Focus: New business in a class of its own

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The Independent Online

There is a hidden agenda stalking this election, dominated as it is by concern over public services, and that is a policy that dare not come out of the shadows: the privatisation of schools. In the record of the Labour Party over the past four years there are vague promises about what is to come, but there is an agenda. Under New Labour-style "radicalism", schools are to be opened up to the private sector. This presents a huge opportunity and a whole new market for business, worth billions.

The chief executive of one company providing education services says: "There are 400,000 teachers, most of whom support Labour. They [Labour] are not going to come out with [their policy] at this time." These services will remain free at the point of delivery, at least if, as overwhelmingly expected, Labour remains in office. But the private sector is going to be introduced rapidly in that delivery.

In education, the opportunity is vast and companies have begun to circle this market, sensing rich pickings. The big boys, Serco and Capita, are limbering up. Remember, the Local Education Authority (LEA) budget for 2000-2001 was £22bn.

All support services in schools, such as catering, payroll and maintenance, are likely to be up for grabs. Already the building programme for new schools has been taken over by the private sector. But deeper penetration is on offer: private management of state schools.

The policy is buried in a paragraph in chapter four of Labour's schools Green Paper. It says: "We intend to develop a new model which would enable an external private or voluntary sector sponsor to take responsibility for a weak or failing school against a fixed-term contract of, say, five to seven years, with renewal subject to performance."

Sure enough, the first long-term contract to be awarded to a for-profit private company was announced at the end of last month. Nord Anglia Education, a listed company, has been asked to take over the running of a Surrey school, Abbeylands in Addlestone, an institution described as "experiencing severe difficulty in attracting pupils".

Nord Anglia will have a seven-year contract to manage Abbeylands, which (appropriately) it plans to turn into a school specialising in business. Kevin McNeany, the chief executive of Nord Anglia, says: "Private sector companies have never had the opportunity to run schools before. We see this [contract] as the forerunner of things to come."

The sums are compelling and even a struggling pupil could work out that millions are on offer. There are 18,150 primary state schools in the country and 3,550 secondary institutions. A large secondary school would have an annual budget of £2m or more. The Government said in April that 359 schools still "require special measures", that is, they are failing. It is thought some 2,000 more are scraping by.

Intriguingly, this policy anticipates successful schools bidding to take over failing schools, on their own or in partnership with a company. Where will it all end? The Abbeylands deal does not mean that Nord Anglia becomes the employer of the teachers at the school. Technically, that will remain the school's governors. But, the company has decided on a new educational direction for the school and that shows it will wield considerable power over what is taught there.

In America, Edison Schools, a Nasdaq-listed company that has raised millions from investors, has far-reaching management contracts implementing its distinctive educational programme in 113 state schools, with 57,000 pupils. The point of introducing the private sector is to bring in new ideas, new ways of doing things and commercial expertise. Efficiency gains and management skills are the most obvious of the benefits supposed to follow.

Edison, which has a stock market value of $1.3bn, raises money privately to invest in the schools it runs, saving tax-payers' money, and it clearly takes its brand very seriously for winning new business. It offers stock options to its teachers and take-home computers for every pupil.

In the UK, once the private sector is involved, there appears no reason why it need be restricted only to failing schools and why teachers and the actual education provided will not fall increasingly to private sector providers. The hiring and firing of teachers is, surely, a management responsibility. But Tribal Group, an education specialist listed on the Alternative Investment Market earlier this year, sees the main opportunity in non-teaching support services to schools. It also sees this nascent market rapidly consolidating around a few key players.

Henry Pitman, Tribal's chief executive says: "The market is in its infancy. It's fragmented. Larger groups will be established. I'd be very surprised if there wasn't a separate education sector on the stock market in a few years. In the US, there are some 75 listed education companies." There are several markets available. The Abbeylands contract is the most far-reaching but less sensitive areas already have an established private sector presence. And, some 30 "failing" LEAs are now being run or partnered by the private sector, another potentially large market.

Capital Strategies, a City finance house, estimates that the market for straightforward non-education services in schools is already worth £2.5bn a year to the private sector. This includes the likes of school dinners and transport. But, increasingly, non-core back-office operations such as financial management and administration will be outsourced. Capital Strategies estimates that the support services market will be worth £5bn a year within five years.

Mr Pitman says: "If, for the same money, you get a better service, everybody should be a winner. If standards in schools rise, the private sector deserves a profit on that."

The key reason for growth in this market is that the Government is insisting on devolving an increasing part of the education budget straight to schools, rather than handing it to LEAs to be spent on their schools. This move will give 90 per cent of the budget directly to schools. It means that schools can shop around for services and LEAs will have to compete with private sector providers, and non-profit voluntary organisations, for the business. Correspondingly, the market will grow because the private sector is now grasping this opportunity. Big outsourcing specialists such as Capital, WS Atkins and Serco are winning contracts, acquiring small operators in this sector, and putting together formidable teams to launch an assault on this market.

These outsourcing contracts are separate from the multi-billion pound market for building new schools, under the private finance initiative (PFI) so enthusiastically taken up by Tony Blair's Government. Since November 1997, some 30 contracts have been signed to build 450 schools in total. Capital expenditure on schools is said to be worth £8bn over the next two to three years. New Labour has been accused of being infatuated with the private sector. The second term's impact on schools will show how true that is.

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