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Steve Beechey, MD, education sector and investment solutions, Wates Construction

Revolution or evolution?

As the governments Priority Schools Building Programme enters its second phase, Steve Beechey weighs up the pros and cons

Posted by Dave Higgitt | October 29, 2014 | People, policy, politics, money

Time has a way of creeping up on you. It feels like only yesterday that worn-out schools dotted the country and construction was in the dark about how best to work in partnership with government to improve the school estate. Looking up and down the land, the present picture is very different. Since those dark days we’ve witnessed the well-documented ‘mega programme’ Building Schools for the Future (BSF) and the subsequent upheaval produced by its replacement smaller brother, the Priority Schools Building Programme (PSBP). Given the shake-up that occurred upon Gove’s arrival at the Department for Education (DfE), all eyes are watching closely to assess whether Nicky Morgan’s leadership upholds the commitment to the school building plans set in motion under the old regime. Whilst it’s always difficult to assess the long-term implications of a rebuilding programme on this scale, we can certainly draw a few conclusions from what’s occurred over recent months and what the next year may hold for the education sector at large. 

What’s been achieved?

Now that the recent controversial changes to the national curriculum have kicked into gear and parliament is back in session, the entire education sector is poised for either increased stability or, perhaps, renewed radicalism by Nicky Morgan, although early indications would point to the former rather than the latter. Time will tell as to what will transpire in the run-up to the general election, but for now let’s ponder what’s been achieved and what needs to be urgently addressed by the new-look DfE.

First the good news. Significant steps have clearly been taken since 2011 to bolster, improve and otherwise rejuvenate the school estate. The announcement in May of an additional £2bn in capital funding within this parliament went a substantial way towards addressing the condition of schools that weren’t allocated money in the first tranche of PSBP funding. A lot of ink has already been spilled on how the DfE under Michael Gove’s leadership grasped the nettle and made this significant commitment to support a significant rise in capital spending, although a great deal more should have been invested in order to really address the challenge of an under-funded school estate. However, it was a much needed step to back up the James Review’s recommendations with a mix of capital and private finance and to put the condition-based approach right at the heart of the DfE’s agenda.

However, cost remains an issue for many contractors, with a number of recent industry reports indicating that some are struggling to meet the pressures of affordability targets given the current inflationary cost pressures from suppliers and subcontractors. This is an issue that is not going away soon and will have to be taken into account by the new ministerial team if contractors are going to be able to follow through on the expected pipeline of work for 2015/16. 

Delivering on the school estate’s potential

After a two-year period where it has frequently felt like the schools sector has been in flux, we’ve reached another crucial crunch point: the start at the end of the year of the first bids for PSBP2. Many in construction will now be weighing up how to negotiate any obstacles that could emerge over the coming year, which may derail progress in this second phase of the programme. So how can the DfE, through the Education Funding Agency (EFA), best help the industry to prepare itself and meet the challenges likely to emerge over the next year?

First, the EFA needs to ensure that projects are costed fairly so the correct funding can be allocated in the design of a new school. For instance, at Wates, we have experienced significant issues surrounding ‘abnormals’ having not been properly assessed and costed on a number of school projects. With the base rate applied to every square metre of school floor space in the EFA’s calculation already quite low, particularly when the facilities output specification tends to be of a high standard, any miscalculation in the project cost can have a major impact on contractors already working to very tight margins.

Second, the EFA needs to continue to refine the bidding process. While bidding for a PSBP project is not as onerous as it was bidding for one under BSF, it is still time consuming, expensive and involves significant specialist resources. Moreover, the rewards on offer to contractors through PSBP are not as attractive to those which were available under BSF. The EFA therefore needs to continue to refine the bid process to bring down costs and make the programme efficient and attractive to potential bidders

Finally, as far as the EFA and government are concerned, I would argue that we need to tweak the planning system so there is a presumption in favour of school building projects. Some local authorities make the planning extremely onerous, causing months of delays; a system that assumes that a school project should get the go ahead, unless the authority and community prove otherwise, would help speed up delivery. 

Can PF2 truly take off?

July saw The Amber Consortium, made up of Amber Infrastructure, Lloyds, IPP, Aviva and EIB, appointed to oversee PF2’s financial aggregator – a mechanism set to raise £700m in debt finance destined to deliver the private finance element of PSBP. Whilst the headlines have concentrated on how this figure accounts for a smaller percentage of the overall funding package than was originally intended, we do now enter a crucial phase in the aggregator’s progress. As the aggregator, the consortium will have a difficult job on its hands to attract investors and pave the way towards producing £700m’s worth of investment for the PSBP.

When PF2 moved onto the agenda two years ago, it truly had the potential to be the ‘private finance silver bullet’ we’d been waiting for. Before its announcement by the Treasury, other alternatives for shifting financial liabilities off balance sheet had been touted: tax increment financing, local asset-backed vehicles and the non-profit distribution model. Despite the devolution of decision-making to a more local level, many of the funding mechanisms that could help achieve a greater level of decentralisation have proved to be non-starters or, at best, very late developers. What is more, whilst PF2 will underwrite around £700m of private funding, the fact of the matter is that the burden of spending has fallen on the DfE’s capital budget. Although the reasons for not relying on PF2 as an additional way of raising funds may become clear in the fullness of time, it’s concerning that a funding mechanism that was touted with such fanfare only relatively recently should be marginalised to such an extent. 

Final thoughts

This is an exciting time for contractors, with a flurry of bids throughout the coming months set to demonstrate that this part of the sector is still very active. Yet understanding from the government, particularly on commercial pressures confronting contractors, will be needed. It would be easy to say that this is a critical phase in the life of the programme, that we’ve reached a crucial juncture in its future. But when we account for the PSBP’s impact on the number of school places, it becomes clear that every phase is all important. If I could make one final plea to the DfE, it would be to ensure that it retains sight of the end game and works with the sector to construct the buildings that will support the delivery of learning for our future generations. 

Steve Beechey is managing director, education sector and investment solutions, Wates Construction W:

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