Value for Money Examination 48: The Grouped Schools Pilot Partnership Project

Summary of Findings

Public private partnerships (PPPs) are contractual arrangements under which private sector partners deliver projects and services that traditionally were delivered directly by the public sector. The concept involves the public sector partner specifying clearly the outputs and service levels required. Payment is subject to the agreed outputs and service levels being delivered by the private sector partner. This arrangement aims to give the private sector partner scope to decide how best to deliver what is required, with the potential to make efficiency improvements and reduce costs. The risks inherent in the development and delivery of each service are allocated between the partners, depending on which partner can manage them best. On that basis, PPPs have the potential to deliver better value for money in the provision of public services.

PPPs may be structured in a number of ways, with varying degrees of involvement of private sector participants. The contractual arrangements become more complex as the degree of involvement of private sector participants increases. In order to test the feasibility and value for money that can be achieved in partnership projects, the Government approved a pilot programme of PPP projects in June 1999. Adopting a ?learning by doing? approach, the aim was to identify issues and problems encountered during the implementation of the pilot projects, and to use the information and learning to develop PPP policy and enhance the PPP process.

The pilot programme included a ?grouped schools? project proposed by the Department of Education and Science (DOES). The project was the first of the pilot programme projects to reach the agreed contract stage. This examination was carried out to provide an input to future PPP arrangements through the identification of any shortcomings in the conduct of the pilot project to help guard against their possible recurrence in later projects. Specifically, it sought to assess

  • how the DOES developed its specification of requirements and managed the grouped schools project
  • how the proposals received from potential private sector partners were evaluated, in selecting a preferred bidder
  • how the value for money offered by the final agreed deal was evaluated.

Project Outturn

The DOES sought formal proposals from private sector partners interested in designing and building five new second-level schools on publicly-owned greenfield sites, and in maintaining and operating the school facilities for a subsequent 25-year period. The private sector partners were also asked to source the funding for the project. The successful bidder was Jarvis Projects Ltd (Jarvis).

The total time required to procure the five schools using the PPP approach was around three and a half years. Under the traditional approach to the procurement of new schools, the comparable elapsed time typically averages around four to five years. However, the relative priority for funding of individual projects is a significant factor in the elapsed time outturn for conventionally procured projects.

During initial planning of the grouped schools project, the DOES planned to have construction work start in April 2001, and to have the schools built, commissioned and operating by September 2002. Given the complexity of the PPP process, particularly in a pilot project, this timeframe was probably too ambitious. In the event, the agreed contract terms were approved by Government in November 2001. All the schools were completed and handed over by the end of 2002 and were operating in January 2003.

Subject to Jarvis meeting the agreed service levels in running the schools, the DOES will make monthly payments to Jarvis over the 25-year life of the contract. In addition, the DOES made a one-off payment in January 2003 to cover the cost of Jarvis?s liability for VAT arising on the handover of the school buildings. Total expenditure by the DOES associated with the grouped school deal is projected to be ?283 million (including VAT), or an estimated ?150 million in net present value terms.

Expenditure on the deal may be reduced if options built into the contract allowing the DOES to prepay the project debt are exercised ? assuming the circumstances are right ? or if refinancing of the deal by Jarvis results in reduced monthly payment amounts by the DOES.

Specifying the Project Requirements

The DOES?s initial proposal, approved by the Government in June 1999, was for a PPP project involving a bundle of three new schools. By the time the project was formally launched in the market in July 2000, the approved bundle had been expanded to include five new schools.

The point of putting together a bundle of schools was to create a project of a scale that would be attractive to potential private sector partners. At the time the project was launched, the expected cost of constructing and equipping three schools in the conventional way was in the range ?24 million to ?31million. This was significantly greater than the recommended minimum capital value threshold for PPP projects. The increase from three to five schools made the project more attractive to prospective private sector partners, but it also increased the State?s exposure in the event the pilot project would not deliver good value.

The DOES specified the type and minimum scale of accommodation to be provided by the private sector partner, taking account of the planned curriculum in each of the schools. The minimum areas specified ? involving buildings with gross internal floor areas totalling around 30,200 m2 in the five schools ? were based on the DOES?s existing area norms for second level schools. The final designs for the schools provided for buildings with gross internal floor areas totalling around 34,700 m2 ? about 15% more than the specified minimum.

The increase in area related mainly to provision for social and circulating space and for internal division. While this should result in an improved environment for teaching and learning, it also increased the cost of provision of the school buildings. The higher costs were passed on to the DOES in the form of higher payments over the life of the contract.

Unless the costs of higher standards of provision are offset by savings elsewhere, raising standards in some schools reduces the State?s capacity to meet demand in other schools when budgets are limited. Agreeing to provide higher standards of accommodation in the context of the grouped schools project also raises the issue of what accommodation standard is to apply in subsequent school projects, however they are procured.

The DOES did not at any stage set a budget or spending limit for the grouped schools project. This meant that at the time it went to the market seeking proposals, the DOES had no reliable benchmark against which to judge the affordability of what the bidders were offering, or the relative cost of procuring and operating the schools by the PPP and conventional approaches.

Selecting the Private Sector Partner

The DOES received project bids in February 2001 from three private sector consortiums that came through a qualifying short-listing process.

The Jarvis proposal was not the cheapest of the bids received, but was judged to be significantly better than the others in design and technical terms, reflecting an innovative approach to the design of the schools. When all the evaluation criteria were taken into account, it emerged as the preferred proposal. On that basis, the Jarvis-led consortium was named as the preferred bidder in March 2001.

The expected cost of construction of the schools increased during negotiation of the details of the contract with Jarvis. Some of the increases were attributable to the DOES, and so increased its projected expenditure over the life of the contract. These increases in cost were partly offset by reductions in interest rates on the commercial debt being raised for the project. Other increases in cost were attributable to Jarvis, and so were not passed on to the DOES. In general, the DOES appears to have maintained reasonable competitive tension in the course of the negotiations.

Evaluating the Cost of the Deal

The assessment that the Jarvis proposal was the best of the bids received did not, in itself, establish that it represented the cheapest way of procuring the required service. Before entering the contract, the DOES therefore carried out a comparison of the costs of procuring the schools and their operation over 25 years under the terms offered in the Jarvis deal, and the likely cost of using conventional procurement arrangements to procure schools of a similar size, and to run them over 25 years.

The cost comparison exercise ? completed in September 2001 ? concluded that procuring and running the schools through the proposed PPP arrangement would result in a saving of around 6% compared to procuring and running the schools conventionally. However, the analysis contained errors in relation to the timing and discounting of payments and overestimated the residual value of the school buildings at the end of 25 years. Correcting the analysis for these factors suggests that the DOES should have concluded that adopting the PPP approach to the procurement was likely to be in the region of 13% to 19% more expensive than conventional procurement. The analysis also indicates that the deal involved relatively little transfer of risk to Jarvis.

By the time final agreement on the deal had been reached in November 2001, a number of elements of the deal had changed. Specifically, it was decided that the liability related to VAT on building handover would be paid to Jarvis as a lump sum at the end of the construction period (thus reducing the borrowing requirement for the project and the level of the monthly payment over the project life), and interest rates had fallen. Taking these changes into account, the analysis suggests that the projected cost of the final PPP deal was 8% to 13% higher than the projected cost of procuring and running the schools using the conventional approach.

Ultimately, the full value for money represented by the grouped school project will be determined over the 25-year life cycle of the project. Furthermore, the costs and benefits of adopting the PPP approach should be assessed relative to the performance of a comparable group of schools procured conventionally. It is too early in the life of the contract to carry out such an assessment, but formal evaluation of the project over, say, the first five years of operation of the contract, would be desirable.

Lessons from the Pilot Project

The experience of developing and implementing the grouped schools project provided the DOES with significant new perspectives in relation to provision of second level schools.

  • It resulted in the provision of school buildings significantly bigger than allowed under the DOES?s area norms for conventionally procured schools.
  • The necessity of adopting a longer-term view in looking at the procurement and running of schools suggested that changes in building specification may potentially result in savings on maintenance and running costs, but may require higher levels of expenditure at construction stage.
  • The analysis undertaken also suggests that the costs of properly maintaining and running schools may be significantly higher than the levels of funding currently being provided by the DOES to second level school managements.

However, it is recommended that further careful analysis of the life-cycle costs and benefits be carried out before policy changes are made in relation to these aspects of schools provision.

More generally, significant changes have occurred in the way PPP projects are developed and managed since the deal was agreed for the grouped schools project. Based on the experience with a range of PPP projects in the education, transport and environment sectors, the Department of Finance revised its requirements for the procurement and appraisal of PPP projects. The new proce