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

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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

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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

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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.

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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,

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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

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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

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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

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(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,

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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

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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

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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

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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.

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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

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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

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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

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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

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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

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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.

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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.

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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.

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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.

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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

• The Implications of Public/ Private Partnerships for Education Services in Northern Ireland (Standing Committee B) (introduced on 1997-12-05 00:00:00 - CREATE - e836565) [This document] [view current proposal at this moment]
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