesses, wittily called "Del Boy Enterprises" or the "Ashenlungs Tobacco Company" (geddit?).

Outside North Korea, Cuba and Bolsover, it is hard to find such negative stereotypes of business on open sale these days. Like Giraudoux's Madwoman of Chaillot, who read the same edition of a newspaper every morning to preserve the memory of a golden moment in her youth, Wragg has chosen to live in another time.

Does that matter? Well, it does if others join him. Because if schools reject out of hand the prospect of working more actively with the private sector, they may deprive themselves of the opportunity to break out of a spiral of decay in which many are still sadly locked.

I cannot speak for the Department for Education, but the motives of the private sector members of the Chancellor's Private Finance Panel, on which I have particular responsibility for education, are rather different from those ascribed to us by Professor Wragg. We have four reasons for wishing to lever more private money into the education system.

First, we believe that the Government has under-invested in the capital stock of the education system over many years. The best estimate we have of the capital value of educational assets is Pounds 36 billion. This year's capital budget will be around Pounds 550 million. That means that the Government is assuming a 71-year replacement cycle for educational buildings, which explains, in accounting terms, the evidence of our own eyes that many are in desperate need of refurbishment.

Second, education is a growth business. There will be growth in the nursery phase and, certainly, in higher education. The CBI argues that we need 40 per cent of our university age population in higher education by the end of the century.

Third, there seems no likelihood under this or a successor government that the public sector will provide unconditional public capital to rectify the omissions of the past and provide for the expansion of the future. Certainly there is no present sign of such a commitment on the part of either major party.

Fourth - and here self-interest does come into play - there are considerable idle resources in the construction industry, which has not yet benefited from the recovery.

These points amount to a powerful argument for attracting private finance, to make better use of the assets which the education system has. Schools are typically on good sites close to centres of population; they have extensive car parking, large public rooms, and catering facilities - all of which are fully utilised for only a modest proportion of the working week.

Universities and colleges have training facilities which can be of direct relevance to businesses, and a considerable store of marketable expertise in their faculties.

The Private Finance Panel has been working to bring these assets and opportunities together. But to do so we need to overcome considerable obstacles. These lie in the rules which surround public sector institutions, particularly those which are part of a local authority.

We have made some progress. The last budget introduced some important changes in the financial regimes operated by the funding councils, reducing the rigid distinctions between capital and revenue expenditure. Further Education colleges have also, for the first time, been allowed to borrow using Exchequer-funded assets as collateral.

And there are to be new rules for local authorities to allow them to contribute assets to local authority-influenced companies, without immediately suffering a penalty in the form of a notional capital receipt which they must use to repay debt. Some LEAs are already seeing the attraction of this new financial regime.

There is still a long way to go. We would like to see more financial flexibility for schools, too. And in a perfect world we would like a capital charging system, such as has been introduced into the National Health Service, to promote more rational use of assets. In time, we will overcome these obstacles. In time, we may even convince Professor Wragg that not all business people are trying to rip him off. But I am not holding my breath.

Howard Davies is the director general of the Confederation of British Industry.

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