School Pools

By Chris Cook

I was most of the way through a post on the abysmal state of football economics generally, and the surreal goings on at my beloved Magpies (that’s Notts County, not Newcastle United) in particular, when a couple of events focused my mind on schools instead…

Firstly, I accompanied Norwegian guests to the Holyrood Parliament to watch this week’s installment of Ministers’ Questions. I was pleasantly surprised by the standard of the Q & A that took place, with none of the Westminster slapstick, until the subject of Scottish school building, or the lack of it, really kicked things off. The first outbreak of fisticuffs was when the Education minister fielded a question, and off they went again when the subject was revisited in a question for the Deputy First Minister, Nicola Sturgeon.

The attack from Labour was based upon the almost complete paralysis of SNP plans in respect of the Scottish Futures Trust ( a form of “Not for Profit” PFI) generally, and specifically the SFT’s failure to get moving on a programme of rebuilding Scotland’s appalling stock of school buildings.

Now anyone would have thought that Labour having been in power in most of Scotland for more than 50 years might have had something to do with the state of Scotland’s schools, but when this was pointed out by Ms Sturgeon Labour were having none of it.

Didn’t the SNP know that there are new schools breaking out all over Scotland as a result of PFI/PPP? Now, PFI was well described by a commenter in The Times as….

“…where the taxpayer pays top dollar prices for rented schools built to the lowest possible standards that the developer can self certify as being up to spec.”

…omitting to point out that astronomic levels of privately financed debt and dividends to shareholders will add insult to injury far into the future.

The problem for the SNP is that they have spent two years and millions of pounds in coming up with a scheme where the participation of the private sector is grudging at best, and the potential savings minimal.

Having seen the way the wind was blowing, it was no surprise to hear that afternoon – from the Labour MSP whom I had come to meet concerning partnership financing – that while he was interested in affordable housing, and renewable energy, the real political itch to scratch right now is in fact how to sustainably finance new schools.

I like to think he and his colleagues may now have something new to chew on. The minority parties in the Scottish Parliament have a lot more potential for getting things done than most people realise – just ask the Norwegians, where it is relatively rare for any single party to be in power, and collaboration is normal.

One of the political attractions of the proposal is that it does not need legislation, so work could commence tomorrow. Another is that since it genuinely does not involve borrowing, then the Treasury should not be too concerned about it, particularly as it would not be originating from the hated SNP. Watch this space.

Child Trust Funds
All good clean fun. But then the next day I read a post by Matthew Taylor on his Director’s blog at the Royal Society of Arts site in which he extolled the virtues of the Child Trust Fund as a Labour policy of which he is proud.

Now I happen to agree that the CTF is indeed one of the Jewels in the Labour Crown, but unfortunately it’s still a diamond in the rough. It is possibly the only Labour policy which directly addresses what the Red Tory, Phillip Blond, calls “The Recapitalisation of the Poor”.

Blond recognises that we have reached a position where the system of financial capital has once again achieved – through a toxic combination of compounding debt and private property in land, turbo-charged by modern financial innovations such as securitisation – what it has always done for thousands of years. Wealth has become unsustainably concentrated in the hands of a relatively small – and shrinking – number of the super-rich, and the merely loaded, who obtain an increasing amount of income or capital gains from unearned rents derived from privileged property rights.

Firstly, the CTF does not go anywhere near far enough. However, I hardly think – in the current climate – that it would be likely to be expanded even by another Labour administration, and I think that its chances of survival under the tender caress of the Osborne Axe are slim.

Secondly, an increasing number of people simply do not have the spare cash to save – although the children of the comfortably well off, who know a good thing when they see one, may now be getting even more comfortably well off. For the indebted majority it makes far more sense to pay off credit cards at 15% and up, or mortgages at 5% and up, than ever it does to invest in Junior’s CTF at 2.5%.

But thirdly, and at last getting to the point of this post, it made me think that maybe CTF funds might be put to a better use than either sitting on deposit – at rubbish (and non index-linked) rates in a problematic bank or building society – or alternatively being gambled on the latest stock market bubble.

So I thought, why not should not CTFs be directly invested in Schools, rather than feeding the bottomless appetites of the City and the Treasury?

The School Pool
This proposal is a variation on a generic theme of investment within a partnership-based legal framework – a “Capital Partnership” – rather than a framework of Company or Trust law.

Firstly, in return for an Equity Share in the outcome, the land on which a school is built would remain with, or be transferred by the owner to, a Custodian, probably the local authority. Investment is then made in the land on the basis that the contractors cover their costs, but plough any profit margin into the buildings, thereby giving them an interest in high standards of energy efficiency and building quality, because they have a stake in the outcome. Those costs which have not been invested would be funded by a pool of development credit, of which more anon.

When the buildings are complete a pre-agreed index-linked payment is made in respect of both the value of the land, and of the value invested in the land. A proportion of this “Capital Rental” payment is made to a Manager/Operator and covers maintenance and depreciation, and any other services specified – the rest is available to be paid to investors generally, and Child Trust Funds in particular.

The result is that the stream of rentals is divided into fractional or percentage Equity Shares, not a million miles away from Units in a Unit Trust, or interest-bearing Preference Shares in a Company. The Alchemy is that the cost of financing is drastically cut (due to the absence of debt and the reasonable return) to the great benefit of the local authority.

For CTF investors there is a reasonable index-linked return from investment in a local “School Pool”, which could be one example of new classes of low risk Public Equity as a complement to the exciting world of conventional Company shares traded on Stock Exchanges. The risk taking development investors could keep their equity shares as a long term investment, or sell them for use as development credit.

When the kids reach 18, then there are some interesting choices. The fund might be credited towards their further education, instead of student loans; it could perhaps be a pool of capital available for them to use as young entrepreneurs, or it may be reinvested by way of an early start to a pension pot.

A good place to begin would be to use it to rid ourselves of the existing albatross hanging around taxpayers’ necks. That’s right – we simply convert the toxic waste from existing school PFIs to a simple but radical new class of Public Equity – the School Pool, and this will free up development credit to build the new schools.

So we could see a virtuous spiral – CTF money would pay off existing school PFI debt; development credit would be released; new schools would be built; new investment would then be made in the new schools once complete, freeing up the credit again….and the Pool would propagate.