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Building schools for when?

Created:

12 June 2009

Written by:

Julian Hofmann

"Poor planning", "persistent over-optimism" and "widespread disappointment" were some of the more positive descriptions used by the parliamentary public accounts committee in describing the state of the Building Schools for the Future (BSF). However, while the committee's report focuses on government's mishandling of its flagship £45bn school rebuilding programme, it also raises serious questions about private sector involvement in public sector projects generally. BSF has become an important source of earnings for many listed companies, but specialising in such PFI deals now looks like it may not have been worth the high entry costs and major administrative hassle.

The essential problem for the government is that completing the building programme by 2023 will require more than 250 schools a year to be overhauled from 2011 onwards to hit the full 3,500 target. That means doubling the current rate of progress, and the committee estimates that the programme is already 145 schools behind. Most of these shortfalls are due to initially over-optimistic assumptions about the build rate, but also a complicated procurement system that costs nearly £10m to set up before even a foundation stone is laid. An obsession with speedy completion has also left some schools delivered on time but with ongoing teething problems.

The committee also pointed out that consultants seem to be a cause of higher costs, by fulfilling roles that could be carried out by local authorities. In one noteworthy example, a single KPMG consultant cost the tax payer £1.35m over three years, whereas, it is argued, the Department of Education could have employed someone directly with the relevant commercial skills.

The credit crunch is also having an effect on the funding of the programme. Even though PFI only makes up around 40 per cent of the total programme, the Treasury has had to step in with £2.4bn of funding facilities for those projects that are unable to find debt finance at acceptable levels. This source of potential funding is rather convoluted, as the Treasury will lend money at commercial rates of 5.88 per cent, in spite of the fact that straightforward 'gilts' funding would cost only around 3.5 per cent in interest. To manage the debt risk, the Treasury has had to set up a risk management team along the lines of commercial banks.

So far this has only affected a bid by Newham council, but which does not involve any of the big PFI players. But, as we pointed out earlier this year (Public Finance Initiative, 4 March 2009) it is now clear that private finance is being steadily usurped by public money, along with rising intolerance of off-balance sheet spending. The availability of funding is a source of comfort as the programme is materially significant for supports services and IT companies such as Mouchel, Mitie, RM, VT Group and Redstone.

However, while funding is there for the short-term, the question is whether the same flow of projects will continue if all spending from now on has to be shown on the Treasury's balance sheet. Two sets of accounts could be used to book PFI projects, but external bodies such as the National Audit Office and the Office of National Statistics intend to count it as part of the national debt. That leaves projects open to potential budget cuts.

Another interesting development might come on the political front, if a recent speech from shadow chancellor George Osborne is anything to go by. Speaking to the Association of British Insurers, Mr Osborne said, "The medium-term priority is to make the transition from an economy built on excessive debt to one built on savings and investment... For companies it means reducing the reliance on debt and leverage to increase returns - assisted by reducing the bias in our corporate tax system against equity and towards debt financing." This poses an interesting conundrum for companies that are expected to borrow privately to fund public sector projects.

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