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Northern Ireland Forum
for
Political Dialogue
~~~~~~~~~
THE IMPLICATIONS OF
PUBLIC/PRIVATE PARTNERSHIPS FOR
EDUCATION SERVICES IN NORTHERN
IRELAND
~~~~~~~~~
Presented to the Northern Ireland Forum for Political Dialogue
on Friday 5 December 1997
1
Adopted: Friday 5 December 1997 CR 17
1. INTRODUCTION
Background
1.1 The first meeting of the Northern Ireland Forum for Political Dialogue
was held on 14 June 1996. One of the first actions of the new Forum
was to set up a number of Standing Committees to examine key issues
affecting the people of Northern Ireland. Standing Committee B (Educa?tion Issues) was one of the earliest committees to be established (26 July
1997) with the remit "to examine the contribution which education serv?ices and structures make to the promotion of dialogue and understanding
within Northern Ireland and report to the Forum". Details of the current
membership of the Committee are set out in Annex A of this report.
1.2 Within this broad remit and with the approval of the Forum, the Commit?tee opted to examine three specific issues:
(a) the review of education administration in Northern Ireland being
carried out by the Department of Education;
(b) pre-school education and the proposed pre-school voucher
system;
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(c) the implications of public/private partnerships for education
services.
1.3 The Committee reported on the first two topics on 22 November 1996
("The Review of Education Administration in Northern Ireland - Educa?tion and Library Boards”) and on 27 June 1997 (“An Examination of
Pre-School Education in Northern Ireland”)
Current remit and report
1.4 This study was prompted by the fact that successive governments have
been unable to solve the worsening crisis of school accomodation within
the resources currently available to the education sector, and have turned
to the private sector in the hope of harnessing immediate extra funds
without incurring additional expense in the long-term. In line with current
public/private partnership policy, the Department of Education has de?cided to explore the viability of a partnership approach by piloting six
education “pathfinder” projects. Concern about the implications of intro?ducing private finance into the Northern Ireland education service led the
Committee to select this area for examination.
1.5 The Committee wrote to the key organisations concerned with
public/private partnerships (PPPs) seeking their views on PPP policy and
practice in Northern Ireland, particularly in the education sector. On 10
and 11 July 1997 advertisements were placed in Northern Ireland’s 3
main daily newspapers seeking submissions from interested parties.
Some 25 letters and written submissions were received from a range of
3
relevant organisations and several of these bodies were also invited to
give oral evidence to the Committee between 11 September and 30 Octo?ber 1997. Details of those who provided oral and written submissions are
at Annex B, as is a list of the documents and reports which the Commit?tee considered. The transcripts of evidence sessions are reproduced at
the end of the report.
1.6 In trying to assess the implications of public/private partnerships
for education services in Northern Ireland, the Committee recognises a
number of important constraints on this study:
(1) Little appeared to be known outside the Department of Education
about Information Technology (IT) partnership schemes, such as
the Accruals Accounts project. Consequently, the Committee was
not able to examine this area in any detail, other than to reflect the
concerns of witnesses about the possible loss of public sector
jobs.
(2) Most of the evidence presented to the Committee related to the use
of private money and expertise in the construction and
management of school buildings. When this report refers to PPPs
it is largely in this context.
(3) The education pathfinder schemes are at a comparatively early
stage in their development; no contracts have yet been signed. The
Committee was concerned not to prejudge their likely out?comes and that concern is reflected in this report which
4
concentrates on identifying benefits and flagging up concerns. A
full evaluation is not possible at such an early stage.
1.7 Sections 2 and 3 of the report chart the development of PPP policy and
what is known about the current education pathfinder projects. The re?mainder of the report sets out the key issues raised by witnesses and the
conclusions and recommendations the Committee drew from this
evidence.
1.8 This report enjoys widespread cross-party support and the Committee, in
conducting its examination, was conscious of the relevance of this issue
to the remit of the Forum - the promotion of dialogue and understanding
in Northern Ireland.
5
2. THE EVOLUTION OF PPP POLICY
The Private Finance Initiative
2.1 The Conservative government was committed to keeping direct taxation
levels low by reducing public expenditure. This led to the introduction of
a number of initiatives intended to increase private sector involvement in the
provision of public services, such as privatisation and contracting
out. In practice, it left a legacy of chronic underinvestment in the
infrastructure of those services.
2.2 In November 1992, the then Chancellor of the Exchequer, Mr Norman
Lamont, launched the Private Finance Initiative (PFI). It was the latest in
a range of policies designed to change the focus of the public sec?tor from the direct provision of services to their purchase and
regulation. It differs from privatisation in that the public sector is
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involved as a partner in the project and it differs from contracting out be?cause the private sector usually provides capital assets as well as
services.
2.3 According to successive Conservative policy documents ("Breaking New
Ground" and “Private Opportunity, Public Benefit"), PFI was not sim?ply about private sector investment in public services e.g. new build?ings, roads etc., but about "exploiting the full range of private
sector management, commercial and creative skills".
In practice, the private sector would normally provide, operate
and maintain new buildings and structures and the public sector
would repay the capital and running costs over a long contract period, nor?mally 25 years or more.
2.4 The main benefits of PFI to the public sector would be the immediate
improvement of public services through the provision of new and
badly needed infrastructure at a lower cost. The private sector would
benefit from new opportunities to invest in areas traditionally the
preserve of the public sector, with their profit margins depending
upon their efficiency. Better value for money would be achieved
through the private sector's more commercial approach to design,
management, spare capacity and generating additional income and
its assumption of the costly risks involved. The public sector
would be free to concentrate on what services to provide
(policy and legislation), leaving the private sector to consider how
best to provide them. Critics of the policy were concerned about the
mortgaging of future resources for such long contract periods.
They were also sceptical about whether PFI would really deliver savings,
7
since value for money would be determined by comparing PFI bids
against projected publicly-funded alternatives whose accuracy is
debatable. These issues are set out in greater detail in Section 4 of this
report.
2.5 The PFI initiative had little impact in its first year and, in 1993, the new
Chancellor, Kenneth Clarke, set up a Private Finance Panel to promote
PFI policy and to identify areas of public sector activity where the
private sector could become involved. By 1994, in order to maximise
the scope of PFI and to reserve public funds only for those schemes
where PFI was inappropriate or too costly, the government announced
that no capital projects would be approved until PFI options had been
fully explored. For the remainder of their term in office the
Conservatives concentrated on promoting PFI but, although many
potential projects were identified, little progress was made on the
ground. This was largely because of the length and complexity of
the PFI procurement process and because the public sector was ill-adapted
to drive it forward. There were many concerns about the ef?fectiveness of the initiative and many calls for its abolition, or at least
for a fundamental review.
The Bates review
2.6 As soon as the new Labour government came to power, the Paymaster
General instigated a review, under the chairmanship of Malcolm Bates,
with the remit to consult widely on the PFI initiative, identify its failings
and make recommendations for its future. The review team reported on
8
23 June 1997; all of their 29 recommendations were accepted by the
Paymaster General and are at various stages of implementation.
2.7 Bates' recommendations were primarily intended to streamline PFI and
fall into 4 main categories:
(1) Changing structures: intended to adapt public sector
administrative structures to partnership with the business world.
(2) Improving the PFI process: intended to streamline PFI practice
and reduce the length, complexity, cost and failure rate of the
assessment process.
(3) Learning the PFI lessons: intended to ensure that the lessons of
pilot PFI schemes are disseminated, using co-ordinating and
liaison structures, case studies and guidance notes.
(4) Bidding costs: intended to reduce the cost of PFI bidding for the
private sector.
Bates' recommendations are reproduced in full at Annex C.
2.8 Compulsory PFI testing of all capital projects was ended and the private
finance initiative was renamed public/private partnerships. The basic
principles remain the same, however, and the terms tend to be
interchangeable. The minister for Education and Employment, Mr
Stephen Byers, has made it quite clear that the new government is
9
determined to look to partnerships with the private sector to provide new
investment in the schools sector:
"We are developing, in consultation with local authorities and
the private sector, a new long-term strategy for the management
of schools' infrastructure. This will ensure that schools can take
full advantage of levering in private sector capital and maximising
its impact"
(Stephen Byers MP, DfEE Schools Standards Minister).
3. THE NORTHERN IRELAND CONTEXT
Roles and responsibilities
3.1 One of the key recommendations of the Bates review was the creation of
a Treasury Taskforce to act as the focal point of all PPP activities
within government. The policy team is responsible for establishing
rules and best practice for partnerships, while its projects panel
10
(comprising experts from the private sector) aims to help
departments secure good quality partnership projects and signs off
the viability of significant schemes.
3.2 In Northern Ireland, the Department of Finance and Personnel (DFP)
liaises with the Taskforce and is represented on the Interdepart?mental PFI Group which comprises most Whitehall depart?ments as well as the Welsh and Scottish Offices. In Northern
Ireland, DFP chairs a similar group comprising all NI departments.
DFP’s role is to provide policy co-ordination and oversight, to
promote the PPP approach, to disseminate information and
to approve partnership projects above specified delegated
limits. Its Economics Division specialises in PFI appraisal and
can also call upon the experts in the Treasury Taskforce for advice and as?sistance with projects.
3.3 While DFP maintains a strategic and supervisory role, individual NI
departments are responsible for their own procurement decisions (up to
certain cost limits) i.e. for identifying and taking forward schemes within
their areas of responsibility and for which they hold the associated
capital budgets. They have their own PFI teams.
PPPs in Northern Ireland
3.4 Expenditure on infrastructure in Northern Ireland amounts to about
£500 million a year (out of a total public expenditure budget of £9
billion). Not all of this would be amenable to a partnership approach,
11
either through not being commercially attractive or sufficiently cost
effective, but there is some scope for PPPs.
3.5 Progress has been slow since 1992, although the Bates review and the
new Labour government have given a fresh impetus to the initiative. At
the time of this study the following projects had reached the stage of
narrowing the tender process down to one preferred bidder:
(1) Royal Group of Hospitals (RGH) - Car parking
(2) Belfast City Hospital - Renal unit
(3) RGH - Theatres and Intensive Care equipment
(4) Miscellaneous small energy contracts
(5) NW Institute of Further & Higher Education - accomodation
Annex D contains a list of schemes under consideration as potential PFI
projects in Northern Ireland at the time of writing of this report.
The capital crisis in the education sector
3.6 The recent history of investment in school accommodation in Northern
Ireland is one of chronic underfunding with backlogs, delays and
moratoria in top priority schemes, and poor maintenance. There is an
urgent need for capital investment in our schools, where there is a
backlog of priority projects totaling some £350 million. This backlog
consists of a wide range of schemes, from new school buildings to
12
refurbishments and extensions. There are also many badly needed minor
capital works and a backlog of maintenance work totaling some
£120 million.
3.7 The traditional approach to investment in school accommodation has
been for the Department of Education to prioritise schemes in order of
educational need (the “Schools Capital Priorities Planning List”) and to
deal with them in order of importance within the level of resources
provided in the Secretary of State's annual public expenditure
allocations. In 1997/8 the capital budget was reduced to £23 million
from a previous annual average of £55 million. At this low level of
investment, current public sector resources cannot hope to make any
significant impact on the ever-increasing problem. The Labour
government's review of public spending, though welcome, is un?likely to bring any significant improvement. In the meantime, many
of Northern Ireland's schools are overcrowded, poorly maintained and
littered with mobile classrooms.
The PPP "pathfinder" projects
3.8 While there is agreement about the pressing need for investment in
school accommodation, the current government has committed itself to
keeping levels of direct taxation down and so ruled out any significant
increase in public sector resources. Consequently, the Department of
Education is already exploring the scope for applying PPP to
schools through six pilot "pathfinder" projects for the supply
of “teaching accomodation and related support services,
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including building/grounds maintenance, caretaking, cleaning, ca?tering, and security” at the following colleges and schools:
(1) North West Institute of Further & Higher Education,
Londonderry
(2) Belfast Institute of Further & Higher Education
(3) Wellington College, Belfast
(4) Balmoral High School, Belfast
(5) Drumglass High School, Dungannon
(6) St. Genevieve’s High School, Belfast
3.9 To date, all the projects have been advertised in the “Official Journal
of the European Communities” (OJEC), Expressions of Interest have
been received and reduced to shortlists of 3 companies who have been
issued with Invitations to Negotiate. When their bids have been re?ceived and evaluated, a preferred bidder will be selected for each pro?ject and detailed negotiations will begin. Only the NW Institute
pathfinder has so far reached the stage of selecting its preferred bidder
(the Northwin Consortium), the rest are expected to reach this
stage early next year.
A brief position report on the 6 education pathfinder projects is attached
as Annex E.
3.10 It is obviously too soon for a detailed evaluation of the pathfinders. The
education authorities concerned have yet to live through the realities of
being tied into 25 year contracts for accomodation and related services
14
but their experiences of the PPP process to date have raised a number of
important issues. In particular, the Education and Library Boards
expressed concern at the length of the procurement process and
its cost in both staff time and consultants’ fees, due to the relative inexperi?ence of the public sector in PPP procurement. In the case of the
NW Institute, it has taken 15 months to reach the selection of a pre?ferred bidder and it is likely to take a further year before the contract
is finalised and work begins on site. The high cost of bidding
as a proportion of total contract costs is likely to confine the pri?vate sector’s interest to sizeable school projects, unless there are
other, compensatory benefits. These issues are explored in greater de?tail in the next Section.
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4. THE KEY ISSUES
4.1 The issues raised by witnesses fell mainly into two categories: those
relating to the principles underlying PPPs (the theory) and those
relating to the PPP process (the practice). Opinion was divided on the
merits or otherwise of involving the private sector in education
services. There was, however, considerable agreement about the
main weaknesses of the current PPP process.
Public/Private Partnerships : The principles
4.2 The key issues emerging from evidence about the partnership concept,
and its relevance to education services, are set out below. Together they
reveal both the complexity of the issue and the wide variety of views on
it.
Benefits:
4.3 There is no viable alternative: Though witnesses admitted that this
argument comes close to making a virtue of necessity, they agreed that
public sector funds are unlikely to meet real capital needs and that other
16
sources of investment must be seriously considered. The govern?ment is faced with the problem of balancing chronic underfunding
of public services, particularly education and health, with its
manifesto promise not to increase taxation. PPPs harness private
sector capital in a way which does not affect direct taxation or
the public sector borrowing requirement.
4.4 Spreading the load: The partnership approach, involving repayments
over long periods (normally 20-25 years), spreads the financial
burden evenly throughout the lifespan of the contract rather than in?curring large up-front payments. This involves a change of ap?proach to financial planning, although it is not very different
from budgeting for the long term running costs of new school build?ings acquired in the traditional way.
4.5 Better administration: A major characteristic of public sector account?ing is the separation of capital and recurrent expenditure which can bring a
lack of understanding of the links between the two. PPP contracts, by
their nature, connect expenditure on school buildings with their running
costs and will bring a greater realism to bids for capital projects. Where
buildings have to be budgeted for and repaid, they cannot be regarded as
free gifts. PPPs will bring a more businesslike approach to planning and
use of buildings.
4.6 Value for money: Supporters of the PPP approach argue that it
differs from other borrowing arrangements, such as hire purchase
or mortgage, because the client actually pays less in the long run.
17
The key measure of value for money is the comparison between the
PPP bid and traditional costs for construction and management over
the contract period. Since the government can borrow capital more
cheaply than the private sector and does not need to make a profit on in?vestment, other savings must be found to make a partnership ap?proach viable. The private sector claims to have much to teach about
efficiency, economy and innovation and cites cheaper long-term
running costs, risk transfer and maximising returns on assets as the
main benefits of PPPs. These are explored below.
(a) Cheaper running costs: The basis of the PPP approach is that the
public sector purchases a package from the private sector; in the
case of the schools sector, a building (new or refurbished) plus
operational services such as cleaning, maintenance, security,
catering etc. The theory is that these services are an?cillary to the core business of teaching and would benefit
from the introduction of a more businesslike approach.
Schools will be better maintained because standards and penalties
will be specified in legal contracts and staff will be freed from
maintenance and operational concerns to concentrate on teaching,
raising standards and producing a better educated workforce. In
short each sector concentrates on what it does best.
(b) Risk transfer: The public sector will benefit from being freed from
many of the costly risks associated with large scale projects. Since
payment levels for services are agreed in advance, all de?sign, construction and operational risks will fall on the
18
private sector e.g. cost and time overruns, failure to meet
service requirements etc. As the facilities manager, it is in the
interest of the private supplier to ensure that buildings
are designed for efficient and economical operation.
Obviously some risks are difficult to transfer; the private sector
should not be held responsible for changes in pupil numbers
stemming from changes in education policy or legislation.
Whether they should bear the cost of pupil fluctuations due to
demographic trends is still a matter of debate which will affect the
level of private sector interest in school projects.
(c) Maximising returns on assets: Under the PPP approach, the
private sector provides and operates the school building while
the public sector pays for the services specified in the contract,
including the use of the premises. In order to reduce costs
to the public sector and to achieve greater value for money
than the public sector comparator, suppliers must ex?plore the options for using school grounds, facilities and hours
of opening as opportunities for generating addi?tional income.
Although the education sector is labour intensive and non profit
making, some schools and colleges are likely to be more
commercially attractive than others e.g. because of opportunities
to sell or develop surplus land. This has the benefit of reducing
repayments by the public sector. However, it also raises
19
important equity issues which will be explored later in this sec?tion (see
paragraph 4.20).
4.7 Benefits for the economy: The economy will benefit from new
investment in school buildings. Public spending in NI represents
around 50% of construction contracts and cutbacks in capital
spending have hit the industry hard. Twenty five years of jobs and
wealth creation in the construction and facilities management sectors
should make a favourable impact.
4.8 Value of pilot schemes: Finally, it is reasonable and sensible to test run
pilot projects to explore both the potential and the practicalities of a
partnership approach. Until a full evaluation of the success or otherwise
of the education pathfinder projects is possible, it would be unfair to
prejudge the outcomes.
Concerns:
4.9 Although aware of the claims made in favour of the partnership
approach, many witnesses had reservations about whether PPPs will
deliver improved public services. Their main concerns are set out below.
4.10 Length of contracts: The public sector has little experience of 25 year
contracts requiring detailed advance specification of service needs and
long-term budgeting for the repayment of both capital and running costs.
The education sector will need to guard against the over?20
commitment of future funds which will restrict its ability to respond
to changing circumstances and priorities. The long timescales in?volved also raise concerns about the solvency of private
sector providers, declining pupil numbers, the changing education
context, the implications of repayments for the budgets of education
authorities, and the need for flexible contracts with inbuilt get?out clauses and review mechanisms.
4.11 Accumulation: PPPs alter the phasing of capital expenditure; they do
not avoid it. The ability of partnerships to solve the capital backlog
will be limited, among other things, by the education sector’s ability to
meet the accumulating long-term repayments. The build-up of fi?nancial commitments 25 years into the future will reduce the
ability of education authorities to react to changing circumstances
and will mean that future budget cuts will fall on the remaining,
shrinking budget areas.
4.12 Resources: Representatives of Education and Library Boards were
particularly concerned about how the repayments are to be financed over
the contract period, particularly about the implications for Local
Management of Schools (LMS) budgets which are designed to
cover the running costs of schools. Under the PPP approach school
running costs will now contain a significant element of capital and
interest repayments. If no additional funding is provided by the Department
of Education, the result will be a transfer of capital debt from the De?partment to schools and Boards which will lead to reduced staffing
levels and increased class sizes. On the other hand, if additional
21
money is produced by simply converting capital funds to a reve?nue stream, this will reduce the available capital budget and
impact directly on PPP “unfriendly” school projects, regardless of their
educational priority.
4.13 Residual value: Concern was also expressed about what happens to the
buildings at the end of the contract period. If the public sector wishes to
retain an option to buy, this should be agreed at the outset. If the deci?sion is to extend the contract, futurepayments will need to be reduced to take
account of the repayment of the capital costs. If the contract is not
renewed, there could be conflict with local communities over
controversial proposals for the future use of the property. There is
also the question of the private sector consortium having a monopoly
position where there are proposals to extend the building, removing the
competitive edge from the bidding.
4.14 Value for money: Bids will be carefully costed to ensure that the private
sector recoups its capital outlay, together with interest charges (which
are higher than for the public sector) and a reasonable profit. Given these
financial facts of life, the education sector needs to be convinced of the
benefits to the public purse of spreading payments over such long?term contracts. Despite the theoretical benefits outlined in the previous
section, PPPs are largely an unknown quantity in practice. Experi?ence elsewhere in the UK is largely confined to roads, sewerage, water,
and clinical and custodial care - little is known about partnerships in
schools.
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4.15 Although the acid test of the viability of a PPP approach is how it
measures up against a public sector comparator, there are flaws in the
comparison process. If comparisons are to be meaningful, there
needs to be a significant improvement in public sector resource
accounting, and in the specification of risk factors if they are to be com?petitively costed. These subjects will be revisited in the section
dealing with the PPP process (see paragraphs 4.32 and 4.34)
4.16 Additionality: The partnership approach was originally intended to
produce additional investment in public services. If it becomes a
substitute for mainstream capital investment, nothing additional will be
gained. It will simply become a replacement for traditional expenditure,
only with the added danger that commercial concerns rather than
educational priority will determine funding.
4.17 Commercial attractiveness: The education sector is a non-profit making,
labour intensive service (85% of running costs are staff salaries) so what
is the attractiveness to the private sector? The key factors appear
to be the long-term facilities management contracts associated with new
school buildings and the opportunities for generating addi?tional income.
4.18 Third party revenue proposals could involve conflicts of interest over
incompatible alternative uses of spare school lands or facilities. Both
Wellington College, Belfast and the North West Institute, Londonderry
have valuable surplus lands which could be developed for
non-educational purposes. The public sector needs to be sure that the
23
true value of surplus assets is reflected in the level of repayments so
that a fair share of the benefits goes to the public purse.
4.19 Commercial attractiveness will lead to “cherry picking” of school
projects and the danger of skewing development away from education
priorities and running foul of the government’s own policies on equity
e.g. Targeting Social Need (TSN) and Policy and Fair Treatment (PAFT)
4.20 Equity. This was one of the most significant, non-financial areas of
concern raised by most witnesses. If commercial attractiveness re?places educational priority as the determiner of investment in
schools, there will be important equity implications. There is widespread
concern that PPP could lead to a 2-tier education system, with com?mercially unattractive projects (whether because of location, vandal?ism, declining enrolments or lack of additional assets) having to
queue for traditional funding from a dwindling public sector capital
budget. This would erode the principle of equal educational oppor?tunity for all, in direct opposition to government’s equity
policies. There was also concern that most of the education capital
backlog consists of small projects and refurbishments which might
have to be “bundled” together to make them commercially viable,
and that the economics of PPP might lead to amalgamations of small and
rural schools for purely commercial reasons.
4.21 Employment concerns: Another major concern of witnesses was the
potential of facilities management contracts to externalise public
sector jobs. It is mainly, though not exclusively, through the more
24
economic management of buildings that the private sector expects to
recoup their investment and make their profit. The Wellington Col?lege and North West Institute pathfinder schemes include sup?port services with potential job losses for the public sector. The
implications of the Accruals Accounting project are even more
far-reaching, involving job transfers in salaries and accounts. Consultation
with staff and their representatives is vital, yet appears to have been vir?tually non-existent.
4.22 While many witnesses believed that the education sector should not be
involved in estate management, concern was expressed about whether
the externalisation of jobs might eventually encroach on core teaching
posts, increasing the danger of educational priorities becoming
subordinate to market forces and commercial considerations.
4.23 Consultation: The absence of a regional devolved government in
Northern Ireland means that decisions about education policy and
services are not taken by local, elected representatives. In order to
offset the worst effects of this “democratic deficit” it should be
government practice to consult as widely as possible on proposed
new initiatives. PPPs have considerable implications for the administra?tion of local education services, including committing public represen?tatives to long-term contracts and their expenditure consequences,
yet there appears to be a lack of knowledge and understanding
of the subject among some public representatives serving on
education authorities.
25
4.24 In new and largely unexplored territory such as the education pathfinder
projects, consultation is vital. The Department of Education is
acknowledged to have consulted well with the private sector (through an
extensive market sounding survey and programme of information
seminars) and to be aware of their concerns. On the other hand,
Education and Library Boards and staff trade unions do not appear
to have been so well informed or consulted. It is also impor?tant that the views of local communities are taken into consideration
when plans are being made for local schools, particularly where there
is the possible risk of loss of a local asset.
Public/Private Partnerships : The process
4.25 Whatever their differing opinions on the PPP concept, witnesses were
united in the view that the process needs streamlining. Their main
concerns are set out below:
4.26 Lengthy, complex process: The experience of the current pathfinder
schemes, particularly the North West Institute, is that it takes about 15
months from initial advertisement in the Official Journal of the European
Communities (OJEC) to invitations to reach preferred bidder stage and at
least a further year before work begins on site. The Western Education
and Library Board had to appoint a Project Manager and set up a project
Board and Project Team to manage the process, with a very high input of ad?ditional staff time. The specifications and information about the tender ran
to some 4 volumes.
26
4.27 The education pathfinders are hampered by a lack of experience of PPPs
in Northern Ireland. There is a need to streamline the process as
much as possible, to cut out unnecessary time, effort and expense
and to ensure that the lessons learned can be shared with other PPP
client teams and bidders.
4.28 Bidding costs: A major constraint on PPPs is the high cost of bidding
relative to the size of the contract. The Construction Employers'
Federation estimated that it could cost a consortium up to £200,000 to
reach preferred bidder stage. Bidding costs have to be recouped by
successful contractors so nugatory expenditure benefits no-one.
Reducing bidding costs might also encourage more small, local firms to
risk bidding.
4.29 The largest expenses are consultants' fees and design costs. Since the
Department of Education currently requires designs to “80% of
build” specification, the bidding stage can prove extremely costly.
Private sector witnesses emphasised the need for the early in?volvement of partners (particularly the users and the facilities
managers) to obtain maximum benefit at the design stage and
to avoid unnecessary expenditure, even if this means
lengthening the bidding phase.
4.30 Public sector administration: The move away from the letting of
building contracts to the negotiation of long-term service contracts
requires a culture change in Government administration and the
development of legal, financial and property management skills.
27
4.31 The lack of in-house expertise in these areas has led to the employment
of consultants to advise the Department of Education and the Education
and Library Boards in the pathfinder process. This raises 2 main issues:
(1) These high initial outlay costs need to be properly taken into
account when costing the public sector comparators - although
they should decrease as public sector expertise is built up
through experience and through training and recruitment.
(2) There will be a significant waste of public money if schemes do
not ultimately go ahead at the end of the testing process.
4.32 Public sector comparators: The key measure of the value for money of
partnerships is how they compare with traditional public sector con?tracts. It is crucial that the public sector comparators are as realistic and
as accurately costed as possible. Private sector witnesses
criticised:
(1) The inadequacy of projecting school maintenance costs on historic
maintenance costs, as these have traditionally been unrealistically
low and have contributed to the problems of disrepair throughout
the school estate.
(2) The failure to identify and include all public sector costs,
particularly staff time.
28
4.33 Viability: Witnesses generally agreed that there is a “threshold of
viability” for projects, although they varied in their estimates of where
this cut-off point should be (quoting anywhere between £500,000 and
£25 million).
It is clear that the higher the cost of bidding in proportion to the size of
the contract, the less attractive the project will be to private bidders. It is
therefore unlikely that minor works and maintenance schemes will attract
PPP interest. The Department of Education expects that the majority of
capital projects will continue to be carried out by the education sector,
with PPP remaining peripheral and unlikely to deal with smaller schemes
without some form of grouping or “bundling” to achieve a combined
contract of a viable size.
Concern was expressed that bundling school projects would
disadvantage small rural schools with fluctuating pupil numbers, as
decisions on amalgamation might be influenced by commercial rather
than educational considerations. There was also concern that bundling
would lead to problems of ownership and contract management.
4.34 Risk factors: Private sector witnesses were concerned that risk factors
should be:
(1) Properly allocated. Although guidance on the allocation of most
risk factors is well developed, there was a strong belief that the
education sector should guarantee private partners against
29
the risk of declining pupil numbers if inner-city or small rural
schools are to stand a chance of attracting PPP funding.
(2) Clearly defined. The more loosely risk factors are defined, the less
likely they are to be competitively priced by bidders. Overpricing
will lead to more expensive bids which is in the interest of neither
party.
4.35 The Northern Ireland capital market: The Committee heard much
evidence about the underdeveloped state of the NI capital market and
some scepticism about the ability of local businesses to make much
impact on the capital crisis in Northern Ireland schools.
(1) Northern Ireland is considered a high risk area for investment, this
results in higher borrowing costs, shorter debt terms and
less competitive bids. Private partners need to find more
savings and risk transfer to beat public sector comparators.
(2) At present, the capital market for equity is virtually non-existent.
Local banks are profitable and are reluctant to take shares in
partnerships (by taking equity or mezzanine debt positions). This
reduces the number of players in the PPP market and means that
local businessmen may have to look for financial backing from
outside Northern Ireland.
(3) The Northern Ireland private sector lacks experience of long-term
facilities management, with bidders tending to be several distinct
small firms rather than a single provider of ancillary services. The
30
fact that facilities management can be perceived by the public
sector as a threat to its traditional areas of responsibility may
hinder the development of effective partnerships between clients
and bidders.
(4) The result of Northern Ireland’s lack of FM expertise is that local
consortia tend to be led by building contractors in need of
construction contracts and more geared to design and build than
to finance and operate. These are usually small, family businesses
without strong capital bases or experience of long-term contracts.
At present, the Department of Education does not require
contractors to hold equity for the life of the project. This is
important if local firms, who would have a greater vested interest
in maintaining quality of service over long-periods in the local
market, are to be able to compete for PPP contracts.
Summary:
4.36 Opinion is deeply divided on the issue of the potential role of PPPs in
education provision. Those who believe that it is the duty of the state to
provide adequate funding for education services (even if this means
raising taxes), distrust PPPs as an attempt to avoid public expenditure on
schools buildings. Others accept that, in the absence of any mandate to
increase taxation, the government must give serious consideration to
alternative sources of capital funding.
31
4.37 The key issue is whether PPPs are a panic reaction to debt or a rational
strategy - a short-sighted quick fix for the current capital crisis or an
innovative way of improving the delivery of education services.
4.38 Supporters of the partnership approach to public services pointed to the
failure of Government funding to meet capital needs which has led to the
current crisis in the education sector. As an alternative, PPPs
claim to offer:
(1) Immediate improvements by injecting additional funds while
postponing repayments.
(2) Greater value for money through a more businesslike approach to
running costs and surplus capacity.
4.39 Opponents of the partnership approach were concerned about:
(1) The ability of the public sector to properly cost, define and budget
for such long-term contracts.
(2) The implications of an accumulation of PPP commitments for
other areas of education expenditure, particularly school budgets.
(3) The possible subordination of education and social concerns to
commercial considerations in the making of decisions af?fecting education services.
32
(4) The impact of PPPs on existing public sector jobs.
4.40 It is clear that PPP solutions will have to be faster and cheaper, and the
long-term revenue stream must be available to support them without
detriment to the education of children, which must remain the chief
consideration.
4.41 Whether in favour of the concept of private sector involvement in
education services or not, most witnesses agreed that there is a need to
simplify the PPP process, standardise the elements and evolve models of
best practice. It is, after all, in no-one’s interest to add to the complexity
and length of the process - driving up costs and stalling development.
33
5. CONCLUSIONS AND RECOMMENDATIONS
5.1 The policy of using PPPs as a means of delivering public services,
particularly where large-scale capital investment is involved, has enjoyed
the support of successive governments. Having established the
partnership principle, the outgoing Conservative government struggled to put
it into effect. The new Labour administration instigated an immediate review
with the express aim of streamlining the process to make it more
effective.
5.2 Neither government has been able to solve the crisis of school
accomodation. With no mandate to increase direct taxation, the Labour
party is addressing only the most urgent and affordable projects.
Although the review of spending may bring some additional resources, it
is unlikely that public sector funds will meet real school building and
maintenance needs. PPPs have evolved as a possible solution to part, if
not all, of the problem.
34
5.3 In Northern Ireland, the education pathfinder schemes are testing the
viability of a partnership approach to the construction and management
of school buildings. None of them have reached the stage of awarding a
PPP contract and so it is too soon for a full evaluation. Initial indications
are that there is considerable private sector interest in providing
education services, but that PPP proposals are likely to be narrowly
focused and to have limited impact on the current capital crisis without
the “bundling” of small schemes or even the adoption of a regional
approach to the education estate.
5.4 Although it is difficult to comment on an issue that has not been
processed to a conclusion, there are genuine concerns about the concept
of PPPs and about the practicalities of the PPP process. From its
examination of the evidence, the Committee concluded that there
are a number of areas where action or improvements are needed. The
Committee’s recommendations are set out below.
Priorities
5.5 The Committee concluded that the main priority of the education
service must be the welfare and development of pupils and that
educational needs should not become subordinated to commercial
considerations.
Recommendations:
(1) That PPP projects should be required to meet clearly
established criteria of educational need, educational ex?cellence, equity and parity of provision, and mutuality. This may
necessitate impact assessments to be conducted
35
and the results to be made publicly available before con?tracts are agreed.
(2) That priority capital projects are not by-passed in favour
of more commercially attractive PPP projects of lesser
educational priority.
Administration
5.6 The Committee concluded that the partnership approach involves a move
away from the purchasing of school buildings to the long-term
procurement of education services. This will require a radical change in
public sector attitudes and practices with regard to planning and
budgeting
Recommendations:
(3) That public sector procurement structures should be simpli?fied and delayered as much as possible and that responsibilities
are clear.
(4) That, in line with the recommendation of the Bates report,
the Department of Education should strengthen its Private
Finance Unit “by the addition of deal making and pro?ject management expertise” to reduce the current,
costly dependence on external consultants .
(5) That non-confidential information and documentation on PPP
projects should be held in a central PPP Project Office
rather than dispersed among various client bodies and
should be accessible to all interested parties.
The process
36
5.7 The Committee concluded that there is considerable scope for
streamlining the PPP process and that the Bates report contained many
useful recommendations for achieving this.
Recommendations:
(6) That all the recommendations of the Bates review concerning
the PPP process should be implemented in Northern
Ireland as quickly as possible.
(7) That care should be taken in the selection of potential PPP
projects to reduce the likelihood of costly, failed bids.
(8) That tendering and primary processes should be simplified as
much as possible and that only the minimum of information
should be required to reduce bidding costs, particularly design
costs.
(9) That clients and bidders should be engaged as early as possi?ble in the design process to avoid nugatory expenditure.
(10) That care is taken in the drawing up of contracts to ensure
that the education service gets the maximum benefit from surplus
assets and opportunities for generating additional
income.
(11) That there should be sufficient flexibility in the terms of
contracts to cope with changing educational needs and
circumstances. This may entail the inclusion of “get?out” clauses and inbuilt review mechanisms.
(12) That options for contract renewal after the contract expires
are clearly defined and written into PPP contracts.
Value for money
37
5.8 The Committee concluded that, since the key test of value for money is
how the private sector bid measures up against a public sector
comparator, the latter needs to be very accurately projected.
Recommendation:
(13) That public sector comparators must be reliably calculated.
This will entail stringent resource accounting by the public
sector, particularly with regard to costing staff time,
and a realistic approach to projecting mainte?nance costs.
Resources
5.9 The Committee concluded that the success of the partnership approach
to education services will largely depend on the public sector’s ability to
budget for the long term repayments.
Recommendations:
(14) That the Department of Education must take early decisions,
in consultation with all education partners, about how to
make provision for PPP repayments without jeopardis?ing schools’ LMS budgets or the education capital
budget. Protection for schools’ LMS budgets should be
guaranteed.
(15) That the Department of Education should revise its strategic
plan to take account of its proposed commitment to PPPs and
to clarify the long term public expenditure implications
of PPPs on education spending.
38
(16) That there should still be a public sector capital budget
available for priority education projects which are
inappropriate for a PPP approach.
Bundling
5.10 Although this was one of Bates’ proposals to make small public sector
projects more attractive to the private sector, the Committee concluded
that there are concerns about its appropriateness to the NI education
sector.
Recommendation:
(17) That there should be a detailed exploration of the implica?tions of the bundling concept, particularly its possible reper?cussions on small and rural schools.
Consultation
5.11 The Committee concluded that PPPs have considerable implications for
the administration of local education services. It is vital that the issues of
consultation and public accountability are adequately addressed.
Recommendations:
(18) That the Department of Education should set up mechanisms
for meaningful consultation on PPP proposals between all
partners in the education sector i.e. The Department, the
education authorities, staff and their representatives.
(19) That better provision should be made for public accountability
for procurement decisions, taking into account not only
financial considerations but also public and local community
interest in the provision of public assets and services. This
39
should include cost benefit analyses, public consultation
and planning enquiries.
Employment
5.12 The Committee concluded that there was considerable concern
about the employment implications of PPPs for the public sector
and for local firms.
Recommendation:
(20) That PPP policy should ensure that local employment and lo?cal businesses are given every opportunity to participate in PPP
projects.
6. SUMMARY OF RECOMMENDATIONS
(1) That PPP projects should be required to meet clearly estab?lished criteria of educational need, educational excel?lence, equity and parity of provision, and mutuality.
40
This may necessitate impact assessments to be conducted
and the results to be made publicly available before con?tracts are agreed.
(2) That priority capital projects are not by-passed in favour of more
commercially attractive PPP projects of lesser education priority.
(3) That public sector procurement structures should be simplified and
delayered as much as possible and that responsibilities are clear.
(4) That, in line with the recommendation of the Bates report, the
Department of Education should strengthen its Private Finance
Unit “by the addition of deal making and project management ex?pertise” to reduce the current, costly dependence on external
consultants .
(5) That non-confidential information and documentation on PPP
projects should be held in a central PPP Project Office rather than
dispersed among various client bodies and should be accessible to
all interested parties.
(6) That all the recommendations of the Bates review concerning the
PPP process should be implemented in Northern Ireland as
quickly as possible.
41
(7) That care should be taken in the selection of potential PPP projects
to reduce the likelihood of costly, failed bids.
(8) That tendering and primary processes should be simplified as much
as possible and that only the minimum of information should
be required to reduce bidding costs, particularly design
costs.
(9) That clients and bidders should be engaged as early as possible in
the design process to avoid nugatory expenditure.
(10) That care is taken in the drawing up of contracts to ensure that the
education service gets the maximum benefit from surplus as?sets and opportunities for generating additional income.
(11) That there should be sufficient flexibility in the terms of contracts
to cope with changing educational needs and circumstances.
This may entail the inclusion of “get-out”clauses and inbuilt re?view mechanisms.
(12) That options for contract renewal after the contract expires are
clearly defined and written into PPP contracts.
(13) That public sector comparators must be reliably calculated. This
will entail stringent resource accounting by the public sector,
42
particularly with regard to costing staff time, and a realistic
approach to projecting maintenance costs.
(14) That the Department of Education must take early decisions, in
consultation with all education partners, about how to make
provision for PPP repayments without jeopardising schools’ LMS
budgets or the education capital budget. Protection for schools’
LMS budgets should be guaranteed.
(15) That the Department of Education should revise its strategic plan
to take account of its proposed commitment to PPPs and to clar?ify the long term public expenditure implications of PPPs on
education spending.
(16) That there should still be a public sector capital budget available for
priority education projects which are inappropriate for a PPP
approach.
(17) That there must be a detailed exploration of the implications of the
bundling concept, particularly its possible repercussions on
small and rural schools.
(18) That the Department of Education should set up mechanisms for
meaningful consultation on PPP proposals between all
43
partners in the education sector i.e. The Department, the
education authorities, staff and their representatives.
(19) That better provision should be made for public accountability for
procurement decisions, taking into account not only financial
considerations but also public and local community interest in the
provision of public assets and services. This should include cost
benefit analyses, public consultation and planning enquiries.
(20) That PPP policy should ensure that local employment and local
businesses are given every opportunity to participate in PPP
projects.
44