Private Sector Public Schools: Fiscal Responsibility Dictates It, Says Nova Scotia

There is a widespread perception that there is a nationwide shortage of classroom space. Education proved to be an issue of serious voter concern in Maryland’s 1998 election, with both gubernatorial candidates feeling compelled to make promises to hire at state expense over 1,000 new public school teachers (despite spotty evidence that reduced class size has any long-term impact on student achievement).1 Regardless of the issue’s merit, there will continue to be electoral demands for new school construction. So we may rest assured that federal, state and local politicians will continue to respond with taxpayers’ money.

The role of the fiscally responsible policy maker thus becomes one of devising the least costly means to construct new schools. Instead of publicly financing school construction, with all the budget bloating and cronyism so prevalent in such projects, Maryland should follow the example of other jurisdictions such as Nova Scotia, the United Kingdom and Florida. Maryland should follow their lead and encourage the private development of public schools. Experience elsewhere has demonstrated savings to taxpayers of up to a third, coupled with sufficient incentives to allow the private sector to turn a reasonable profit.

Traditional Approach
In 1997, the United States spent $27.1 billion on new public school construction, an increase of 23 percent in such inflation-adjusted spending since 1993. (Over the same period, the school-age population increased by 6.6 percent, suggesting that, at the aggregate level, spending on school facilities outpaced the growth in student population.)2 The vast majority of this school-construction expenditure was spent in the traditional manner, i.e., direct public financing, subject to the usual battery of regulations and set-asides that so often accompany public projects.

In older cities and communities (such as Baltimore City), the major school construction issue is the repair and renovation of older school buildings, many in poor condition because of systematic neglect by city governments. At the other extreme are the classroom shortages that often occur on the suburban fringe, where population growth is at its most rapid and where school construction often fails to keep pace with student enrollment. The suburban counties around Baltimore are no exception in this regard. As a result, classrooms and facilities may be overcrowded, and schools may set up temporary mobile classrooms to accommodate the growth in students. Often in these circumstances, school systems in the exurbs contend that the growth in tax revenues derived from the new households does not keep pace with the higher school-construction costs incurred in serving them; they argue for state and/or federal financial assistance to meet their immediate needs, with relatively little heed to overall cost.

Private Alternatives
Although public financing of public schools has been the norm in the United States, this can scarcely be described as the most efficacious use of taxpayer funds. In contrast, innovative approaches here and abroad clearly demonstrate that the private sector can build the desired facilities more quickly and for less money. These experiments with public/private partnerships suggests that the key elements of these efforts could be emulated in other U.S. public school systems, to the considerable benefit of students – and the taxpayers who fund their education.

Nova Scotia, Canada
In 1997, Canada’s province of Nova Scotia (map 1) implemented one of the most ambitious programs for the private construction of new public schools. By the end of 1998, 41 new schools had been either completed or approved for construction under the Public Private Partnership program (or “P3,” as it is known). Another 12 have been proposed for approval.3 Drawing on the resources and talents of the private sector, P3 was implemented as a way to boost public services quickly while making as little impact as possible on Nova Scotia’s limited budget.4

Nova Scotia has a population of approximately 947,000 (about half that of the Baltimore metropolitan area) scattered across 55,362 square kilometers. With an unemployment rate of over 10 percent, an economy still suffering from the long-term decline of the North Atlantic fishing industry and a freeze on the provincial capital budget since 1990, efforts to upgrade the school system might have been postponed indefinitely pending the availability of financial resources.

As a result of these pervasive financial shortfalls, Nova Scotia’s government needed to tap alternative sources of money. According to the province’s Ministry of Finance, “The key objective is to enable Nova Scotia taxpayers to get better value for their tax dollars by shifting the responsibility for the operation and/or financing of non-core activities to the private sector. In the process, the potential exists for service to improve within the same public expenditure framework, or for the same level of public service to be provided at a lesser cost to taxpayers.”5

Under P3, the Ministry of Finance requests bids from qualified developers to provide one or several school facilities built to the ministry’s specifications in a designated district. Completed projects are provided on a “turnkey” basis – the developer furnishes the desks, telephones, blackboards and computers, while the school system provides teachers, principals and students.

Prospective bidders compete on price, and the cost of the project is converted into a 20-year lease with annual rent payments equal to 85 percent of the capitalized cost of the project. In effect, the school system gets to use the building for less than the cost to build and finance it, while the developer begins the lease 15 percent in the hole. In order for the developer to earn a profit on his investment, the contract is structured so that the school system leases the building for specific hours, such as 8:30 a.m. to 3:30 p.m., Monday through Friday, September through June, as well as select off-hour periods. During the hours and days in which the public school system is not using the facility, the developer can rent its space to other approved and compatible organizations and businesses.

Such off-hours use includes renting the facility to educational and civic organizations or similar entities for which classrooms and/or auditoriums are essential. Organizations and businesses whose activities are not compatible with a building used primarily by children are prohibited from leasing space, and such prohibitions are defined clearly in the contract. By using the building more intensively than would be the case if its occupancy were limited to just public school functions, the developer/owner of the building obtains more revenues and earns more profit. These extra revenues are “passed on,” in effect, to the public school system in the form of below-cost rent.

Because developers must compete actively with other providers of space for off-hours revenue, they have an important incentive to ensure that construction is done to high-quality standards and design. One of the first developers to win the right to construct and lease five schools, Nova Learning, also won the province’s 1998 Lieutenant Governor’s Design Award in Architecture. (In Canada, the provincial chief executive is called the lieutenant governor, not the governor.)6

The school system’s 20-year lease on each facility includes options to renew the lease at the same rent for up to two additional five-year terms. The school system also has the option of buying the facility at a predetermined price if it so chooses. Most important, the school system has no obligation to rent the facility beyond the first lease term, thereby providing the developer/owner with a powerful incentive to maintain the building to its highest standard and upgrade it technologically.

If the public school system determines that the original developer performed inadequately, it simply can contract with another developer for a new facility. Alternatively, if demographic changes in the province or community lead to a reduction in school-age children, the public school system can elect not to renew as many leases next time around. In any case, Nova Scotia’s P3 program allows the school system to shift a number of important technological and demographic risks to the developer/owner and at the same time enhance its own flexibility and educational choices – at a lower cost than would be the case if the construction, financing and ownership were entirely within the public domain.

United Kingdom
Nova Scotia is not alone. The United Kingdom, now controlled by a center-left Labour government, has also embarked down the road to private development of public schools. Below, two different programs are discussed: one in Scotland and one in England and Wales. (The remaining U.K. province, Northern Ireland, is not treated in this essay.)

Scotland: The Scottish Office, which is the cabinet department responsible for overseeing policy initiatives pertaining solely to Scotland, encourages local communities to utilize private financial resources to fund the construction and renovation of public infrastructure, including what the British refer to as “state” schools (i.e., public schools).7 This program is entitled PFI Scotland (with “PFI” standing for Private Finance Initiative). As in Nova Scotia, PFI Scotland has moved beyond the pilot-project stage and now is a fully operational component of the government’s infrastructure program, particularly for public schools.

As of late November 1998, more than 70 schools with approximately 50,000 students in eight local jurisdictions – including Scotland’s two largest cities (Glasgow and Edinburgh) – were scheduled to be replaced or renovated under PFI Scotland.8 The cost of this renovation and replacement initiative is expected to total

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