Private function

January 26, 1996

Who benefits from the Private Finance Initiative? First the taxpayer, if you start from the view that spending less is to taxpayers' advantage even if it means crumbling infrastructure. More than two thirds of capital spending projects in England's further education colleges and over half of universities' capital spending now funded by government are supposed to migrate to private funding by 1998/99.

Second, the consultancy industry. PFI bids must involve consultants. At least for universities, the funding council is finding non-formula money to meet 50 per cent of this cost.

Third, the Government's funding quangos, which are able to exercise considerable control even though they do not foot the bills. Further education colleges are not being granted new freedom to go with their new responsibility. All FE PFI schemes will have to be approved by the funding council. In English universities the picture seems slightly more favourable. The Higher Education Funding Council is less concerned about approving all projects.

There is also recognition that using PFI is not plain sailing as was suggested in the Budget. Sir Christopher Bland, chairman of the Private Finance Panel, has recognised that universities, as free-standing institutions, cannot use the PFI in the way Government departments directly responsible for roads or hospitals do. Higher education minister Eric Forth has agreed to work with the Committee of Vice Chancellors to iron out flaws.

Fourth, the building industry may benefit. It badly needs the work that major restoration of the education infrastructure could generate. However, its impatience with the PFI has been voluble. Schemes that might once have gone ahead quickly have been held up for months. If the Government and, before his attention is diverted by the BBC, Sir Christopher, are able to unblock the log jam there could be real benefits.

But the big question remains, what is in it for universities and colleges? Why would they choose to carry out a capital project via the PFI with all the attendant red tape rather than simply borrowing money in the usual way? Since they do not (not in living memory anyway) default on loans, universities can get cheaper money than most companies.

One answer is that the PFI removes uncertainty. Under a full-blown PFI scheme, the private sector contractor designs, builds and runs a building or some other facility. This may be attractive to less financially secure institutions, and there are a number around, even if it comes at a price. It may be attractive too to those that lack the glamour and high prestige that attracts private donations.

But this is a slim advantage and the supposed advantage of bringing in outside management skills smacks of nannying. Universities and colleges need their own management skills and the sooner the better. The Ministry of Defence used to pay contractors billions for cost overruns: now most big contracts are for a fixed price, and delivery to time and budget has become the rule. Education establishments can similarly toughen up.

The opportunity cost of PFI projects is high. Not only does negotiating such schemes involve valuable staff time and high consultancy fees. Sharing risk with the private partner also means forgoing the proceeds if the project is successful. Take student accommodation, particularly attractive for PFI schemes, providing a predictable cash flow. Building halls of residence via the PFI means that the cost vanishes from the university's books but it also means that some or all of the profit does too.

Given the defects, it is perhaps surprising that the English HE funding council has been notified of 30 PFI projects and there are bound to be more, particularly if Mr Forth can broker some change to the scheme to help with projects that do not produce an obvious cash flow: lecture theatres, laboratories or libraries, all under pressure from increased student numbers.

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