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Audit Scotland Report on PFI Schools Brief 41

Audit Scotland Report on PFI Schools


July 2002

The Audit Scotland Report

Established in 2000 Audit Scotland provides services to the Accounts Commission and the Auditor General for Scotland. In June 2002 the Audit Commission reported to the Accounts Commission with its Audit Review: Taking the initiative: Using PFI contracts to renew council schools. The study looked in detail at six of the current twelve PFI schools projects in operation in Scotland. The six projects are for 65 schools, in Falkirk, Glasgow, Balfron (Stirling), Highland, Edinburgh and West Lothian.

The Report's Conclusions:

Why PFI?
For local authorities the single most important driver of PFI as the procurement route has been the opportunity to obtain substantial additional investment for the renewal of schools. It is noted that the Scottish Executive has determined the level of investment in each case, as well as the financing route. Councils have not been able to use alternative traditionally funded routes because of restrictions on council borrowing.

Need for options to PFI
Audit Scotland call for a real choice of procurement options for future projects, to include PFI and non-PFI options. The report suggests a wider choice of procurement routes could help to improve value for money in this sector.

Councils have managed PFI processes well so far. However, Audit Scotland notes that we are at an early stage in the 25-30 year life-span of PFIs, so it is too early to judge their contribution to education.

To date PFI providers are delivering new schools and associated services reliably and without significant cost changes for councils. But the disadvantage with PFI is the reduction in future financial flexibility and the higher costs associated with the more rigorous PFI procurement.

Public Sector Comparator
In order to go down the PFI route councils have to prove that this is cheaper than using public funds. A theoretical Public Sector Comparator (PSC) figure is arrived at to compare with the PFI option.
The Report found that the cost advantage between PFI and the PSC was narrow:

  • in 5 of the 6 cases the PFI construction costs were higher than the PSC,
  • in all 6 cases the operating costs of the PFI option were higher than the PSC,
  • in most cases the risk adjustment figure tipped the balance back in favour of the PFI option.

It concluded that the way councils decided on the PSC was "subject to inherent uncertainty and subjectivity". Audit Scotland also stated that current approaches to obtaining the PSC did not take into account the higher costs of private sector borrowing compared to councils' borrowing.

PSC: Financing Costs
The Report examined the overall financing costs for the private sector, concluding that its costs in the range of 8-10% a year are 2.5-4% higher than a council would pay if it borrowed money on its own account for a similar project. This adds costs of between £0.2m - £0.3m a year for each £10m invested in a project. Audit Scotland advises that councils and the Executive should assess how best to reflect the cost of borrowing by councils in the PSC.

Value for money?
Audit Scotland concluded that it was not possible to draw overall conclusions on value for money as it is difficult to quantify the benefits associated with PFI.
The Report notes that it is important to the whole integrity of the PFI process that councils as clients hold the providers to their contractual commitments.

Unique to PFI?
A crucial point made by Audit Scotland is that the "benefits available from PFI are not necessarily unique to PFI". This is a clear indication that given access to alternative funding methods councils could deliver schools without having to take the PFI route.

Sharing Best Practice
The report notes the significant differences between councils in the costs of their schools under PFI. It recommends that there is a need to share best practice and promote value for money to avoid the variances that are seen in these initial PFI schools schemes. It is suggested that the Scottish Executive should develop a leadership role in co-ordinating and sharing best practice.

Guidelines on minimum standards
There are no minimum standards on acceptable size for a school classroom, or other facilities. It is recommended that the Scottish Executive, in partnership with local authorities should develop best practice guidelines on minimum standards for the learning environment.

Costs of PFI
The Report observes there are substantial costs to be paid for entering into a PFI schools contract. Councils' costs are substantial, and costs arise for private sector companies during the competition process. In the 6 cases that Audit Scotland examined the combined set up and advisers' cost for private and public sectors range between £1m and £12m (between 5-15% of core construction costs) and tended to be proportionately greater for smaller projects.

PFI Risks
The transfer of responsibility for many risks to the private contractor reduces the council's exposure to risk, but there is a price to be paid for risk transfer, and PFI does not guarantee that councils achieve the most cost effective balance in this area.

The Report fails to acknowledge that in the OBCs UNISON has seen if the contract is terminated by company failure or poor performance, the authority picks up the bill.

Impact on Long Term Spending
In the 6 cases studied local authorities have only contracted for part of their education estate to be covered by PFI. Audit Scotland warns councils are tied to the PFI payments, and that there is a risk that future financial pressures will fall on the remaining part of the education budget or on other council services.

Latest PPP Schools Round

Despite this report, the Scottish Executive unveiled a new raft of PPP projects on 25 June 2002. The £1.15 billion package is to fund around 300 school building projects. Last year councils were invited to bid for a share of Executive revenue funding to support school building capital projects under PPPs. Local authorities could bid in either December 2001, or September 2002, with 15 Councils entered bids last December. The amounts awarded to individual councils can be seen at:
The Executive is also making up to £150,000 funding available to councils to assist in preparing Outline Business Cases. In addition to the PPP funding, £26.7m has been made available for immediate school repairs under the School Building Improvement Fund. Every council in Scotland will benefit from this investment.

Issues for UNISON:

* The Public Sector Comparator does not stand up to scrutiny we need to challenge councils on how they arrive at the PSC.
* If the Executive does take up the point to work with councils to determine minimum standards for class rooms and other school facilities, UNISON should ensure that our views are incorporated when guidelines are established.

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Dave Watson -

@ The P&I Team
UNISON Scotland
14 West Campbell St
Glasgow G26RX
Tel 0845 355 0845
Fax 0141 221 8953

Further information: Accounts Commission: Scottish Executive: