Glasgow council’s announcement came in the same week that the Department for Education and Employment announced a further release of funds to be spent on PFI schools. The government has earmarked about £1.6bn for PFI schools projects between 1998 and 2002. Since 1998, it has spent £350m a year, but from 2001-02 this goes up to £450m. The large sums are part of a £5.5bn pot of gold to be spent by the DFEE to alleviate a massive backlog of repairs to Britain’s crumbling schools.
The schools market is one of the PFI sectors that is slowly starting to mature. But any firm looking to make money in this market should be prepared to do its homework.
Like the troubled PFI hospitals before them, PFI schools are expensive to bid. There is the problem that councils are likely to want the cheaper option of refurbishing buildings when a new building would involve less risk for the operator. On top of this, getting the bid approved often involves coming up with a proposal that suits everyone – from the council to the chemistry teacher.
Protracted bidding
That the process is not straightforward is highlighted by the fact that, so far, only eight PFI schools projects have reached financial close. As with all PFI projects, the bid process is protracted. From initial notice in the European Union’s Official Journal to appointment of preferred bidder can take eight months or more. The council will send an invitation to negotiate to three to four consortia. In 50% of cases, the council then introduces a “best and final offer” stage.
“BAFO is about the design and facilities management proposals as well as price,” says John Tibbitts, investment manager at Kier Project Investments. Kier is preferred bidder on the long-running Pimlico School saga. “It is difficult to get a design everyone is happy with first time around,” he adds. The bidders have an opportunity to take on board any comments and tighten up their proposal before the preferred bidder is selected.
Once a preferred bidder is chosen, the detailed negotiations on the legal and funding issues begin, and it can take anything from three months upwards to reach financial close. The legal issues of the contract involve complex discussions about how the PFI provider’s performance will be measured. The consortium and client must lay down details such as the level of lighting to be maintained at desktops at all times. The catering facilities must be able to provide options to suit different dietary requirements. As an added complication, since early this year the services are market-tested. Every five years, the PFI provider and council get together to benchmark the performance of, say, the caterers compared with those at another school. This process will show if the concessionaire is paid too much or too little, and the payment is adjusted.
Expensive advice
Obtaining the financial and legal advice necessary to put together a complex bid is costly. A contractor can expect to pay about £1m on a PFI schools deal worth £20m over 20 years, should it reach financial close. Other contractors report bid costs of 10% of the value of the contract. And the competition is fierce, with between 15 to 20 responses to any notice in the Official Journal.
But moves are afoot to reduce the financial burden of PFI deals for both contractors and local authorities. A number of projects, such as the Glasgow scheme, have bundled together several schools into one deal. Brian McCarthy is bid director at Balfour Beatty Capital Projects, which was named preferred bidder on the £125m Stoke-on-Trent schools project, a bundle of 120 schools. The firm also made a bid for the Glasgow scheme.
“We don’t think single schools are value for money in terms of bidding costs,” says McCarthy, “but grouped schools with a higher value are better value for money in bids.”
But bundled schools tend to lean towards huge amounts of refurbishment, which involves greater risk for the bidders. They are faced with assessing a large number of buildings to see what the whole-life repair and maintenance costs will be in a short space of time. The more extensive the surveys, the more it costs them in the early stages of the bidding process – and the more they have to lose.
Stephen Prendergast, managing director of Amec Education, found that the sums did not add up. “We looked at one project where we got the survey from the council four days before the bid had to be submitted. We concluded that it needed new roofs and electrics and we thought we should just knock it down,” he says. Amec estimated that it would take £7m to do the repairs but the council’s budget was £2.5m.
Amec has tried to convince local authorities that new build is best. And, in some cases, councils are listening to contractors. In Stoke-on-Trent, the initial instruction was to refurbish the existing schools. As head of premises and client services at Stoke-on-Trent City Council, Mike Inman was in charge of the “exhausting, exhilarating and exciting” project. Inman decided to be flexible with the deal and to see what the private sector came up with. It was, after all, his first PFI scheme. But when it came to the crunch, the best solution, provided by Balfour Beatty, was to rebuild 10 of the 120 schools.
The bidding contractors all made time-consuming surveys of the schools. They also met with the headteachers, governing bodies and staff to find out their views. “The schools to be replaced were 1940s and 1950s buildings with flat roofs, metal-framed windows and concrete coming off in chunks,” says Inman. The local authority was happy, and so were the heads, governors, parents and teachers.
Multiplying problems
Meeting the requirements of such a diverse bunch of interested parties can be a nightmare. The bidder needs great charm and diplomacy to navigate what can turn out to be a minefield of different interests.
One PFI provider recounts how he managed to win over the head and governors. With only the teachers left to convince, he attended a staff meeting where all the teachers were in favour of the project apart from one militant National Union of Teachers member, who had to be calmed down before he whipped the rest of the teaching staff into a frenzy of dissent. To avoid such confrontation at Stoke-on-Trent, Inman ensured meetings were held at every critical stage of the process for all the bodies involved.
Dealing with one head and governing body can be bad enough, but with a grouped deal the problems are multiplied. How do bidders ensure they do not upset one headmistress by providing a nearby school with a fully equipped gym while her own has to make do with a poky school hall?
In most cases, the limitations of the site will determine what facilities are provided. At the Glasgow project, Dimitrios Hatzis, managing director of Amey Ventures, explains that meetings with the heads were crucial to explain such restrictions. But for other projects, Hatzis thinks the grouped approach can work to the schools’ advantage. There is a greater opportunity for innovation – such as offering shared sports facilities.
The PFI schools market has some way to go before it becomes as mature as the prisons market. It is far more complicated because so many different parties have client input, and when a scheme is grouped the level of interest becomes vast. The process needs to be approached in a slow and measured fashion so that mistakes can be learned from and successful working methods recorded. A greater level of standardisation in terms of contracts and methods of payment is also needed.
But one thing is sure – the market will not go away. As Hatzis says: “Education is not like arms dealing; it is a sector that is needed.”
