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PFI academy conversions - free at last?

13 April 2012

The first raft of private finance initiative(PFI) schools has now converted. Even the dreaded "vires issue" seems to be in retreat. Anja Beriro and Craig Elder of Browne Jacobson explore the issues that converting PFI schools currently face.

What "funder issue?"

In essence, banks which had funded the construction of PFI schools became concerned that the wording of the Academies Act could make it unlawful for councils to continue to make PFI payments in respect of academies.

This resulted in a great deal of debate between the funders, various legal advisers (including a number of leading QCs) and the Department for Education (DfE). In some cases, this has delayed conversions by up to a year. For high-performing schools hoping for a smooth transition to academy status, the process really had started to seem unending.

However on the majority of schemes this issue appears, finally, to be resolved. It is therefore a good time for PFI schools contemplating conversion to consider the issues that may be involved.

PFI documents - what are the issues?

Deed of Variation to the PFI contract

Varying the original Project Agreement is an additional requirement for a PFI converter. These should not prove controversial, and are intended to make sure (for example) that the academy can take advantage of the "required insurances" under the PFI contract. However, funders do still raise issues on these variations such as attempting to ensure that, in fact, the academy could never make such a claim. They may also ask the academy to enter into various direct obligations to the PFI funder which need to be reviewed carefully.

As the Deed of Variation is between the local authority and the PFI contractor, the main practical issue for the school is its lack of control over its completion. If a funder doesnt view it as particularly important it could flounder for weeks in the inbox of the funders lawyer before being turned around. This can lead to frustrating delays, even now that the main "funder issue" appears to have been resolved.

School Agreement

The governing body of a PFI school will have entered into a Governing Body Agreement (GBA) when the Project Agreement was signed. This sets out certain obligations (mainly related to payments by the school to the local authority to cover both the construction of any new buildings and ongoing services). It will also set out arrangements for, among other things, agreeing changes to services, action by the authority for non-compliance by the PFI contractor and exchanges of relevant information.

On conversion, the GBA is effectively replaced by a School Agreement which will include similar obligations to those under the GBA. On key matters such as payment, the starting point is that the arrangements under the GBA should be reflected under the DFEs standard form School Agreement.

What DFE hadnt fully anticipated was the range of GBAs in use. Almost every local authority has drafted its GBA differently. Some have a reasonable amount of detail and some literally nothing more than a side of A4. In the latter case, a lot of commercial discussions may be needed to turn it into something resembling the DFEs 40-plus page School Agreement.

What has become apparent is that when the Project Agreement was entered into originally, and at the same time the GBA, the local authority hadnt usually considered that at some point in the future the budgets for these schools would be taken out of their hands. The GBA often requires knowledge of how that authority runs its budgets and is based, quite rightly, on a relationship of trust between them and the school. The problem now is that the local authority no longer has the same control over the budgets and the new academy may want a much clearer explanation for the amounts that it is being asked to pay.

This is where a knowledge and understanding of complex PFI and other project documents is essential on the part of the schools lawyers. To be able to work out whether the School Agreement is right requires the lawyer to dissect certain parts of the Project Agreement and other documents and translate this into appropriate wording. If there is a financial detriment to either side this could lead to lengthy negotiations.

Allocation of risk is another issue that often pops up during these negotiations. There are a number of ways of allocating risk and cost through PFI documents for matters such as school meals and utilities which must be approached on a case by case basis.

Another important point is the payment by the authority to the academy of any deductions that are made from the Unitary Charge. It is often the case that prior to conversion the authority and school split this financial gain. Post-conversion the academy should be receiving all of these. It is even more important if the academy has agreed to pay a management fee to the authority in relation to the Project Agreement.

Principal Agreement

The Principal Agreement is the other additional document for PFI schools. This gives comfort to the local authority that, should the academy stop paying its contribution, the DFE will assist. It also covers what is known as the "Affordability Gap" payment, which is required when the sums paid by the academies (plus any PFI credits) dont fully cover the payments that must be made by the local authority to the PFI contractor. From the schools perspective, we need to make sure that no additional obligations - particularly any obligation in relation to the Affordability Gap - are included.

Effects on timetable and local authority fees

Any PFI conversion is likely to take considerably longer than for a non-PFI school. Some local authorities undertake the work themselves but others will use external lawyers and they will want to pass the cost of this onto the school. As hard as it may be to swallow, DfE are likely to take the position that this is a matter for the local authority and the school.

In the opinion of DfE, a PFI conversion is likely to take around 6 months. In reality, much depends on whether there is a meeting of minds between the local authority and the school on timing, and whether protracted debate is required on the commercial issues.

This article was first published in Education Executive

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