Flawed schools cost capital Â£100m too much, says PFI expert
When Storm Gertrude whipped across Britain at the end of January it blew the wall off an Edinburgh school and the lid off Scotland's PFI scandal.
The high winds which damaged Oxgangs Primary at the start of the year led to structural concerns about the building and ultimately uncovered structural flaws in 17 city schools, which have had to close for safety reasons – creating chaos for thousands of children and their parents.
As Edinburgh’s crumbling classrooms cause yet more uncertainty for pupils, the disruption has shone a light on the complex and contentious financing mechanism that was championed by Labour to build these schools.
The so-called Private Finance Initiative (PFI) model used to fund public sector building projects has been criticised as an expensive drain on public money, which in the case of Edinburgh has produced substandard schools.
Calculations carried out for Scotland on Sunday suggest that the 17 affected schools – which were all built or refurbished using a phase-one public-private partnership (PPP1) – could have been built for around £104 million less had an alternative funding method been used.
It has also been calculated that the overall cost to Edinburgh City Council of paying for PPP1 and its sister scheme, PPP2, which has funded a further eight schools in the capital, will be far in excess of £1 billion.
Furthermore, serious questions have arisen about the offshore funds which own stakes in the projects once they are sold off or spun out by the construction firms involved.
Today Scotland on Sunday can reveal that much of the equity in Edinburgh’s PPP1 and PPP2 schools is owned by funds registered in tax havens of the Channel Islands.
While there is no suggestion the funds are not paying UK taxes, critics of PFI have raised questions about public building projects being owned offshore.
Under the PFI model, private firms build and operate facilities such as schools and hospitals which public bodies then rent back over the long term.
The public sector authority signs a contract with a private sector consortium, technically known as a Special Purpose Vehicle (SPV). The SPV tends to be formed to provide the PFI and is typically owned by a number of private sector investors, usually including the construction company, service provider and a bank.
In the case of the 17 closed Edinburgh schools, the SPV is Edinburgh Schools Partnership, a consortium led by Amey and Miller Construction, the well-known builder which was acquired by Galliford Try in July 2014.
Dexter Whitfield, director of the European Services Strategy Unit think tank and a PFI expert who has given evidence on the economic model to the House of Commons, claimed the model was a “licence to print money”.
Using official data, Whitfield calculated that Edinburgh’s PPP1 contract would cost Edinburgh City Council £532m over three decades – a sum which includes a building cost of £129m and £200m for day-to-day cleaning, catering, ground maintenance and other services.
When the construction cost and day-to-day services are subtracted from the £532m total, Whitfield claimed that a sum of £203m would have been collected by Edinburgh Schools Partnership.
Had Edinburgh City Council eschewed the PFI method and organised the contract itself, Whitfield said the project would have been funded via the HM Treasury Public Works Loan Board. Assuming the same construction cost of £129 million, Whitfield used the Public Works Loan Board interest rate in late 2001 – when the contract reached financial close – to make his comparison.
Using an interest rate of 4.25 per cent, the estimated cost of borrowing £129m over 30 years was £228m. When the £200m for services was added, the total came to £428m – a figure that would have saved £104m for the public purse when compared with the PFI total of £532m.
“I am very confident £104m is the ballpark figure based on the reasonable facts,” said Whitford. “Basically the council has paid over the odds by £104m for 17 schools. Many local authorities were initially reluctant to engage with PFI but then it became the only show in town, which meant that if councils needed new schools they had no option but to use PFI because successive governments choked off public sector capital spending. It is a continuing scandal.”
Edinburgh City Council’s PFI bill amounts to far more than just the £532m cost of PPP1. There is also the public cash being spent on its PPP2 programme – set up to deliver the Juniper Green and Bonaly primaries as well as the secondaries of Tynecastle, Holyrood, Craigroyston and Broughton, and the joint campus of Forrester and St Augustine’s.
The cost of PPP2 will come in at more than £735m by 2038/39, putting the total PFI spend on Edinburgh schools at well over £1.2bn.
Research carried out by Scotland on Sunday shows that Edinburgh Schools Partnership – which runs the PPP1 schools at the centre of last week’s controversy – is owned by four funds.
A fund managed by Aberdeen Asset Management owns a 30 per cent share in ESP. Semperian PPP Investment Partners owns 33 per cent and 3i owns 17 per cent.
The Guernsey-registered John Laing Infrastructure Fund (JLIF) owns a 20 per cent share.
Links to the Channel Islands can also be found in PPP2, which is 100 per cent owned by Guernsey-based HICL Infrastructure.
Whitfield said that while the SPVs running the schools paid tax, the funds behind them were not based in Guernsey “for nothing”.
“The question is whether they are paying the full amount of taxes because they’ll get tax breaks and all kinds of things. In terms of the parent companies, quite clearly they’re in Jersey and Guernsey to avoid taxes,” Whitfield said.
Mark Hellowell, an expert on PFI based at Edinburgh University, said the ownership of the buildings by investment funds created a “clear risk”.
“These projects end up not being owned by big engineering companies but specialist investment bureaux that tend to be offshore and operate in non-transparent ways,” he said.
“The fact that these assets tend to get sold by the original construction company to financial investors with no knowledge of civil engineering creates a clear risk. These are very long-term contracts, but the original engineers don’t necessarily have a strong interest in making sure these buildings will stand the test of time because they know that relatively early on they’ll be able to divest themselves of the associated assets. The people who buy the equity are then on the hook if things go wrong.”
The closure of Edinburgh’s PPP1 schools began when contractors carrying out repairs at Oxgangs warned of missing header ties – structural fixings that attach an outer wall to an inner wall.
With continuing uncertainty over when the affected Edinburgh schools will re-open, architects last week led calls for the procurement of schools to be passed back to councils.
While the SNP government scrapped PFI deals with the creation of the non-profit distributing (NPD) Scottish Futures Trust in 2008, there is still disquiet over the way public procurement is handled.
Alasdair Stephen, of the award-winning Dualchas Architects, said many of the country’s brightest and best designers are continuing to be frozen out by a process which “reinforces mediocrity”.
“There’s a much bigger issue here than missing wall ties,” he said. “The issue is that PFI schools are poorly designed bits of architecture which will not inspire learning, and that’s a huge problem. The buildings built under PFI are not just mediocre, some of them are absolutely terrible.
“Although the SNP’s NPD system is immeasurably better than PFI, cost still trumps quality.”
Defenders of PFI schemes, however, say that the model whereby developers finance buildings has enabled the speedy construction of large-scale public buildings at a time when public money was scarce.
They also argue that the contracts allow local authorities to deduct payments when things go wrong – placing a massive incentive on developers to sort out problems.
In the case of Edinburgh, the closure of schools has already led to the city council deducting a large sum from its £1.5m monthly payment to the Edinburgh Schools Partnership.
There have also been suggestions that the local authority is lining up a hefty compensation claim as more public money is spent on dealing with the 7,000 or so children affected by the crisis.
The mounting costs include emergency welfare payments to parents living on benefits, bus and transport costs to ship students to different schools, staffing costs incurred from managing the crisis and any costs for hiring additional facilities while the schools are closed.
It remains to be seen how successful the council will be in reclaiming any of this cash and it is understood that the local authority has not ruled out taking legal action.
According to construction lawyers, there may be provision in the PFI contract to compensate the council. But there could well be a dispute over how much that should be.