PFI not suited to all projects

December 1, 1995

The Private Finance Initiative is set to become the main capital funding mechanism for universities barely eight months after it was first introduced in the higher education sector.

Universities have long turned to private investors. According to Government figures, there is currently Pounds 1.6 billion of private investment in universities, and most new building attracts 75 per cent private funding. But the PFI, launched in higher education in March, is not simply designed as a means of borrowing more money. The essence is risk-sharing, and typical PFI projects like DBFO (design, build, fianance, operate) are intended to create long-term partnerships between colleges and companies.

It has been trumpeted as a way of enabling universities to deal with activities which are not part of their core business of teaching and research. Student accommodation is seen as a prime PFI venture, and earlier this month Greenwich University signed a 30-year deal with construction giant Wimpey worth Pounds 40 million. Sports facilities are also PFI-type projects, and Brighton University is working with a leisure company to build a tennis-oriented recreation facility that is expected to attract students funded by scholarships from the Lawn Tennis Association.

In this tradition, the Treasury this week anounced a Pounds 100 million complex being developed by King's College London and the United Medical and Dental Schools. But cuts in capital spending announced in the Budget suggest that the Government wants to extend the PFI to core business. Michael Jack, financial secretary to the Treasury, said that the Government was responding to academics. At the recent Greenwich project launch vice chancellors "expressed the desire to extend the range of services that can be offered through PFI".

But Nigel Brown, deputy provost of London Guildhall, said: "It is less easy to see how PFI will work on capital projects which do not have income streams attached to them." While student accommodation has rents, teaching facilities and libraries do not have any obvious income stream, he said.

Sir Christopher Bland, chairman of the financial panel, acknowledged that the PFI might be ill-suited to such non-commerical academic projects: "An income stream will continue to determine whether it can be a PFI project: the rules do not change."

Mr Brown also said that the PFI is not necessarily the cheap option because projects entail "huge upfront costs". The Greenwich project cost Pounds 400,000 in consultancy payments. Another hidden cost is VAT, often around Pounds 100,000 per year on a major project.

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