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P&I Team Briefings Home | Responses | PFI Index | Policy Guide



In March 2001 we published a briefing on PFI in Schools (see P&I Briefing 11) which warned that the Scottish Executive was promoting the privatisation of Scotland's schools through the Private Finance Initiative (PFI).

£5m was made available to 21 local authorities for feasibility studies resulting in bids being made for further Executive subsidies. A decision on these bids will be made in two tranches (April and September 2002) which is likely to result in the privatisation of over 100 Scottish schools.

This update is based on a study of the information provided in these bids and highlights some of the issues branches will need to raise locally if schemes in their area are approved.


In June 1999 the Scottish Executive announced that there would be greater openness and transparency in the PFI process. Indeed transparency is a key element in the Executive's vision for public services in Scotland. However, this vision apparently does not extend to PFI in Schools.

Very few authorities have published the full version of the Outline Business Case (OBC). Most have published sanitised versions with essential documents and figures missing. Even councillors making decisions on the submission of these bids do not realise that they have not been shown the full OBC. Commercial sensitivity is often used as an excuse for not publishing PFI documents.

However, even this excuse does not apply at the OBC stage as no private sector bids have been considered. Transparency is also vital to the public consultation sessions which councils have embarked upon. These sessions have only limited value if schools and parents are shown only part of the picture. In any case unlike schools built with conventional finance bidders are not limited to the outline specification.

They can vary the design of a school considerably and the authority is then debarred from consulting parents because it then becomes "commercially confidential". This is why many PFI schemes change significantly between the OBC and FBC (Full Business Case) stages.

If these bids are sound then there is no reason for not publishing them. Unless of course there is something to hide!


Many councillors are on record as saying that they are using PFI because it is "The only game in town". Ironically if they submitted a bid on that basis it would be rejected. All PFI schemes have to demonstrate value for money by showing that the private bid is cheaper than the Public Sector Comparator(PSC).

The problem for councils is that the PSC will almost always be cheaper because they can borrow more cheaply than the private sector, have fewer fees to pay and of course they don't have to make a profit. Most of the current bids assume a 16% return on capital employed. We doubt if many parents are getting a 16% return on their own investments at present!

Because the PSC is cheaper it has to be "refined" to enable the project to proceed. We explained some of the methods used in the last briefing and branches should refer to that paper and other UNISON guides for more detail.

Accounting Methods:

The favourite is to compare costs by adopting Net Present Value (NPV) instead of real cash flows. This method favours PFI bids and the effect is magnified by using high discount rates. Typically the schools bids are using a rate of 8.5% when independent analysts have recommended 5%.

Like for Like?:

One of reasons many councils have not published the financial appendices to their bids is because they have not constructed the comparisons on a 'like for like' basis. Costs are placed in the PSC which have no equivalent in the private bid.

Risk Transfer:

If the above methods don't produce the "right" result the bids rely on putting a notional financial figure to risks allegedly transferred to the private sector. The best published example of this is the Glasgow schools scheme which turned a £35m loss into a £35m saving by producing an entirely notional £70m risk factor.

In practice the only significant risks are at the construction stage and in conventional schemes these risks can also be covered by penalty clauses. As the National Audit Office has highlighted PFI companies have made millions out of these alleged risk factors by refinancing schemes after the construction stage. In the current bids authorities rarely justify the very large sums of money allocated to risk transfer (typically 12.5%) although usually they are the only financial justification for the bid.

One authority was so convinced that its bid would produce the 'right' risk figure that it presented the OBC to the council before the figure was produced! One detail councillors are rarely advised of is the risk transfer if the PFI scheme fails. This is usually hidden away in an appendix called the "risk allocation matrix". In the current bids they all require the council to pay compensation if the project is terminated due to the fault of the private company. How many parents would pay compensation to a supplier of faulty goods. The council will have to!


The annual payments made to the private company for the use of the PFI school is funded out of current revenue and a subsidy from the Scottish Executive called level playing field payments. Of course no equivalent subsidy is made available for authorities which want to build schools using conventional finance. That would be a real level playing field!

Even after these payments most of the current bids have a substantial affordability gap. Typically 15% of the cost. Councils are proposing to bridge this gap by either cutting the space specification, lowering the quality standards or cutting services elsewhere. Again this is exactly what happened in the Glasgow schools scheme. In addition once the contract is signed the PFI money is ring fenced and if the authority faces budget cuts in future it will be the non-PFI provision which has to be cut. Remember that the bankers always get their money!

Branches should also look carefully at the land sales and site rationalisation plans in many of the current bids. An explanation of how land sales are used to fund PFI deals is available on the UNISON website.


The current bids are ignoring the revised Treasury rules which allow PFI schemes without staff transfer, subject to a value for money test. Most bids do not even undertake a VFM test. They cling to the old "off-balance sheet" principle which Treasury ministers discarded in 2000.


The private company which owns the PFI school is called a Special Purpose Vehicle (SPV). Several authorities are looking at ways of participating in this company either through a joint venture or by using a not for profit company. Whilst such mechanisms might recover some of the windfall refinancing gains it fails to understand that PFI companies make profits from the services provided to the SPV. The lenders still get their exorbitant rate of return and the FM provider profits by cutting the wages and benefits of the already low paid and predominately female workforce. In addition due to the perceived lending risk not for profit companies do not usually directly employ staff.


The Scottish Executive claims its support for PFI schools is based on the needs of pupils and parents. From this analysis the only real gainers are consultants, bankers and big business who profit from the public purse.

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

March 2002

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