School investment: what’s new?
On 9 September 2019, the Scottish Government and COSLA launched the first phase of the Learning Estate Investment Programme (LEIP). The first phase of the programme will consist of 11 projects, several of which will involve multi-purpose campuses bringing together nursery, school, college, university and other community facilities. In total, these 11 projects will include replacement of 26 schools. A further phase of investment is to be announced within the next year.
LEIP follows on from the Scotland’s Schools for the Future (SSF) programme, which was the Scottish Government’s school investment programme over the last decade. Under SSF, a total of 112 schools were rebuilt or refurbished, with a total Scottish Government investment of £1.8 billion.
Who is funding the new schools investment programme?
The new programme of investment will bring together Scottish Government and local authority funding, with the Scottish Government providing £1 billion of funding over the duration of the programme, and local authorities providing at least £2 billion. The first phase of investment will involve Scottish Government funding of between £220 million and £275 million.
The planned approach to investment for this next phase of school investment differs in a number of important respects from its predecessor, the SSF programme.
Under LEIP, local authorities will be fully responsible for the costs of constructing new schools. Local authorities will need to find the money to pay for building the new schools either from their capital budgets, or by borrowing the money through the Public Works Loan Board (PWLB). This is an important difference from the SSF programme, where the Scottish Government and local authorities shared the costs of building the schools.
Under SSF, some schools were funded directly from capital budgets, but many were funded using public-private partnerships (PPPs). PPP arrangements include the UK Government’s Private Finance Initiative (PFI), the Scottish Government’s Non-Profit Distributing (NPD) model and the Scottish Government’s hub programme. (See previous SPICe blog on private financing for further details.)
Under these schemes, upfront construction costs are met by private contractors and the public sector partners then pay ‘unitary charges’ for the duration of the contract period (usually 25 years). These unitary charges cover the construction costs of the school as well as ongoing maintenance costs and interest charges. In Scotland, more than 300 schools have been built or refurbished using ‘revenue financing’ schemes and a total of £12.2 billion in unitary charges remains to be paid to the private sector contractors for these schools over the next 25 years. These charges are paid jointly by the Scottish Government and local authorities, with the exact shares varying between projects.
So, if local authorities are funding the costs of building the schools, what is the Scottish Government paying for?
With local authorities now responsible for the full costs of building new schools, the Scottish Government’s investment will instead be covering the ‘lifecycle and maintenance’ costs of these new schools. This includes the day-to-day running costs of the buildings and the ongoing maintenance costs. This investment will aim to ensure that the schools are kept in a condition that meets standards and outcomes agreed in advance between the Scottish Government and the local authority.
The Scottish Government and local authority will agree a funding stream at the outset of the project and this funding will be transferred to local authorities as a specific revenue grant i.e. a grant that is transferred to the local authority but can only be used for a defined purpose.
LEIP and SSF compared
The main differences between LEIP and its predecessor, SSF, are set out below.
‘Funding for Outcomes’
The Scottish Government describes LEIP as an ‘outcomes-based funding model’ and says that Scottish Government funding will be for the ongoing maintenance and lifecycle of the project and ‘for the achievement of other agreed outcomes’. It is not clear at this stage what these ‘other agreed outcomes’ will involve. However, it is clear that there is funding that will be specifically linked to agreed outcomes and will only be available when there is evidence of these outcomes being achieved.
What questions remain?
It is not yet clear what ‘funding for outcomes’ will look like in practice. It is likely that this will only become clear once some of the initial projects are finalised. Meanwhile, a few further areas remain unclear, including:
- How will lifecycle and maintenance costs be agreed in advance for a 25 year period? The Scottish Government has said that benchmark costs will be used, but this is a long period over which to anticipate all the costs associated with a school building, including energy costs, maintenance requirements, labour and material costs. The Scottish Futures Trust as LEIP programme managers may have a role in this.
- Who bears the risk if maintenance costs turn out to be higher than expected? Will it be the local authority or the Scottish Government?
- Alternatively, if costs turn out to be lower than anticipated, is the local authority able to use the funding to support other areas of activity?
What are the advantages of this approach?
Under LEIP, there will be no reliance on private sector financing. Instead, any required borrowing to support the programme will be undertaken by local authorities through the PWLB. This has the advantage of reducing interest charges, as local authorities can borrow at more favourable interest rates than the private sector. However, by placing all the burden of borrowing on local authorities, this could potentially impact on the ability of local authorities to borrow for other capital projects as they need to demonstrate that any borrowing plans are ‘prudent’.
An alternative, if private financing is to be avoided, would be for the Scottish Government to undertake the borrowing (which would still be cheaper than private financing). However, this would then restrict the Scottish Government’s ability to use borrowing to fund other capital investment. The Scottish Government has a capital borrowing limit of £3 billion, with an annual cap of £450 million. In addition, if the Scottish Government borrows, then any interest payments count towards its commitment to keep revenue finance costs to within 5% of the Scottish Government resource budget. If local authorities undertake the borrowing, repayment costs will not feature in the 5% calculation.
It is also worth noting that, although the Scottish Government has opted to move away from revenue financing for schools, it has not fully rejected the concept of revenue financing. NPD is no longer in use, but the Scottish Government is proposing to use a new model of revenue financing – known as the ‘Mutual Investment Model’ (MIM). However, this will not be used for schools and there are no projects being funded using MIM as yet.
Nicola Hudson, Senior Analyst, Financial Scrutiny Unit