The Private Finance Initiative & the Education Market
By Jonathan Rutherford
23rd February 2003
Gordon Brown's recent speech to the Social Market Foundation was widely reported as a riposte to New Labour's promotion of the market as the solution to long term public sector underinvestment. A read will disabuse the idea of a radical change in New Labour thinking. Brown is committed to making market's work and increasing their involvement in the delivery of public service infrastructure. He argues that PFI is quite distinct from privatisation. 'The public sector can harness the efficiency created by private sector competition, and retain control over the services... there should be no principled objection to PFI'.
The PFI was launched in 1992 by Norman Lamont as an accounting device to limit public borrowing. In 1997, Paymaster General, Geoffrey Robinson and his advisors from Arthur Anderson set up Partnerships UK in the Treasury with a remit to promote and extend the PFI both at home and overseas. The PFI has become a major alternative income stream for public expenditure. On November 18, 2000, Gordon Brown told the Private Finance Annual Conference, 'I hope bankers and their credit committees get the sense of security they intuitively search for ... in the very real continuous flow of business opportunities that schools, hospitals, prisons, roads and government accommodation projects offer for the long term. These are core services which Government, whether local or central, is statutorily duty bound to provide, and for which demand is virtually insatiable.. Where else can you get a long term business opportunity like that'.
In October 2002, the Office of Government Commerce reported a total of 524 PFI schemes at a capital value of £22.9bn. The amount is based on the public sector estimates for capital expenditure which are, on average, just 22% of the total costs of PFI projects. For example the extension to Wythenshawe Hospital in South Manchester is put in at £65.6m. Alfred McAlpine, reports total revenue flows will be £550m over thirty five years, plus additional equity returns through renegotiating its loans after completion. Add to this advantageous land sales and asset transfers and the public sector contribution goes up even higher.
Unlike the health sector, education is a relatively undeveloped market with 81 projects in England, the majority in the schools sector, at a value of £1.5bn. Nevertheless this is changing rapidly. Over 500 primary and secondary schools are already part of PFI schemes, either signed or in procurement. A further £900m has been committed up to 2006. The global dimension of this market has been realised with the £34m scheme to build and manage four primary and secondary schools in Ealing, North London, awarded to the Japanese bank Sumitomo Mitsui Banking in partnership with construction company Kajima. Minister, David Miliband is currently negotiating a £45bn PFI plan to refurbish all British secondary schools. Dave Batty, Director of the Pricewaterhouse Coopers Project Finance team estimates that by 2005 there will be over one thousand operational Public Private Partnership schools. All this excludes the government plans to create 1500 business backed specialist schools by 2006.
The case for PFI has been justified on a division between non core, infrastructural services and core social domain services like teaching. The division has already been substantially broken down across the public sector by a range of techniques such as Public Service Agreements, new performance based public management systems, regimes of best practice and Value for Money. These forms of governance make public sector organisational cultures receptive to private sector participation. Plus, there is evidence that the aspiration of private companies to manage and deliver core services is shared by government. New DfES guidelines on PFI are speeding up 'the transformation of the school estate', using criteria which are based on 'proving that the project will help transform educational attainment'.
A significant new market is being created out of the system of publicly funded education in the UK. It is transforming the old public private sector divide. The French sociologist Michel Callon argues that for an object to become a commodity it must become an object of calculability and must be 'disentangled' from its social ties so that it can be sold. The market must frame its actors and their relations in order to make them clearly distinct and disassociated from one another. Briefly I want to identify the actors in the emerging PFI education market.
A typical PFI scheme involves the public sector client, the private sector operator, the financial lender, the building contractor and sub contractors, a number of technical, financial and legal advisers, and the facilities management team. The private sector establishes an independent legal company called the Special Purpose Vehicle which bids for the contract. The contract is central to disentangling the service from its social ties. It exclusively defines the parties with a legitimate interest in decisions effecting the project and its outcomes as those contractually involved. What pertains to be relevant to the scheme is what is written in the contract. Price and contract displace social values. F.A. Hayek makes this point in his 'The Principle of a Liberal Social Order': 'Strictly speaking it is meaningless to speak of a value 'to society' when what is in question is the value of some services to certain people, services which may be of no interest to anybody else.'
Key actors in the PFI market have been banks like HBOS, Abbey National, European Investment Bank, Bank of America , Barclays Bank, the Royal Bank of Scotland play major roles as PFI arrangers. The influence of the financial services industry is reflected in the number of institutions which have an equity stake in UK Partnerships. Abbey National Treasury Services plc, Sun Life Assurance plc, The Prudential Assurance Company Ltd, Barclays Industrial Investments Ltd, The Royal Bank of Scotland plc/Bank of Scotland and Halifax Projects Investments Ltd, form the great majority of shareholders.
A growing number are establishing longer term strategic partnerships with construction companies like Accord, Alfred McAlpine, AMEC, Amey, Balfour Beatty, Bovis, Jarvis, John Laing, Kier Project Investment Ltd, and WS Atkins plc. PFI's are transforming the construction sector as these companies turn themselves into Support Services' Infrastructure Management Companies to take advantage of the the higher returns to be found in the PFI and outsourcing markets. For example, leading arms manufacturer Vosper Thorneycroft owns the Careers Management Group which provides Connexion services in areas of London and the South and has recently acquired the supplier of schools inspection services, Westminster Education Consultants Ltd.
The large accountancy corporations are ubiquitous. PricewaterhouseCoopers has a large PFI practice of 132 projects across the UK, as well as being auditor of 22 authorities. KPMG has negotiated more than £7.5bn of public sector deals using PFI and PPP, and provides audit services to over 40% of Higher Education Institutions in the UK and to over 30% of FE Colleges. Law firms are also significant actors , reflecting the significance of contracts in framing the scope of legitimate interests and responsibilities. Eversheds has over 94 HEIs and 230 FE colleges as clients. John Boardman, head of Eversheds' Education North, commenting on its recent contract with Sheffield Hallam University identified the source of law firms' expanding work in the sector: 'The appointment highlights an increasing drive within the education sector for universities to put more of their services out to tender.'
As the PFI market develops, the private sector is demanding the standardisation of contracts and bidding procedures. The drive for economies of scale is encouraging the 'bundling' of schemes across services such as housing, schools, social services into single larger packages. Partnerships are becoming self standing companies using existing revenue generating PFIs to bid for new schemes. Government policy, particularly its Comprehensive Spending Reviews, has driven public bodies down the PFI route, creating a corporate welfare network in which the high bidding costs favour the established large corporations.
Less obviously, but no less significant, the PFI is integrating public services in the capital markets. Historically, funding for PFI came from bank debt, but more recently bonds are proving an attractive form of long term financing. Bonds require an international rating. To secure a good rating and lower the cost of funding, companies buy insurance for their bond issues from Monolines. Monoline insurers in the UK are US owned AMBAC UK and MBIA who both guaranteed a £30m bond issue by the Royal Bank of Canada Financial Group, for the Greenwich University PFI. A third US Monoline, Financial Security Assurance Inc (FSA) was bought in 2000 by leading European Bank Dexia for $2.6bn. Dexia has acted as arranger and lender in more than 20 UK PFI projects. Pierre Richard, CEO of the Management Board of Dexia told a June, 2002 meeting in Paris, 'For the Dexia Group as a whole, public sector clients are a mine... we are just beginning to exploit them.'
Bonds require an active secondary market which will persuade investors to take on new assets in the primary market knowing that they will be able to sell them on if necessary. 2002 saw PFI projects establishing a secondary market. M&G and Innisfree launched a £100m PFI fund. Abbey National and Babcock and Brown set up the Secondary Market and Infrastructure and Facilities Fund managing £1.5bn worth of PFI and PPP assets. Grosvenor House Group, in partnership with an unnamed bank, opened a £30m PFI fund. In the same month, Monoline Ambac UK initiated a European insurance programme which would allow investors in project finance to transfer the bond and insurance policy in the secondary market. Increasing the liquidity of PFI bond financing will encourage the global buying and selling , and hence ownership of, PFI project debt.
It would be wrong to imagine that constructing this market has been straightforward. There are a growing number of market failures. In March 2002, Amey, a significant actor in the PFI market unveiled losses of £18m. Its share price collapsed and it sold its stakes in all its PFI contracts. In November, WS Atkins the consultancy and facilities management group, disbanded its education outsource department and sacked 400 employees and its Head of Education. Profitable PFIs are also subject to takeover. Edison Capital, a subsidiary of US electricity company Edison International, entered a joint venture with Scottish contractor Morrison Construction to take control of 5 PFI schemes including the Clarendon College project. In September 2000 Morrison was acquired by the Anglian Water Group as it branched out into infrastructure management. When AWG lawyers discovered unexpected losses at Morrison, AWG pre-tax profits fell by 38%, creating problems for the planned securitisation of its assets. In June 2001, Noble PFI Fund acquired Edison capital's UK PFI investment portfolio. The problems between Morrison and AWG is ending in High Court Action with AWG claiming £130m damages.
PFIs are bound by commercial secrecy, increasingly funded by arcane financial packages and vulnerable to mergers, acquisitions, rising and falling capital markets, inflation, deflation, bankruptcy and grandiose corporate ambitions. The influential European Services Forum is lobbying for public procurement in services to be part of the GATS, a move which will increase the liberalisation of the secondary market in PFIs. There are important questions to be asked about who owns and is accountable for these schemes and about their affordability in the long term. The government has actively promoted PFIs in education at a time when the DfES has reported year on year massive underspends in its budget and the Treasury's current account surplus for 2000-01 alone was £23bn. In local authority deals, central government only covers 75% of the capital costs. Who will bridge the gap twenty years down the line? But maybe the more significant question is what alternatives do social democratic critiques of marketisation and the PFI offer?
By Jonathan Rutherford