PFI: modern estate management's Man Friday

April 4, 1997

Remember that with PFI you are buying a service, not a building, advises Mike Sherrington.

As a relative latecomer to private finance initiative contracts, higher education estate management has been able to assimilate some of the lessons learned in other areas such as health and defence. The most significant of these is that compulsory market testing of the viability of schemes for PFI does not work.

Higher education projects do not have to be considered for PFI funding before more traditional procurement methods are used and PFI only has to be looked at for further education projects over a certain value. This is to avoid the painful experience of the health sector, where every project had to be tested to see if it was suitable for pfi, virtually halting the health capital expenditure programme for two years.

But that is not to say there are not pitfalls ahead. Colleges and universities are not like government departments such as defence and transport. Such departments operate from a centralised body so it is easy to pass information on, explains Alec Harris, who is responsible for further education programmes at the Private Finance Panel Executive, the Government's PFIadvisory body. He says: "The problem is that institutions supply people to handle their projects who have absolutely no experience of PFI and might never need to operate the system again. Some are very good but some cause us problems as they do not really understand what PFI is all about."

"The key thing to remember with PFI is that you are buying a service not just a building," explains Natalie Norminton, who deals with higher education projects at the PFP. "The college or university enters into an agreement with the service provider for a 20, 25 or 30-year period and if the service is not up to scratch then the university does not pay for it. This helps transfer risk to the service provider and leaves the institution free to concentrate on its main business of providing education."

PFI is not suitable for every project. Phil Head of the Further Education Funding Council says: "Generally we only look at PFI for schemes costing more than £5 million but in reality £10 million would be a better cut-off point. If a scheme is not suitable for PFI it is usually financed by loans from the bank. Banks are willing to lend to colleges and currently we have more than 100 colleges financing projects in this way."

An exception to this rule is at Falmouth College of Arts, likely to be the first higher education project let as a PFI contract.

Falmouth director of finance Niamh Lamond explained how the £3-million scheme works. "We want to build a 156-unit accommodation block, and feel we have been able to negotiate a better deal under PFI than through traditional methods of financing. We pay the Sanctuary Housing Association £52 per unit, based on occupancy, for 40 weeks of the year. For the other 12 weeks we are free to let them ourselves, with Sanctuary only charging a small administration fee. These arrangements last for 25 years and at the end of that time we have an option to buy the block at a discounted price.

"We expect to sign an agreement with Sanctuary soon and chose it because of its long-term interest in social housing. Sanctuary took a whole lot of responsibility away from us. It found the site, drew up plans, got planning permission, built the block and will manage it. If it fails to provide the service we require then 15 per cent of its capital investment is at risk. We are only a small institution with 1,500 students and we found that the housing association provided the professional experience in property matters which we lacked," she said.

It is this long-term basis that several pundits feel is likely to be of most benefit to educational institutions. Derek Gorman is consultant director of Chesterton which works on a number of PFI projects including the first English further education scheme at Clarendon College, Nottingham. His view is that "ongoing maintenance in education has traditionally been underfunded, with resources constantly being diverted away to other areas. This is impossible under PFI arrangements because the university or college enters into a service contract where it has to meet its commitments and these include proper maintenance of the buildings."

"PFI does not provide a magic solution. Colleges only have a certain pot of money and PFI does not make that pot any larger. PFI commits institutions to a long-term period of expenditure which helps budgeting, because they know how much they will have to pay out each year. However, the downside is that there is no flexibility in this arrangement."

PFI is mainly used to provide residential accommodation: the largest scheme is at Westminster University. Alan Strang, the university's financial controller, described the rationale behind the decision to cast off a £28-million student housing estate under PFI arrangements: "We are not in the hotel business; we are using too many of our resources in hotel management and we are not necessarily good at the hotel business. Although we will obviously still keep a watching brief on what happens to student accommodation, going down the PFI route for this allows us to concentrate on doing what we do best and that is providing education."

According to Mr Harris, however, most of the first tranche of further education PFI projects are teaching blocks. But Chesterton's Mr Gorman worries that it can be hard to justify teaching buildings financially. Mr Head advises: "If a PFI project gives value for money then go for it; if it does not, then consider other ways of financing."

Non-residential schemes which have satisfied these criteria include a £16.5 million project to refurbish the listed Adams building at Clarendon College, Nottingham and a £30 million scheme to establish the Winter Gardens Media Centre for Bournemouth University.

As is to be expected from a scheme in its infancy, there have been some minor problems. A PFI scheme at Stoke on Trent College was abandoned because the FEFC felt it has been misled over funding claims.

Other projects are behind schedule, some, according to Mr Harris, nine months late because of site difficulties. Chesterton's Clarendon College project was first advertised in an official European Union journal in November 1995, and is only now able to appoint a developer.

Ms Norminton and Mr Harris agree that education attracts the wrong sort of operator. Mr Harris blames the size of projects for attracting second-division contractors. Ms Norminton wants more facilities managers involved, rather than construction contractors after a quick profit.

Despite all this, PFI is set to become a major method of estate management procurement soon, even with a change of government.

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