Open savings, hidden costs

November 10, 1995

It will not be too long before every senior common room echoes to the jargon of the private finance initiative. BOOT for build-own-operate-transfer, DBFO for design-build-finance-operate, FM for facilities management, and PFI for the thing itself.

Launched in the higher education sector last March, the PFI is now being actively promoted in a series of seminars sponsored by the Higher Education Funding Council for England. Already Greenwich University has struck an ambitious 30-year deal with construction firm Wimpey worth Pounds 40 million (page 4).

Even today, universities are no strangers to private investment. Since the early 1980s, they have courted the commercial sector, and according to recent government statistics, capital projects on university campuses are currently backed by Pounds 1.6 billion of private investment.

But the PFI is something else. It is not simply another brainwave for borrowing money to build new accommodation. More than this, it is a blueprint for a university and private sector partnership where the financial risks of initial construction and long-term management are shared.

The PFI represents a tremendous opportunity. For a start, it could allow universities to concentrate on their core business - teaching and research - which is what they do best. Universities are less about profit margins and more about breaking even, yet very often they did not even do that. Greenwich had a Pounds 500,000 a year deficit on residential accommodation, mainly because of escalating maintenance costs. Now it will no longer need to worry about rising damp and leaky roofs.

Another benefit is that universities need not be burdened by debt on new accommodation built for growing numbers of students. This means that they will still have the option of borrowing money in more conventional ways for new teaching buildings and libraries, which might be less attractive to the private sector because of their limited alternative commercial use.

But financiers are not in the business of charitable giving, and universities will find that the PFI has significant drawbacks. It will not be a choice available to every vice chancellor since the private sector - taking a coldly commercial view - will only wish to ally with the best and largest institutions. Private investors will not want to rescue incompetently-managed backwater colleges.

And even for those lucky institutions whose projects are "PFI-able" - as the term has it - there are significant disincentives. Risk-sharing, and the slackening of control that implies, will mean some de facto erosion of a university's autonomy.

There are fiery financial hoops to jump through too. Just to get a PFI project off the ground costs around Pounds 500,000 in consultancy fees, and then there are the hidden VAT expenses, which can amount to around Pounds 100,000 annually on a major deal. In any case, private sector partners will want to make a profit on the PFI deals they do, and this is money that has to come from somewhere.

The PFI may seem like a heaven-sent scheme for the strapped-for-cash higher education sector. But it won't be the answer to every vice chancellor's prayers.

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