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About the P&I Team Briefings Home | Responses | PFI Index | Policy Guide
PFI in Schools Briefing No 11
The Business Case Rebutted

The Private Finance Initiative (PFI) is fast becoming the preferred method of building or refurbishing Scotland's schools. Under PFI private companies design, build, own and operate schools in return for a fee for the duration of a contract which is typically as long as 25-35 years. This briefing looks at the growth of PFI in schools and sets out some of the key arguments branches can use to oppose the backdoor privatisation of Scotland's education system.

The Growth of PFI in Schools
PFI in schools constitutes one of the main growth areas of PFI in Scotland. Schemes with a capital value in excess of £500million are currently being planned. The local authorities, include Glasgow, Falkirk, East Renfrewshire, Stirling, Aberdeenshire, West Lothian, Fife, Edinburgh, Highlands, East Lothian and Midlothian.

The schemes in Glasgow and Falkirk are pathfinder schemes. These are used as a model for other local authorities to follow. Scottish Executive Ministers have recently confirmed their support for PFI in schools and have encouraged local authorities to use this method of funding.

The Case Against PFI in Schools
When a schools PFI scheme is proposed, local authorities justify this method of funding with a number of specific reasons. In this section, we address some of these reasons and give branches the necessary counter arguments.

PFI provides additional funding.
The cost of borrowing by PFI companies is included in the fee they charge to the local authority. Therefore the effect is the same as if the council borrowed the money itself - except they could have borrowed at a lower interest rate.

Off Balance Sheet Treatment.
The Government encourages local authorities to use private finance as the loans generally do not appear as Government borrowing. This is known as "off balance sheet" treatment. This is of course an accounting illusion as the tax payer still has to meet the bill. The

Treasury's official position is that accounting reforms mean that PFI cannot be used to take projects of the public sector balance sheet. However, local councils believe that in order to receive approval and financial support from the Scottish Executive that their schemes have to be "off balance sheet".

Staff Transfers.
There is a widespread perception amongst Scottish Councils that to achieve "off balance sheet treatment" depends on transfer of staff to the private sector. Glasgow City Council wrongly told its authority "that there has to be a significant transfer to a private sector contractor". In July 1999, the Government changed the accounting treatment for PFI, following UNISON's campaign, which means that there is no longer a requirement to include support services in PFI schemes. Branches should get authorities to demonstrate that transferring staff represents value for money in its own right.

Revenue Neutral.
Authorities usually claim that PFI schemes are "revenue neutral" and that the costs are met partly from the Scottish Executive and partly from the existing revenue budgets for the service being transferred to the private sector. In practice, there is almost always an affordability gap which is bridged by cutting services. For example, in Glasgow, staff discovered that the new schools would have fewer classrooms, teaching areas and sports facilities. The estimated charges for accommodation in the Glasgow scheme almost doubled between feasibility study and final business case stages. In addition the system for allocating a Scottish Executive revenue support for PFI results in the mismatch between the amount they receive for any given year and the PFI charge. Over the period of the contract, PFI funding does not match the cost to be met.

Over the course of a 25-30 year contract, it is inevitable that the use of a school will change and hence the income flow. Any shortfall has to be met by the council or the school itself as PFI funding is ringfenced. This means that other services within or outwith the school will have to be cut to meet this shortfall in funding.

Value for Money.
Every PFI scheme should have a Public Sector Comparator (PSC) to demonstrate that the PFI scheme is value for money. Our analysis of schools PFI schemes shows that these are usually distorted to give the impression that PFI schemes meet the value for money criteria. This is often done by applying different criteria to the PSC avoiding a level playing field comparison. Favourite tricks are to apply different discounting rates and other alleged benefits which are given notional cash values. When looking at PSC's, branches should ensure that all figures are produced on a like for like basis.

Risk Transfer.
In all schools PFI schemes UNISON has examined, the value for money of the PFI option was dependent on the valuation of risk transferred to the private sector. In practice, all the real risks are retained by the council and in the Glasgow scheme even the borrowing was underwritten by the local authority. Authorities put huge valuations on the risk to massage the PSC. For example, in the Glasgow scheme the risk factor was calculated at £70million to cover up the fact that the council would be paying nearly £35million more in cash than if its schools were funded by conventional finance.

Contract Termination.
Councils claim if the contractor fails to provide the subscribed level of service they can terminate the contract. Astonishingly, under Treasury rules, PFI contractors are entitled to receive compensation when the contract is terminated due to their own breach. Again, this is done simply to massage the benefits of PFI.

In reality, most local authorities only go down the PFI route because they believe public sector capital will not be available. Ironically, if they stated this, they would not qualify for Scottish Executive funding. This is because the approval process requires them to confirm that it has evaluated the PFI option against the PSC and found it to be better value. In practice, most of the financial issues associated with PFI schemes are either kept from elected councillors or where they are shared they are so complex that they are not understood. Most Scottish local authorities have gone out of their way to avoid public scrutiny either by publishing no information or by publishing sanitised versions of the full business case. Public accountability is almost non-existent.

Branch Action
Branches should identify possible schools PFI schemes as early as possible. Ask about the authorities capital programme and how they intend to finance it. This enables you to press for early disclosure of information and to begin campaigning. UNISON recommends a twin track approach which encompasses campaigning and negotiating. For further details see the UNISON guide Challenging the Private Finance Initiative (Stock No.1763). Other information can be found on UNISON websites or
on this site.

Contacts list:
Dave Watson
@ the P&I Team
14 West Campbell St
Glasgow G26RX
Tel 0141-332 0006
Fax 0141-307 2572

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