| Figure 1 portrays quite the vision of utopia masking what is the largest English school building programme for over 25 years! There are more than 3500 secondary schools in England and it is estimated that 3000 of these require significant capital investment outside the existing Private Finance Initiative1 (PFI) contracts. Total spending under the Building Schools for the Future (BSF) programme is likely to be between £30 billion and £45 billion in the secondary estate (secondary education facilities) alone over the next 15 years. (Note that expenditure in state schools rose from £683 million in 1996-97 to £33 billion in 2002-03.)
Overview of the BSF Model
BSF was announced in February 2003 as a new approach to investment whereby capital would be used more strategically to improve the performance of the delivery chain. It was undertaken, in part, to support the findings of a study undertaken in 2002 by twelve authorities2 to explore the possibilities offered by modern materials, building techniques and computer technology to create innovative learning environments that inspired children to achieve more.
Design would figure prominently in the large-scale procurement and, to this end, eleven signature designers were commissioned on five primary schools, five secondary schools, and one all-through school. Their aim was to come up with benchmarks of good design. Each designer was also challenged to incorporate innovation that would speed up the process of specification and design development.
Local Education Partnership (LEP). A key to the BSF initiative is the establishment of long term partnerships between private and public sectors to deliver long-term provision, maintenance, renewal and management of schools. At the core of the BSF delivery model is the Local Education Partnership (LEP), a public-private partnership between a local authority responsible for a BSF area programme, Partnerships for Schools3, and a private sector partner selected in open competition under European Union procurement rules. An LEP is a joint-venture company focused around the delivery of the strategic investment programme for its area. In the programme, ownership and responsibility for all aspects of local education (including capital investment) remain with local authorities.
Figure 1: Artist's impression of the outcomes of the UK's Building Schools for the Future programme.
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Eleven local authorities have been announced as the first wave of LEPs to work up their strategic business cases to implement the BSF programme. (It is within these eleven authorities where the designers mentioned above are developing benchmarks to be used throughout the UK.) Two reserve authorities will do the same in case any of the first wave members’ SBCs do not fulfill the robust guidelines established by Partnership for Schools. Whilst it is unlikely that the eleven designers’ original schemes will be adopted entirely by the LEPs, elements such as buildability, sustainability, materiality, colour schemes and use of natural light/ventilation would act as minimum standards to be attained in any proposal.
The LEP Structure: What Delivery Mechanism is Right—Fat or Thin?
Three potential groups comprise each LEP, each responsible for one of the following functions:
1. Strategic Approval. Each LEP board is responsible for the business of schools delivery. Each board has a minimum of five voting parties, one representing the local education authority, one representing Partnership for Schools, and three private sector partners.
2. New Project Development. This group has to deliver recommendations for the implementation and ongoing improvements to the strategic business case. Its members must be able to perform estate planning; join up funding streams and information communications technology planning; integrate with educational support services; and ensure business continuity (decant without disruption to normal school activities), project development and supply chain assembly.
3. Delivery phase. This group undertakes a fully integrated approach to building supply chain implementation and facility management.
Skill sets 1 and 2 constitute a thin LEP, whilst skill sets 1, 2 and 3 constitute a fat LEP. Market intelligence tells us that up to 85 percent of the local authorities will opt for a fat LEP, (128 of the 150 local authorities).
Financing: LEP Risk
Ultimately the LEP will be responsible for maintaining and developing supply chain relationships that bring about continuous improvement in the delivery of new projects as the local programme unfolds. It is expected that experience from the delivery of approved projects will feed back to improve the quality of future proposals.
The LEP will need to be adequately capitalised to fund its partnering activities and to manage any risks it retains in delivering approved projects. This capital will need to be provided either by its shareholders as equity, or by banks or other lenders as debt. In Option 1, described below, it is assumed that the LEP will be entirely financed by equity and shareholder loans. It will, therefore, recover its costs and earn returns through the contracts that it delivers successfully.
Figure 2: Option 1- The LEP as integrated service provider (thin).
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Figure 3: Option 2- The LEP as integrated service provider with special purpose vehicles.
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The LEP may or may not take commercial risks in relation to delivering approved projects through its supply chain; however, in Option 1 it will bear a number of such risks in relation to those contracts. Other contractual arrangements are possible as long as they are approved by all LEP shareholders
Option 1: The LEP as Integrated Service Provider (Thin). If this scenario (Figure 2) were suitable for a participating local authority, the LEP would develop and deliver all approved projects, contracting itself with the local authority and taking the prime commercial risk, which it could then seek to allocate amongst its supply chain. This scenario creates by far the strongest single point interface for the public sector and maximum potential for integrated service delivery.
Whilst this model is very attractive from the public sector point of view in terms of a strong integrated public-private partnership, it has three major downsides4 4:
- Cross-contamination of different contracts and/or lines of activity
- Complications in creating PFI structures amenable to limited recourse debt finance
- A complex and potentially less liquid equity proposition for private equity investors interested in PFI schemes.
Option 2: The LEP as Integrated Service Provider with Special Purpose Vehicles. It may be necessary for the LEP to set up special purpose vehicles (particularly for PFI contracts) to avoid enabling limited recourse finance for PFI and provide the ability to ring-fence the risks of individual contracts. This would lead to a variant of Option 1 whereby the strategic partnering agreement would allow the LEP to deliver approved projects either itself or through special purpose vehicles (Figure 3). These vehicles would be wholly-owned or majority-owned by the LEP in most cases.
This option provides the LEP with the control it would need to ensure good performance across all the contracts and, in turn would govern its ability to secure future work. The LEP’s majority ownership of project companies would not be essential, however, if there were other contractual arrangements for securing LEP control over the performance of project companies.
From a lender’s point of view, this structure preserves the familiar PFI contracting arrangement and enables limited-recourse debt financing of these schemes to operate in the way that is familiar to the market. Moreover, it allows banks to lend to a portfolio of PFI schemes in a local area, which should create efficiencies in the procurement of finance, not least through the greater use of standardised contracts and lower due diligence costs. These features make this structure more bankable than Option 1.
From a private equity investor point of view, the model provides the flexibility for equity investors to be a part of the private sector partnership and to invest directly in the special purpose vehicles set up for approved projects. This flexibility will allow for the efficiencies possible through portfolio investing across a range of PFI projects, resulting again in benefits for both the public and private sectors.
Figure 4: Option3- The LEP as delvelopment company with the private sector partner as service provider.
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The main issue here is likely to be the balance of control of special purpose vehicles between the LEP and private equity investors. If the latter wish to take direct controlling stakes in these vehicles, they would need to seek LEP shareholder consent and possibly provide the LEP with some fall-back contractual rights to step-in and remedy poor per formance if the special purpose vehicle were under-performing or defaulting on the contract.5
Option 3: The LEP as Development Company with the Private Sector Partner as Service Provider. In this version (Figure 4), the LEP would be purely a development company responsible for bringing forward new projects for the local authority’s approval and assembling the supply chain to deliver them, and would not bear any commercial risks related to the approved projects.
The private sector partner can directly capitalise special purpose vehicles to deliver projects, allowing debt to come in at that level, and private equity to come in either at the private sector partner or special purpose vehicle level, with maximum liquidity. The private sector partner could also set up an equity holding company (as in Option 2) that could invest across a portfolio of PFI projects. Third party equity could come into this holding company as well, which, in turn, would maximise the efficiency with which private finance could be raised for PFI schemes.
This model also easily addresses the “cross-contamination” problem associated with Option 1 because of its flexibility.6 It could prove less attractive than Option 2 from the public sector point of view, however, because the LEP’s role would be diminished to a pure development role, the LEP would be less effective, and it would become only a temporary presence.
The business model is more likely to lead to multiple points of contact for the local authority as customer, with the LEP being the interface on developing new projects, but the private sector partner (or one or more of its constituent parts) being the interface on the delivery of approved projects. Such a situation could make integration across different lines of activity (particularly building contracts and ICT) more difficult.
Summary
Whether or not the LEP is led by management consultancy, contractor or education support service, it is clear that the prime contractor will have to display expert knowledge in programme management, information communications technology, supply chain management (building and design) and facilities management (hard and soft).
Whilst PB is very well placed and flexible enough to be a prime mover in any LEP scenario, we must not forget the underlying reason for such an ambitious programme—education transformation, or the need to raise education . |
