For whom the bell of the cashtill tolls

April 12, 1996

Are you PFIable? Alison Utley reports on research that says you are probably not.

The Private Finance Initiative is endangering projects aimed at alleviating the most pressing social or economic needs in favour of those with market potential, according to new research.

Francis Terry, head of research at Nottingham Trent Business School, said PFI had huge implications which appear to have been overlooked. "The Government is at risk of reducing its role in steering policy through the application of public resources if it does not introduce new criteria for backing projects where the PFI is inappropriate," he said.

"Priority in many fields will now attach to schemes where private finance can be used rather than schemes which would be wholly publicly funded."

He cites the hypothetical example of two hospital sites, one near a city centre and the other out of town. "In the new climate the likelihood is that the town centre site will be sold off for commercial advantage, which is a sound decision financially but may not translate to the best advantage for patients who will be forced to travel further to hospital."

Professor Terry has examined the PFI from the perspective of the public sector, of financial institutions and of the private finance panel executive whose former chairman, Sir Alastair Morton, has been outspoken in his criticism of the Treasury's restrictive attitude towards the terms for PFI projects.

The PFI could take its toll on the education sector, where, with the exception of accommodation schemes, there is often no obvious customer to be charged and therefore no secure return on a capital investment. By allowing the market partially to determine its priorities, Professor Terry argues that the Government's ability to shape coherent national strategies is being weakened.

The Government has had difficulty for the past five years in balancing tight controls on public spending with the need to support demand-led programmes such as social security and housing benefit and the need for tax cuts in the pre-election period.

Spending since 1990 has continued on an upward spiral and as an efficiency measure capital expenditure is now planned to fall by about 20 per cent in real terms from 1994/95 to 1997/98. PFI, with ambitious Treasury targets totalling Pounds 14 billion by 1999, is supposed to fill the gap.

Whether the contracts can be secured remains to be seen but according to some newspaper reports, the all-party Treasury committee will report serious doubts and recommend changes to the way PFI operates in a report due after the recess.

Cuts in spending are no longer news to higher education, still reeling from last November's Budget, which saw its capital budget slashed by 52 per cent over three years. But according to Professor Terry's research, PFI has so far had a limited and patchy impact on universities. With a few exceptions he suspects an awful lot of institutions maintain an "uninspired and naive view" that PFI simply means getting businesses to write your cheques. Universities are going to have to accept that they need to make cash where they can, but the problem is that there is an "inherent cultural difficulty with that idea in higher education".

A few of the more enterprising grant-maintained schools have entered into partnerships with developers to extend their premises or facilities but, according to the research, most of the local authority maintained schools seem unlikely to benefit significantly.

None of the 24,000 publicly funded schools is allowed to borrow from the market or to raise a charge on assets. For the 128 universities and higher education colleges, their status as independent corporations confers a wide range of freedoms to borrow money, enter into leasing arrangements and dispose of assets.

In 1994, it was estimated that universities and colleges had borrowed Pounds 1 billion to fund new student accommodation and other projects.

Professor Terry says it is difficult to know how much of this was attributable to PFI and how much it flowed from institutions' ingenuity in responding to demand from a 60 per cent increase in students.

He said: "The prospect for further initiatives seems good because the universities' publicly funded assets can be used as security for borrowing, subject to Higher Education Funding Council consent and provided the institutions' annual level of repayment and servicing costs for all loans except self-financed or reimbursed debt does not exceed 7 per cent of income."

New capital projects could also benefit from a syndicated borrowing scheme intended to enable universities to gain access to longer term finance at fixed rates in partnership with private companies.

However, Professor Terry warns that the PFI, in shifting the burden of capital expenditure from the year in which it is incurred to a series of payments over years, means " the public sector may well end up paying more in the long run for buildings and equipment".

For the further education sector PFI prospects look bleak. According to Professor Terry, although the PFI applies equally to the 460 further education colleges its scope is reduced because the need for residential capital, with its ready income stream, is far less.

"There is a limit to what public authorities or even the private finance panel executive can do to encourage private finance participation if the terms are insufficiently attractive," he said.

Paradoxically PFI would probably be making quicker headway if the underlying economic conditions were more favourable since business is understandably cautious about new types of ventures in such a climate of uncertainty.

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