Bristol’s education system is struggling because of poorly planned and hopelessly optimistic private finance initiative contracts.

Words: Sid Ryan
Illustration: Mish Scott

Education is fast developing as an industry, as the flurry of ‘providers’ established in recent years merge and consolidate into corporate chains, regional blocs and specialist suppliers. This new market offers council-run schools, private schools (which can be businesses, charities or trusts), grammar schools, academies, multi-academy trusts, free-schools, religious schools, and more. While some people focus on this new array of ‘private interests’ gaining control over teaching, it’s worth remembering the ones that have been quietly taking over Bristol’s schools for a decade.

Bristol’s schools got their last taste of the business world when government tried to introduce a market to the education system via the private finance initiative (PFI). In the mid-2000s it stopped paying for new schools, instead inviting private financiers to fund most of its infrastructure programme. In PFI, a group of companies signs a contract with a public body to build a school, the contractors get a bank loan to pay for it and the council agrees to rent the building back for the next 30 years to pay off the debt.

The private bank loan to fund the construction at the heart of a PFI is inherently more expensive than public funding, due to a higher interest rate, onto which you add swaps, hedges, management, advisory fees and more.

The giant loan stretched over the decades means spending millions each year just on servicing the interest. The council’s most recent estimates show £133m of outstanding loan agreements with PFI contractors, onto which £129m of extra interest charges will accrue between now and 2035.

The ‘affordability gap’

The extra interest charges and higher total cost of private financing was understood by local authorities when they entered these deals. But they needed schools and it was government policy, so there was no alternative. Bristol council found themselves in the position of having to sign a 30-year contract containing an in-built ‘affordability gap’ set to drain its other budgets.

Twelve years since the first contract was signed, the affordability gap has become our problem – putting massive PFI repayments in direct competition with having more teachers and better education. With the financial appendices of the original plans redacted for embers of the public, it is unclear what the exact cause of the affordability gap is, but what’s obvious is that it exists, that it’s big and that it’s growing.

Let’s pick apart the 2015/16 figures from the bigger PFI contract, with Bristol PFI Ltd, delivering four secondaries and a primary school for 5,660 students in 2006. The treasury’s data is the the closest indication of the ‘planned’ PFI bill, which reads £15.5m for the year, whereas actual invoices from Bristol PFI Ltd come to £20.8m, nearly £3,700 per pupil. This contract is 25% overspent and has 18 years left to run.

While costs are ballooning, government support for the schemes is drying up. The grant to pay for both schools now only pays for the largest, leaving £12m per year for the other contract coming from the council and the schools themselves. Worse still, PFI payments rise annually with inflation but the government grant support doesn’t, leaving a widening gulf that inevitably means an education system that’s lower in both quality and equality.

Paying the piper

Bristol council is left with a tricky problem: costs are way up and its allocated government funding is down. Unlike most overspent budgets, this one can’t be cut because of the ironclad contracts with the PFI companies. Even the most drastic cut, closing the school, will leave the council being charged for cleaning the empty corridors and still repaying the loan, which is just free money for whatever intermediary happens to be holding the contracts at the time.

On a similar note, the council could refinance the PFI loan to try and reduce the cost, but this would be false comfort. Yearly payments would be reduced, but debt pile gets pushed a decade or two further into the future and still grows at approximately £12m each year. It’s the kind of short-term thinking that got us into this mess to start with.

The only real option for dealing with this affordability gap is to to keep paying, and keep paying more. Last year a ‘one-off’ extra £5m was funnelled from Bristol’s Dedicated Schools Grant to the PFI contracts. The money didn’t solve anything and it wasn’t invested in anything, it was just to keep up with payments so they can be aggregated onto some fund manager’s balance sheet with preferable tax treatment.

Continuing to pay up at the expense of education isn’t right, but nothing else really really works – which makes the contracts a mess better swept under the rug and left for someone else to deal with. ‘Someone else’ in this instance includes the children just starting school, onto whose shoulders all this debt is accruing.