Finance: Schools close as councils rationalise

Suppose Ofsted says a school is failing. Why not close it, and sell the site for redevelopment? Paul Gosling reports on local councils' hard choices

"Neighbourhood" council facilities may be a thing of the past, with local authorities under pressure to make more economic use of their land and buildings. One pointer is a proposal announced last week in Leicester, under which the local authority would close eight secondary schools to get rid of 4,000 surplus places, and build three new, much larger schools. Redevelopment costs should be met from the proceeds of the sale.

More than 2,500 schools across the country face closure, under pressure from the Department for Education and Employment to wipe out surplus places and deal with schools that, like those in Leicester, have been criticised in Ofsted inspections. But the moves also reflect the need for councils to review their property portfolios, and rationalise them where possible.

In the first ever comprehensive survey, conducted last year by the Chartered Institute of Public Finance and Accountancy (Cipfa), it was found that councils owned pounds 100bn worth of capital assets. The survey was made possible only by changes to accounting systems adopted in 1994-5, when councils declared the value of their assets for the first time. Council housing remains the largest sector, despite the massive right-to-buy transactions of the Eighties, but easily the next biggest is school buildings.

Only major urban areas are likely to follow Leicester's lead, and close many failing schools. Elsewhere, the need to limit the distances children have to travel places constraints on the number that can be closed, with the Government this month confirming its wish to keep open as many rural schools as possible. A further difficulty is that failing schools are often situated in poor housing estates, where sites have limited potential for commercial development and attract little interest from purchasers.

Councils, in any case, face conflicting pressures from a cross-departmental government initiative to safeguard school playing fields. Maximising the use of existing schools may be possible only by building on games areas, while the playing fields of closed schools would likely be built on. But Victorian schools, in particular, often have a ready market for conversion into smart homes or offices.

Other council-owned properties may also be vacated for redevelopment in coming years, especially in areas where the local government review has produced new councils, as is the case with Leicester and the adjacent Leicestershire County Council. Leicestershire - which remains a two-tiered authority surrounding the unitary Leicester City Council - is currently undertaking a survey of all the properties it owns, and has begun discussions with district councils to increase shared use. In the future some councils may extend this process to sharing with central government departments, under pressure from the Treasury, which has conducted its own inventory and is keen that departments sell under-used assets.

Leicestershire County Council says that in the long run it may even consider moving out of property ownership altogether, taking on sale and lease- back contracts with property developers. Land Securities is one company that has traditionally redeveloped city centres in partnership with local authorities, and would consider proposals for supplying up-to-date council offices within and above retail centres, in return for redeveloping the sites of existing town halls where these are in prime locations.

Cipfa and the Audit Commission say that councils should be encouraged to make better use of their capital assets by being forced to adopt better cost-centre accounting systems. At present, most local authorities do not show a charge for their property use within their cost centre accounts. Cipfa will propose to the Department of Environment, Transport and the Regions (DETR), in the latter's forthcoming review of capital accounting, that comprehensive cost-centre accounting should become mandatory on councils, and that the annual performance indicators which compare local authorities should show how effectively they use their property portfolios.

The DETR capital review will follow major changes to the controls in using capital receipts, which expire at the end of this month. Currently, councils can use 75 per cent of capital receipts for airports, car parks, shops and farms, which has led many to finalise disposals before the end of this financial year.

In the new year the normal rules will be reverted to, under which a quarter of the capital receipts on council houses, and half the proceeds of other asset sales, can be used for a council's capital programme. The rest must be used for debt redemption, unless the council is debt free, in which case the whole sum can be used for its capital programme. There is an exemption in like-for-like building programmes - such as building new schools for old - whereby all the receipts can be used for new capital works.

New proposals from the DETR, soon to be published, will suggest changing this regime to encourage disposal of under-used assets. In future, all non-housing capital receipts may be used in a council's capital programme. But this will be subject to the proviso that there is some reduction in the amount the DETR allows it to borrow for capital works, limiting the impact on the Public Sector Borrowing Requirement. Councils will almost certainly respond that they want to use all the receipts, but losing credit approvals would eliminate the benefit. Cipfa, on the other hand, would welcome the move, which they believe could achieve a dramatic improvement in councils' management of their capital assets.