Fried eggs with a PFI yolk

April 3, 1998

The public sector has turned to private firms for building project aid, writes Mike Sherrington

University and college building schemes have always been more or less free of some of the worst restraints imposed on other sectors undertaking private finance initiative projects.

They have never had to market test every scheme to see if they are suitable for PFI funding, as health organisations and local authorities have done. This means that they are well placed to take advantage of the more relaxed atmosphere of the new government to private money in the public sector.

Phil Head, responsible for private finance at the Further Education Funding Council, says: "A major conclusion of the Treasury-commissioned report by Malcolm Bates into the future of PFI is that it should only be used where it is sensible and can demonstrate advantages. This is what we have been doing all the time."

Tim Russell, his counterpart at the Higher Education Funding Council for England, explains how public-private partnership, which has to an extent superseded PFI, works. "The way to look at it is like a fried egg diagram with PFI, which still exists, being the yolk at the centre. However, around this yolk are a lot of other options. These include joint ventures, privatisation, contracting out, market testing, sponsorship and levering in private money."

However some establishments have anticipated the relaxing of rules governing PFI and have pressed ahead with schemes that tend to fall outside of the rigid PFI framework.

One of these is Brighton University, which has completed a scheme in association with the London and Quadrant Housing Association, to provide 469 student residences, and another project with Invicta Leisure to build the Brighton Health and Leisure Centre on land formerly owned by the university.

Maggie Deacon, university director of finance, says: "If we were still waiting for Treasury approval for our schemes I doubt if we would even have started work on them now."

However, both schemes are now complete and they have had important implications for the financing of the university's estate programme. Ms Deacon explains: "We drew up a strategic plan in 1994 when we estimated the cost of the improvements we wanted to carry out as being Pounds 50 million. But we had the ability to borrow only Pounds 20 million. By attracting private investment we have already spent Pounds 46 million, and there are several further projects we are looking to start."

Brighton has employed two different tactics in attracting private finance.The housing scheme involves replacing CLASP system-built accommodation on the Falmer campus constructed in the 1960s. The new residences have been built by L&Q on land leased from the university, which in turn leases the accommodation back from the housing association. The arrangement lasts for 25 years and the university is responsible for collecting student rents and holiday letting.

The deal with Invicta has led to the university receiving a cash settlement for the land the complex has been built on. In addition, students can use the centre on six set times a week and discounts are also available for staff and student membership of the centre.

Derek Gorman of property firm Chesterton, which has already been responsible for two completed PFI projects at Clarendon College, Nottingham and Falkirk College in Scotland, says: "One of the key roles private finance can play is through rationalisation of the building estate after various colleges have merged. I expect this to become more important in the next few years as an increasing number of establishments combine resources."

However, the largest privately funded scheme of last year already uses the dispersal of surplus assets as the cornerstone of its funding. This is a project, with an overall value of Pounds 350 million, to provide a new medical and dental school for King's College in London and results from the merger of King's College and the United Medical and Dental Schools of Guy's and St Thomas's Hospital.

The project, for which European Land has been appointed preferred bidder, involves demolishing Hunts House on the Guy's Hospital Campus and constructing a new building as well as refurbishing Cornwall House in Stamford Street close to Waterloo Bridge. European Land will maintain the buildings, which are expected to be ready for occupation next year, for 25 years under a fixed fee.

The whole project has been funded by the disposal of surplus properties, some in the King's Road area, to European Land.

Private finance is being used in innovative ways. One of these is a partnership agreement between Tynemouth College and RM plc to outsource the provision and management of its information technology centre, possibly a further education first.

So far the HEFCE has signed up only one Pounds 3 million PFI "pathfinder" project, for student accommodation at Falmouth College of Arts. Contracts for this project were finally signed on December 9 last year, about eight months later than the original proposed signing date of April 5.

The HEFC has another ten pathfinder projects on its books but some, like a Pounds 30 million scheme to establish a media centre at the University of Bournemouth, have been put on hold while the scheme waits for lottery cash. Another project at the University of Portsmouth has been abandoned because the three PFI bidders put in tenders too high.

The Further Education Funding Council has also seen schemes drop by the wayside, but is optimistic that two important projects at Canterbury and Newbury will move to appoint preferred bidders this year. However, it is becoming clear that the key to attracting private cash no longer involves playing the game by strict Treasury rules and increasingly establishments, like Brighton, are using their own initiative.

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