Analysis: Private lives of public places

Labour is strongly in favour of public-private initiatives, but what are the implications for institutions?

The commission on public-private partnership (PPP) set up by the Institute for Public Policy Research, a left-leaning think-tank that has strong links with Labour, is expected to report this spring.

The timing is significant. The IPPR was expected to report by April. It is now talking about late May, which would probably place it after a general election. It will give Labour a blueprint for a new relationship between the state and private sectors at the start of a possible second term.

The Labour Party has long made clear its support for such partnerships. In Public Private Partnerships: The Government's Approach , Andrew Smith, chief secretary to the Treasury, calls them "a cornerstone of this government's modernisation programme". The government has in particular tried to ensure value for money with the private finance initiative (PFI) through more stringent use of public sector comparators, and has tried to ensure that the pay and conditions for staff are not harmed if they are transferred to private companies.

What does the government's enthusiasm for involving the private sector in public ventures mean for higher education?

Tim Russell heads the private finance unit set up in the mid-1990s by the Higher Education Funding Council for England. He said: "Our job is not to push universities down any particular path. We are here to advise."

The unit supports a number of schemes, designated as pathfinder projects, that explore different PPPs. For each pathfinder project, the unit provides a maximum of 50 per cent of the cost of professional fees up to the point of signing the contract.

The unit uses the term PPP to cover joint ventures, innovative ways of contracting out services, bringing in private finance and selling services to wider markets as well as PFIs.

It defines the PFI as "a method of procurement that seeks to achieve the best value for money by focusing on the delivery of a service, rather than the acquisition of an asset".

While there are no typical PFI deals, a fairly common model is for a private sector company to build and maintain student accommodation. At the end of 30 to 40 years, the university will take over ownership of the building but, in the meantime, the private sector is guaranteed an income from rents.

Peter Ryan, head of PFI at the Office of Government Commerce, said: "We are not doctrinaire. We support initiatives if they make good business sense."

He does, however, believe that higher education has the scope to develop more of these partnerships. "The signs from the higher education sector are promising, there is evidence that people are enthusiastic. The best method of developing this field is to build on experience and build on success.

"As people in higher education see new buildings and facilities established more efficiently than under traditional financing arrangements, this will bring new initiatives to fruition."

The Department for Education and Employment lists 15 PPP/PFI pathfinder projects on its website. There are many in the private sector who believe that this number is set to expand rapidly.

Mark Allan is finance director at Unite, the country's largest provider of student accommodation, which manages about 10,000 units of student accommodation. "When we floated the company in 1999, no university had put up significant units of accommodation for management by private companies," Mr Allen said. That situation has radically changed.

Universities inviting tenders from private companies to manage student accommodation have to publicise their plans through the Official Journal of the European Communities , as with other public sector tenders.

"Unite has established that there are now 35,000 to 40,000 units up for tender," Mr Allan said. "All universities own about 340,000 units. You can see the scope for expansion."

Ian Scott, who carries out research for Unite, asked: "Once you outsource your student accommodation, what about the rest of your estates? Many university buildings are under-used. I can envisage a situation where a private company runs the building and the university is just one of the users."

Other private bodies believe the sector is set to expand. A spokesman for Jarvis's University Partnerships Programme (UPP), said: "The UPP has secured prospective funding of £500 million from Abbey National Treasury Services and Barclays Bank and Barclays Infrastructure Ltd. Of this, £100 million has already been committed."

While many PPPs have concentrated on student accommodation, others are involved in teaching buildings.

The University of East Anglia has reached the final stages of a PFI in which Ballast Wiltshier would build and then run a School of Nursing and Midwifery building.

There have also been innovative partnerships announced during the past year. In February, Keele University announced a financial restructuring of its student accommodation. The deal guarantees the university about £55.5 million from rental income.

A university press release announced: "The financing is the first UK bond issue that is backed by rental income from university study bedrooms and could revolutionise the way UK universities fund themselves."

Paul Rigg, director of finance, said: "We do not see a decline in demand for halls of residences in the next 30 or 40 years.

"This deal enables us to use our future income stream from rents to improve student accommodation and leaves us free to manage the accommodation."

Are PPPs, and PFIs in particular, a good thing?

The involvement of the private sector in what have traditionally been seen as public sector services is happening on a global scale and is highly controversial.

In March, the World Trade Organisation, international trade ministers and European Union representatives will meet in Geneva to thrash out the next stage of the General Agreement on Trade in Services, or Gats.

Many fear that this could pave the way for health and education provision throughout Europe to be forcibly opened to the private sector.

Allyson Pollock, of the health policy and health services research unit at University College London, said: "Profits in manufacturing are falling, and the corporate lobby is targeting the proportion of gross domestic product that governments spend on public services.

"Some of the schemes for private sector involvement in these areas have come from the far right of the Republican Party in the United States and have not even been properly tested."

PFIs have come in for particular criticism. In its submission to the IPPR, trade union Unison said: "There is now a general acceptance that the arguments about PFI being a way of levering in private finance are no longer valid and that the government could comfortably pay for the entire PFI programme without breaching the fiscal rules it has set itself... If PFI or any other form of PPP is really the best way forward, let it be judged on its merits alongside direct public borrowing."

In Public Private Partnerships: The Government's Approach , the government says: "The difference between the private sector's cost of borrowing and that of the public sector is down to some 1 to 3 per cent; and this additional margin applies only to a relatively small proportion of the total cost of each PFI project."

It also argues that the private sector can compensate for the higher price of its borrowing by being more efficient.

Andrew Smith says in the foreword: "On average, privately financed projects are delivering savings of 17 per cent compared to public sector alternatives - this represents savings of £2 billion on a £12 billion programme, equivalent to 25 new hospitals or 130 new schools." This figure comes from a report commissioned from Arthur Andersen and Enterprise LSE.

Professor Pollock and Neil Vickers, also of UCL, describe the 17 per cent figure as "questionable" in evidence to the IPPR: "When the individual projects are analysed, we find that more than half the total savings come from just one project... it and two other projects together account for 80 per cent of the putative cost 'savings'. When these projects are taken out, the average difference between PFI and PSC reduces to the considerably less impressive figure of 6 per cent."

Professor Pollock also argues that one of the claimed benefits of the PFI, that risk is transferred to the private sector, does not always happen in practice. "If the deal is to do with student accommodation, and the university has an obligation to fill the rooms, what happens when they can't?

"Will awards be withheld if students can't pay the rent?" he asked.

In a working paper for the IPPR commission published last March, Peter Robinson, a senior economist with the IPPR and a member of the commission, said: "There is no good reason why planned PPP spending could not just as well be financed through additional public borrowing."

However, he supported the government's value-for-money arguments: "PPP schemes have the potential to deliver good value for money in many circumstances, but the public sector financial framework should provide a level playing field within which to make these value-for-money judgements on a case-by-case basis."

CASE STUDY

Sheffield University has shortlisted four bidders to run its residential properties. If the university goes ahead with this initiative, it could become the first to hand over the running of all its properties to the private sector. The University of Luton is also considering such a deal.

A spokeswoman said the deal would proceed only if criteria, including creation of real cash reserves for the university, improved management for the benefit of students and sympathetic treatment of staff in all outcomes were met. The project is one of the Higher Education Funding Council for England's private finance unit's pathfinder projects.

Sheffield Hallam University is taking a different route. Last year, Victoria Hall Ltd, a private student accommodation developer, announced a new £12 million, 500-bed complex for students. John Nesbitt, chief executive of Victoria Hall, said: "We do not get involved in private finance initiatives. They involve long-term deals in a property market that is in no way straightforward."

Alex Pettifer, director of facilities at Sheffield Hallam, said: "We have 2,500 bed spaces, of which we directly own 1,300. The rest are owned by John Nesbitt. We have a number of letting and management relationships, but our philosophy is that the management of the relationship between students and halls of residences is best done by university staff."