Memorandum submitted by the National Union
of Teachers
INTRODUCTION
1. The National Union of Teachers (NUT)
welcomes the opportunity to submit evidence on Private Finance
Initiative (PFI) projects to the Education and Skills Committee
review of Public Expenditure.
2. The NUT's PFI Unit monitors all schools
PFI projects in England and Wales and draws upon local Divisions
and Associations experiences of PFI to inform the development
of its own policies.
3. The NUT's submission to the Education
and Skills Committee is based upon this local evidence as well
as findings from national research on PFI in schools. The report
draws attention to the implications of this evidence in view of
the DfES' plans to further the use of PFI in schools as detailed
in their annual report.
LOCAL EVIDENCE
4. The NUT would draw to the attention of
the Select Committee the attached NUT document (Annex A) "Five
reasons why teachers and school governors should say no to PFI".[4]
This document details a selection of the many negative experiences
of PFI in schools. Specifically it sets out the five reasons why
the NUT opposes the use of PFI in schools:
— It does not offer value for money;
— It meets the needs of contractors
and not the needs of schools;
— PFI threatens future education budgets;
— Privatised "facilities management"
does not improve the quality of services; and
— All the project risks do not transfer
to the private contractor.
CONSULTATION AND
DISCLOSURE OF
INFORMATION IN
SCHOOLS PFI PROJECTS
5. The NUT has recently expressed its concerns
to the DfES about the weaknesses and lack of transparency in the
present consultation arrangements following our experiences with
the Calderdale Schools PFI project. A copy of the letter that
was sent to the DfES on 13 May 2003 is attached to this submission
as Annex B.[5]
The NUT is awaiting a reply from the DfES.
6. The NUT is further concerned by the affect
that the DfES' plans to shorten the procurement of PFI projects
could have on consultation processes. Whilst the NUT would welcome
the lower costs to the public sector that would result from a
shortening of the procurement process, a streamlined procurement
process should include sufficient time for meaningful consultation
with trade unions and other key stakeholders.
7. Furthermore, the Building Schools for
the Future proposals (see paragraphs 35-40) will weaken the democratic
accountability of PFI projects by transferring key decisions from
the LEA to a regional body. This is a matter of serious concern.
NATIONAL EVIDENCE
Audit commission report "PFI in schools"
8. The NUT would draw to the attention of
the Select Committee the Audit Commission's report "PFI in
Schools", published in January 2003[6].
The Audit Commission compared a sample of traditionally funded
new schools across England and Wales with 17 of the early PFI
schools. The report examines whether the PFI schools were of good
quality, what the schools' users thought about the buildings and
services, and their cost.
9. The study found that overall, the quality
of all schools, however funded, fell below "best practice".
The quality of the PFI schools was, statistically speaking, significantly
worse than that of the traditionally funded sample. The expected
benefits of a single private consortium designing, building and
operating schools were not yet widely evident.
10. The unit costs of new schools varied
widely, with no clear-cut difference between PFI and traditional
schools in either construction or most running costs. There was
no evidence that PFI schools were delivered quicker.
11. The study noted that the DfES only approves
an outline business case for a PFI scheme if the schools have
been consulted and given their agreement to the scheme. Yet the
report found that the level of staff involvement varied across
the early PFI schemes. Only 16% of users stated that they were
involved in the procurement process "a great deal" or
"a fair amount". Those users who expressed less overall
satisfaction with their new school also said that they had little
involvement in the design phase.
12. Problems in some early PFI schemes arose
from the PFI providers' lack of understanding of what schools
needed.
13. Some schools stated that specialist
equipment installed by the PFI provider was out of date. The Commission
believes that equipment obsolescence is a risk that needs to be
factored in to the financial calculations.
14. In some schemes the last minute cutting
down of the specification to fit affordability constraints led
to some components and design `desirables' being sacrificed. Some
of the affected schools then had to install additional furniture
and equipment at their own expense.
15. The report identified a number of areas
where unplanned risks could emerge during the contractual period.
For example, the popularity of new-build schools can lead to increased
demand risk, with pressure to expand pupil capacity very quickly.
Whilst the Audit Commission regards this as a positive sign, it
notes that the LEA must deal with the consequent financial demands
that arise from a variation to a PFI contract. There is also a
possible risk to neighbouring schools from a drop in demand that
could create additional financial pressures for the LEA. Early
signs of this risk materialising were reported during the fieldwork
period.
16. If there is a major problem with a school
building, the bottom line is that the LEA must step in if the
PFI provider fails to respond appropriately, because it is the
LEAs responsibility to provide the education service.
17. The payment mechanism is the primary
vehicle for ensuring that the PFI provider performs to the standards
set out in the output specification and therefore for achieving
good value for money. Yet, the Audit Commission found that the
mechanism was not enforced rigorously in some instances. For example,
teething problems with the provider's information system meant
that one LEA had no information base to make any deductions. In
addition, further work is needed to ensure that payment deductions
are a proper reflection of the impact of the non-delivery of a
service. For example, a deduction of £268.62 was made out
of a monthly payment of about £150,000, for two days' non-availability
of an athletics field. This sum may not be high enough to act
as an effective incentive, and probably cost more to calculate
and administer than the value of the deduction.
18. The report emphasised that the Public
Sector Comparator (PSC) is one of the significant inputs informing
the judgement as to whether a project will deliver good value
for money. The Audit Commission believes that the PSC falls short
of this in two important ways:
— It compares a PFI scheme's cost with
a hypothetical alternative, rather than an actual set of costs
from comparable schemes; and
— It considers the projected PFI contract
cost before the design is finalised rather than the actual outcomes
of the final contract negotiations.
19. In every case the Commission investigated
PFI was judged to offer a saving over the PSC. This would suggest
that the value for money of schools PFI has already been proven.
But if the PFI scheme's costs were not lower than the PSC estimate,
it was unlikely to receive permission to proceed, and the opportunity
to obtain new buildings or refurbishment would have been lost.
Some interviewees claimed that the incentive to estimate on the
high side for the PSC in order to obtain the government funding
was strong. In all but two of the schemes in the sample the cost
advantage of the PFI option relied on the estimate of the cost
of risks transferred. And the size of risks transferred was related
to the difference between the PFI cost and the PSC estimate—where
the PSC estimate of construction and running costs was much below
the PFI cost, the cost of risk transfer added on was on average
higher.
20. Most of the LEA officers interviewed
by the Audit Commission stated that affordability gaps under PFI
had grown as a result of some of the improvements introduced.
Yet the Commission found that the additional cost of these improvements
was not off-set in the early schemes by the hoped for efficiency
gains in schools capital and running costs resulting from innovation
or service efficiencies.
21. The report identified the risk with
PFI is that the impact of under-funding may well surface several
years into the contract, allowing LEAs little room for manoeuvre.
22. The Audit Commission found that the
early wave school schemes shows that the PFI process did not as
a matter of course guarantee better quality buildings and services,
or lower unit costs. The Commission believes that the key lesson
is that if the large-scale new investment is to fulfil the Government's
vision of quality schools that can boost attainment, then these
benefits must be levered out from each individual scheme, and
a way found to ensure that a scheme does not fall short of this
vision during the procurement process. A consistent message, particularly
from headteachers, was that a significant investment of time and
personal commitment in the detailed design and development stages
is essential if the benefits are to be realised.
AUDIT SCOTLAND
REPORT ON
PFI IN SCHOOLS
23. The NUT would draw to the attention
of the Committee the Audit Scotland report "Taking the initiative—using
PFI contracts to renew council schools".[7]
The study looked in detail at six of the twelve PFI schools projects
currently in operation in Scotland.
24. Audit Scotland reported that the single
most important driver of PFI as the procurement route for new
schools has been the opportunity to obtain substantial additional
investment. Alternative traditionally funded procurement routes
have not been a viable option within the financial framework in
operation. This purports the often-repeated claim of English LEA's
that PFI is the "only game in town".
25. For some schools there is a risk of
long-term pupil roll reductions and surplus capacity. It is also
likely that there will be new legislation and shifts in education
policy over the 25-30 year lifetime of the PFI contracts that
will affect how the school buildings are used and what is required
of them. For future PFI projects, councils and private sector
providers should explore the allocation of risk carefully, particularly
whether PFI providers should and could take more responsibility
for managing risk associated with the need to reconfigure schools,
should demand vary within predetermined limits.
26. The report called on the Scottish Executive
to consider the benefits of promoting real choice between procurement
options for school services and said that creating a framework
that allows councils to choose between a mixture of procurement
options (i.e. both PFI and non-PFI) would help secure best value
from PFI.
27. The benefits of PFI procurement are
not consistently available to all school projects or are all unique.
It may be possible to achieve similar benefits from other procurement
approaches but in practice because of funding considerations there
has been little or no opportunity for councils to test them in
practice. Disbenefits of the use of PFI in schools are:
— Managing the PFI procurement process
is expensive for both public and private sectors, particularly
for smaller projects. In the six cases that Audit Scotland examined
the combined set up and advisers cost for private and public sectors
ranged between £1 million and £12 million (or between
5% and 15% of core constructions costs);
— There is a risk that future financial
pressures will fall on the remaining part of the education budget
or on other council services. For the six projects examined the
net PFI payments (after deducting level playing field support
grant) averaged 14% of the councils' total non-staff education
budget. In Glasgow (the largest contract) the net PFI charges
represent 24% of the council's entire non-staff education expenditure
in 2000-01; and
— The cost of private finance is higher
than in the public sector. This cost generally varied in the range
8% to 10% a year, 2.5% to 4% higher than a council would pay if
it borrowed money on its own account for a similar project.
28. Audit Scotland found that in most cases
the cost advantage in favour of PFI as opposed to the PSC was
narrow:
— In five of the six cases the PFI
construction costs were higher than the PSC;
— In all six cases the operating costs
of the PFI option were higher than the PSC; and
— In most cases the risk adjustment
figure tipped the balance back in favour of the PFI option.
HARINGEY SCHOOLS
PFI SCHEME
29. The NUT would draw to the attention
of the Committee a report on the Haringey Schools PFI scheme which
was published in 2002[8].
30. The report found that two years after
signing the PFI contract, Haringey LEA was short of more than
£6 million needed to complete the work the PFI deal was supposed
to cover. The LEA had to take £250,000 from the budget for
the borough's primary and secondary schools to cover the funding
shortfall.
31. The LEA then had to agree to find an
extra £2 million a year for most of the 25 years of the contract
from its own resources.
32. The report noted that to get government
approval for a PFI scheme, local authorities have to demonstrate
that it would give better "value for money" than using
publicly-provided financing, and that the council could afford
it. In Haringey, councillors were advised to exclude the provision
of essential services from the contract to make the project "affordable".
Yet, Haringey's Outline Business Case stated that the cost of
the PFI option was £12.9 million higher than the Public Sector
Comparator (PSC). The estimated cost of the public sector option
was then "refined" upwards until it was higher than
the Council's preferred PFI bidder. Part of this refinement involved
adding to the PSC the cost of the various risks involved in refurbishing,
maintaining and operating school buildings. But how can such risks
be quantified? One commentator noted "there is some evidence
that the costs of risks transferred. . . to the private sector
have been exaggerated so casting the PFI option in an unduly favourable
light".
33. The classroom size set out in the PFI
contract is too small for the curriculum needs in at least three
of the schools. The necessary variation to the contract will cost
the schools more than £1million between them. They can no
longer change contractors and what is more, the annual payments
to the contractor take priority over everything else, including
the teaching budget, regardless of whether or not government funding
for either councils or schools is adequate.
34. The report highlighted the role of school
governors in the Haringey PFI project. Governors were excluded
from playing any role in deciding what refurbishment their schools
needed, in-spite of having hands on local knowledge of their needs.
The Council delayed consulting school governors about the PFI
proposals until the plans were almost ready for Treasury approval.
Later, it provided them with a mass of complex detail that they
were ill equipped to understand, and gave them little help in
understanding it. Many governors' doubts about the project hardened
into opposition so the council made strenuous efforts to persuade
them that they had no choice but to agree as PFI was the "only
game in town". The most reluctant governors won a few concessions
(one was promised a new sports hall for their school) and eventually
all of them fell into line.
BUILDING SCHOOLS
FOR THE
FUTURE
35. The NUT has previously commented on
the DfES' Building Schools for the Future proposals in its response
to the consultation exercise which accompanied the launch of the
proposals. The NUT would draw to the attention of the Committee
its main concerns about the proposals:
36. The consultation paper proposes that
of the £2.2 billion that would be allocated in 2005-06 to
a new national procurement body, £1.2 billion would be procured
via PFI. As the NUT is opposed to the use of PFI it believes that
all of the £2.2 billion funds should be procured through
traditional capital funding.
37. The NUT views the Government's decision
to earmark a set amount of funds for PFI schemes years in advance
of any procurement process as unwise. It pre-supposes that using
the Government's criteria PFI will offer better value for money
than other procurement methods in 2-3 years time. Instead of allocating
£1.2 billion to be procured through PFI, the Government should
allow greater flexibility and accept that value for money might
be best achieved procuring the full £2.2 billion through
traditional capital funding.
38. It is unclear from the Building Schools
for the Future consultation paper whether the proposed £1.2
billion to be procured through PFI will be ring fenced. Clarity
is needed in view of the frequent occurrence of rising project
costs in PFI schemes. For example, if £1.2 billion was not
enough for the Government to fund the PFI projects where would
the additional funding come from? The NUT would be concerned that
there may be a temptation to re-allocate funds from the remaining
£1 billion of the £2.2 billion to cover the costs of
PFI. To avoid such a situation, the NUT, in its response to the
consultation exercise, urged the Government to ring fence the
£1 billion PFI funds.
39. Furthermore, the proposal that companies
that successfully win the first bids will be awarded all the contracts
for the next five years (as is the case with the Partnerships
for Church of England Schools initiative) cannot be in the public
interest, or consistent with the securing of best value from competitive
tendering. It is also difficult to see how such arrangements could
accord with the European Union procurement directives.
40. The NUT is surprised to see Building
Schools for the Future described as a "commitment" in
the DfES Annual Report (launched on 14 May) when the deadline
for responding to the consultation exercise was not until 30 May.
By including the proposals in their Annual Report before the end
of this consultation process, the DfES pre-supposes acceptance
of the proposals by those responding to the consultation.
CONCLUSIONS
41. In view of the substantial amount of
evidence detailed above, the NUT considers the DfES' plans to
further the use of PFI in schools, as set out in their 2003 Annual
Report, to be ill advised.
June 2003
4 Not printed. Back
5
Not printed. Back
6
Audit Commission, `PFI in Schools' www.audit-commission.gov.uk
(2003). Back
7
Audit Scotland "Taking the initiative-using PFI contracts
to renew council schools" (2002). Back
8
Melanie McFadyean and David Rowland "PFI vs Democracy? School
governors and the Haringey Schools PFI Scheme" (2002). Back
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