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Converting to academy status for PFI schools

10 January 2011

What is a PFI school?

A PFI school is one included in one of the government’s private finance initiative (PFI) contracts with a private sector contractor. The now defunct Building Schools for the Future (BSF) is the most well known programme which includes school PFI projects.

Under a PFI, the contractor takes responsibility for constructing new school premises and/or refurbishing existing ones. In addition, it provides a range of facilities management services (FM) including cleaning, catering and maintenance.

In exchange, the contractor receives a single monthly payment (unitary charge), which is subject to deductions if it fails to meet standards set in the PFI contract. For example by performing the FM poorly.

A PFI contract generally lasts 25 years and, at the end of the contract, the new facilities built by the contractor are transferred back to the local authority, trustees or governing body, depending on the category of school that entered into the contract.

Are PFI schools tied into a PFI?

Schools forming part of a PFI will have a governing body agreement (GBA) or similar document with the local authority. This flows down certain rights and responsibilities under the PFI to the governing body. Most importantly, it allows the contractor access to the school and sets out how the school must contribute to the local authority’s PFI payments.

The GBA binds the governing body into the PFI for the full term (usually 25 years). If a local authority were merely to detach the school from the PFI, it is likely that they would have to make additional contractual payments to the contractor. Because of this, conversion to academy status does not offer schools a cost effective opportunity to remove themselves from existing PFI contracts.

Is PFI a barrier to academy conversion?

Although the Department for Education (DfE) will not ‘buy out’ schools from PFI deals, its clear policy is that PFI contracts will not be barriers for schools wishing to convert and they have developed standard documents to deal with the conversion process.

Firstly, the PFI school will enter into a new ‘school agreement’ with the local authority. This commits the academy to meet its PFI obligations usually in the same way as provided for in the existing GBA, although certain new obligations may be included and entitles it to continue to receive the PFI services. Although the DfE has produced a standard form, it will be important to ensure that the school agreement provides sufficient protection to the school given the more 'arm’s length' relationship with the local authority following conversion and accordingly, it is usual to make school-specific amendments to the school agreement. Any specific service or other issues that have arisen to date under the PFI can be considered at this point.

The second document, recognising that local authorities may be concerned about the increased risk of contracting with an independent academy, is a ‘principal agreement’. This aims to ensure that the local authority is not financially worse off as a result of the conversion – for example should the academy fail to make its PFI payments. The DfE will also require amendments to be made under the Articles of Association (the internal constitution of the academy) and the funding agreement to protect the position of the DfE if it has to compensate the local authority due to the academy’s failure. Further complexities arise where the converting PFI school is part of a group (for example a multi-academy trust) with others which are not subject to a PFI or where school premises are shared, in which case a shared use agreement may be required.

Finally, the property arrangements will need to accommodate the PFI position, taking into account the form of the PFI (whether it is a ‘lease and lease back’ or based on a licence) and the type of school.

Effect on the academy conversion process

It is likely that a school’s PFI status will lengthen the overall time needed for the conversion process. It is also worth noting that not all local authorities accept outright the position set out in the principal agreement and may seek better protections from the DfE and/or the academy, which may also add time to the conversion.

A further potential cause of delay is that some relatively minor amendments will be needed to the PFI agreement itself (for example, adding the academy as an insured party), which will usually require the consent of the PFI contractor’s funders. These amendments appeared largely uncontroversial, and DfE had stated clearly that the position of PFI contractors (and their funders) should not be adversely affected.

We are currently advising a large number of PFI schools around the country on their academy conversions and are familiar with both the standard documents and how to deal with the bespoke issues that arise on PFI conversions.

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Mark Blois

Mark Blois Partner and Head of Education

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