The Right Ingredients

The Priority School Building Programme offers the chance for a new breed of PFIs, reports Paul Jarvis

A new round of school investment is set to be both the beginning and end of the government’s school PFI programme. There was relief and hope among the partnerships industry in July when Education Secretary Michael Gove announced the multi-billion pound Priority School Building Programme to deliver 300 new schools through PFI. Coming just hours after the government published its review into operational PFIs, it looked like the start of a new, brighter future for the industry.

However, it has since become apparent that the £3bn being made available for the programme is all that is left in the pot.

“The money is using spare capacity,” explains a source close to the schools programme. “There was some headroom identified in the budget last year.”

This “headroom” emerged through the transfer of revenue that came from the communities department. The money was transferred after the abolition of PFI credits last year – which used to be managed by the communities department – and was a one-off payment to other ministries to help them with their PFI payments. The surplus at the education department was presumably caused by the cancellation of the Building Schools for the Future (BSF) programme.

Clearly, agency Partnerships for Schools (PfS), and the body into which it is being folded, the Education Funding Agency, will have to work hard to squeeze every last drop of efficiencies out of the procurement process.

To help with this, the government has already launched the procurement for a national programme of building condition surveys. This work is actually being carried out separate to the Priority School Building Programme, but may feed in to later rounds once the surveys have been created.

Until then, for councils it will be about “proving your buildings are in an extremely poor state”, as Gary McCarthy, from consultancy WSP, puts it. “That’s going to be interesting because the amount of data and quality of data on the school estate is not that great.”

The agencies may also be helped by the review of European procurement rules.

Critics have long blamed the UK’s slavish adherence to competitive dialogue rules as the main reason procurement takes so long in the country. If UK procurement regulations are liberated, both the government and private sector may find they can make the money stretch a bit further.

Even if that were to happen, though, it would still fall far short of the amount needed to deal with England’s school estate. Estimates put the current maintenance backlog as high as £40bn, making the £3bn investment seem somewhat paltry. “Is this going to be adequate to deal with the need for new places and the decaying estate?” asks the source. “The government will have to go further.”

For the time being, though, there is a clear determination to slowly but surely change the PFI model itself. The theory behind this is twofold: first, the government can get its initial batch of deals out the door quickly, into a market that is comfortable with the existing model and can get some much-needed new schools delivered before the next election.

Second, the move should mean by the time more money might be available in the next spending review period from 2015 onwards, there will be a new PFI model that the industry understands and that has dealt with the opposition of the past. Scotland, for example, took four years to develop a pipeline for its PFI replacement, the non-profit distributing model. Westminster will hope to avoid such disruption by using what is a financially restricted period to develop a new approach.

The source says it is encouraging for the partnerships industry that Gove chose to deliver the schools through PFI at all. The surplus money identified was not PFI credits, just revenue money. “So the government had to decide what it wanted to use that for, and has decided to use it on school building.”

Risk business
That, at least, shows a willingness to engage with the model. But what will the new version look like?

“I expect the risk profile will be refined so that it better reflects the risks that are to be taken by the public and private sectors,” says the source. This will include those areas that most agree need reforming – like insurance risk and change of law risk. These have often been transferred to the private sector even though it may be cheaper for the public sector to retain them.

But the source suggests it won’t stop there. “For example, in facilities management [FM], there will be choices for local authorities and contractors in the specification that is made.”

These choices will cover the extent to which both hard and soft FM are transferred to the private sector – and it may not be a one-size- fits-all approach.

“Different buildings will need different solutions,” the source says. So while one school might be happy to see all its maintenance, from cleaning the floors to mending cracks, carried out by the private contractor, another might opt to outsource only some of those services.

Such an approach will help the government to sell the centrally driven PFI programme as remaining in tune with the localism agenda, giving control to schools and local authorities over how much power they will retain over their buildings.

But ministers will also have to sell such changes in risk profile to the banks – and that could be harder. This needs to be done through the payment mechanism, says one expert, adding that if that balance is struck properly, the bank should be “neutral” on the matter.

“This is work that needs to be undertaken by the government to get the balance right,” says the source.

The education department is currently working on new documentation on risk transfer and other areas, which will be different to the standards used in BSF’s local education partnerships (LEPs). “New documentation will be developed, based on the current standard-form schools PFI documentation,” a spokesperson says.

It is also working on new procedures for benchmarking, with the spokesperson confirming the approach used in the LEPs strategic partnering agreement will not be taken on.

There are suggestions these developments, along with the work undertaken on risk transfer, could give rise to a new set of rules for the delivery of all PFI projects – eventually being codified into an ‘SOPC5’ by the Treasury.

“There is a strong feeling that there will be a ‘son of PFI’ coming through later in the year and that will be starting with the schools,” says Stephen Beechey, at contractor Wates. “It would make sense to have a new model based on an ‘SOPC5’.

“I don’t see any way of dealing with he political naysayers without dealing with that issue.”

Another option for the government could be to tie in the PFI approach with its payment by results agenda.

Under this approach, contractors could be required to sign up to delivering certain results, such as a percentage increase in educational achievement over the lifespan of the contract. This could allow for a recasting of the risk allocation in partnerships contracts, whereby the private sector takes on this risk while the public sector retains control over insurance risk and other areas where little is achieved by transferring it to the contractor.

“It would be reasonably easy to sell payment by results vehicles, for example you see it in prisons already,” says one industry expert. “It would certainly help counter the anti-PFI rhetoric.”

Whether the private sector would be willing to take on such performance or outcome risk remains to be seen – and would certainly require a change in the make-up of consortia, as investors would probably need to include those with some knowledge of getting results. This might also help improve PFI’s image, by bringing in educationalists to guide private sector delivery.

However, all these ideas – even the more modest ones relating to risk transfer – remain further down the pipeline. “It won’t apply to the first projects,” admits the education source. “It is basically a PFI approach, especially for the early ones.”

Even that could look quite different to the way things were done under BSF. Towards the end of that programme’s life last year, PfS began moving towards the so-called ‘smart PFI’ approach.

In June 2010, it was revealed that the agency asked major contractors whether they would accept the idea, which would hand control over design back to schools and local councils. Contractors would then tender for schemes simply by costing a previously built design. That question was never answered, because the programme was scrapped the following month.

However, under the new scheme contractors may well have little choice. Despite the government’s localism agenda, it is expected that the design of schools will be more centrally managed and bidders will have little room for manoeuvre on the design element.

Will Fox, from the Royal Institute of British Architects (RIBA) – which worked on the smart PFI model with PfS – believes all the signs are that smart PFI will soon come to the fore, and not just in schools. “The government’s construction strategy was very much along the lines of the smart PFI idea,” he says.

James’s shadow

Another element that is expected to have a significant influence on the new schools model is the James review into capital investment in education. That document took some of the central elements of smart PFI and ran with them, going beyond giving design control to schools and local councils and focusing instead on developing a few standardised designs promoted from the centre.

Fox is concerned this may be a step too far. “A school is a very complex building, and the structure depends on the site, the number of pupils, and a variety of other things.”

RIBA is working on its response to the James review, but Fox doubts whether ministers will deviate from the standardised design concept. “The government has been clear about going ahead with some of the recommendations [on standardised design],” he says. “We are working on the detail of that with the government.”

Contractors, too, have seen the writing on the wall and are already planning for a more standardised future. Construction firm Wates, for example, has been vocal over recent months about its plans for a new approach to school building, based around its experience on the Campsmount College in Doncaster.

Following that scheme, on which some of the James review principles were tried out, Wates teamed up with technical consultancy Capita Symonds in June to unveil a new model they claim will cut up to 60% from the cost of new school building work.

Saul Schneider, at developer John Laing, agrees this is the way government policy is driving the industry. “When we’re looking at which contractors to work with, I will be more interested in ones that have done work on developing standardisation.”

“There will probably be some standardised designs put out from the government as a ‘starter for ten’,” says Steve Beechey, of Wates.

Fox is worried this will lead to a return to prefabricated buildings popping up across the country, which may be quick and cheap to build, but will not enhance the learning experience. “Certain components could be standardised,” he ventures, “but not the entire building.”

Whether government plans for greater standardisation ever get anywhere near that level remains to be seen, however. Beechey points out that in the original BSF programme, there were so-called exemplar designs which were meant to do a similar job – cut down design cost by giving partnerships a range of top quality ideas to choose from.

“But bidders couldn’t use them because they just didn’t work in most cases,” says Beechey. “So we’ll have to see what comes of that.”

The difference today compared to the BSF years, though, may be that contractors will have a lot less choice over the designs of projects. The government is planning to have much more involvement from the centre on the development of projects, and the days of schools and councils making decisions on everything from the size of classrooms to the types of door handles looks to be over.

“Local authorities are asking how it’s going to work,” admits Janet Lewis, a lawyer at Nabarro. “It will be interesting to see how the design side plays out, especially if the local authority is comparing with a [more bespoke] BSF and academies down the road.” If councils and headteachers feel they are being given bog-standard buildings, they may begin to worry they will lose pupils to the more exciting and impressive BSF schools and academies around the corner.

Central difficulties
And this is just one of the problems facing the government’s more centralised approach to school building. Lewis also points to the fact that local education authorities will in most cases be holding the keys to any land for building on. How those negotiations work between central and local governments, plus the schools and private contractors, remains to be seen.

As schools increasingly opt for academy status, there are also questions over how the increased independence this affords headteachers will impact on the procurement process. Academies may be even less willing for the government to dictate terms than a council, so a central procurement method might be difficult to put into practice.

But with a dwindling pipeline, the expectation remains that the programme won’t be short of interest from private players. “We will see the same groups and players. It is attractive for us,” admits Laughlan Waterston, of funder SMBC.

“The old BSF model was more to enable the government to invest, whereas this will be very similar from a risk perspective for the private sector.”

Indeed, the large contractors may well find themselves in pole position for these schemes once again. It remains unclear how the schools will be grouped, and if the primary concern truly is greatest need, it may well be that a batch of 20 schools could include some from, say, Middlesbrough, some from Liverpool and some from Torquay.

That means a construction firm equally able to building in the north-east as on the south coast will be well placed to win work. Regional operators are unlikely to find the economies of scale needed to satisfy the government. Schneider suggests this would probably not be the best approach, and batching by region or even city might make more sense.

But those existing players in the market will find they have to readjust once more to a new approach. Having worked hard to get their heads around ‘educational transformation’ over the past few years, the focus purely on new buildings will have an impact.

“We had teams geared up to look at curriculum design etcetera, but that has on the whole been put aside by the government,” says McCarthy. “It’s going to be more about dealing with asset condition now.”

This highlights another problem. Constant tweaking of the system is not good for the market and makes it harder for an industry to thrive.

If the government intends to make incremental changes to the PFI structure in the schools programme, it could end up creating even more uncertainty. All developments will have to be smoothly managed, with plenty of industry input.

Otherwise, the dream of a new round of school capital investment could turn into a nightmare for bidders.