Q71 Mr Bacon: Which genius had that idea?
Mr Bell: It was a properly conducted selection process.
Q72 Mr Bacon: I am sure it was. Can I ask you to turn to paragraph 4.18? I remember he came here. He was not wearing a tie; only a t-shirt. It says that the internal rate of return is 12.8% rather than 15% because of the delay in the programme. 12.8% is not a bad return in the present market. Most people would be very happy to get 12.8% in the current climate. Why should there be a return to PUK of 12.8%o when there has been so much delay of almost two years?
Mr Bell: When we rescheduled the targets for completion 2004-05, those became the new benchmark for completion, so the rate of return that PUK is receiving represents the targets that were established 2004-05. It is worth pointing out as well that the expected rate of return is going to be over the lifetime of the whole project and does involve them with us achieving quite demanding milestones and target. Do not forget this is over a 12 or 13 year period.
Q73 Mr Bacon: I would like to ask you a simple question. It relates to a constituent of mine, who was a head teacher, courtesy of the Education Authority, of two schools at one point. She was told by the local Education Authority's building arm or property arm that the proposed construction she wanted to do for her school, which was a very small school, could not be done for less than £200,000. Because of the capital formulation, she could not raise £200,000. She conspired with the local builder and architect and did the whole thing for £70,000. Although it was only on a small scale, I have always thought to myself that, if you could replicate that kind of performance with driven and committed head teachers up and down the country, you would extract far more out of the lemon. What are you comparing? This basket of refurbishment, reconstruction and remodelling? In most cases, structural remodelling would be most appropriate. Are you comparing them with small, similar, locally procured schemes where it is driven by a head teacher and by the government? I have raised with the National Audit Office and I have yet to persuade them to take up this particular point, but it seems to me that you may be missing a trick.
Mr Bell: To take up Mr Byles's previous reference to data from 21 education authorities and 78 schools, that refers to costs under the BSF programme. What you are referring to I think is really quite interesting. That is relatively small scale capital investment. There is nothing to prevent the head teacher doing exactly what she did. Of course, we fund that largely through the devolved capital arrangements whereby schools get about £12,000 to £15,000 a year. Schools are keeping that and then, entirely as they are free to do through proper procurement, getting their own builders to do it. We are not comparing those relatively small scale capital developments against these strategic developments, where you are having to procure across a whole number of schools over an extended period of time. The straight answer to your question is you are not comparing within that basket of data the costs of doing what you do in big secondary projects against the small scale capital developments of the sort that you describe.
Q74 Chairman: I am not sure that you answered the question that Mr Bacon put to you on paragraph 4.18 about the rate of return of Partnerships UK. They are getting 15%. They are supposed to be a public sector organisation; it seems very high to me.
Mr Byles: 15% was the figure which applied in the early stages of this project when there were judged to be a number of risks associated with it. They are referred to in paragraph 4.16. 4.18 is talking about a reduction of that internal rate of return in the maturity of the project, with some discount against not hitting the targets.
Q75 Mr Bacon: Some of these partnerships involve PFI; some do not. Could you tell us how many involve PFI? What is the total net present value of the PFI book and do they all include refinancing clauses in their contracts?
Mr Byles: 41 % of BSF capital expenditure is PFI and, yes, they do include refinancing clauses that limit refinancing gain.
Q76 Mr Bacon: And the total value of these PFI contracts?
Mr Byles: I do not have that figure.
Chairman: Give us a note. Thank you.8
Q77 Mr Williams: Some years ago, this Committee insisted that the department should ensure they share. You told us that you do ensure they share. How has your bargaining position been affected by the credit crunch? Does the credit crunch put you in a better bargaining position or does it put the contractor in a better bargaining position on the share of that refinancing?
Mr Byles: As things currently stand, the position has not altered in the context of the credit crunch. There is a limit on refinancing gains that benefits the public sector to the tune of 70%.
Q78 Mr Williams: I understand that, in fact, the public sector has actually got above 50% now.
Mr Byles: Yes, it has indeed, 70%.
Q79 Mr Williams: That is despite the prevailing economic circumstances.
Mr Byles: That is right. That is the current position. We have a number of banks, as referred to in this report, who are actively lending into BSF at the moment. In fact, the figure is currently double that mentioned in this report.
Q80 Mr Williams: Following up on the point Mr Hill raised, we are told that the local authority guarantees that the Local Education Partnership may undertake all its major school capital projects for ten years. Does that not really mean that the authority is over a barrel? How can you be sure that it is getting value for money?
Mr Byles: In two or three ways. There are the complexities of it. One type of transaction which we do involves competing for the construction element of the school for every school through that ten year period. The other main structure we use regularly tests-
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