How the private sector failed to deliver

Business, ministers insisted, would do a better job of running the state schools than local councils

Shares in edubusiness - the companies that try to take over parts of state education and run it at a profit - have been taking a battering on the stock exchange for more than a year. The likes of Capita and Nord Anglia, which might reasonably have expected to withstand the general decline in the stock market, are worth much less than they used to be.

Three years ago, when the education watchdog Ofsted reported that a local council was not handling its education service properly, the service would be promptly taken out of its hands and handed over to an edubusiness company. That's what happened to the London boroughs of Hackney in 1999 and Islington in 2000. But since Islington, not one council has handed its whole education service over to a private sector company (though Bradford came near to doing so). Hackney has now taken the contract away from Nord Anglia and created a non-profit trust to run its education. In Islington, the edubusiness responsible, Cambridge Education Associates, was fined £300,000 last year - more than a third of its management fee - for failing to reach its targets on exam results. This year it expects to be fined £450,000. Nobody wants to go down the Islington route any more. Essex - a ferociously Conservative council - has just dropped a plan to privatise its education service.

Soon after it had flayed Hackney and Islington in 1999 and 2000, Ofsted meted out the same treatment to Bradford, Rochdale and another London borough, Waltham Forest. The then Ofsted chief, Chris Woodhead, in a typically sweeping and unfair generalisation, said all three had an "ingrained culture of failure and hopelessness". There followed a stern ultimatum from the government that the councils should privatise their education services, or lose them. That is what Woodhead wanted; and in those days, what Woodhead wanted, Woodhead usually got.

Yet rather to their surprise, all three councils got away with half-measures. Rochdale managed to convince Whitehall that it should seek help from a neighbouring council, and got it from Blackburn. Waltham Forest started on the road that had led Hackney and Islington to surrender all its powers to an edubusiness: it brought in a team from the management consultants PricewaterhouseCoopers. How much the report cost council tax-payers is a closely guarded secret, but it was at least as much as the £250,000 the same consultants had charged Islington. But the consultants offered a sort of third way, short of complete privatisation, and the council jumped at it. The council would continue to take policy decisions and employ the chief education officer, but the local authority's services to schools would be handled by a private company. The contract went to a consortium of Nord Anglia and the construction company Amey.

Bradford hired Serco, a multinational firm of management consultants, on a ten-year contract. The company now employs 1,200 former council staff responsible for providing support to schools, but the council kept control of school buildings and education for very young children; and Serco cannot close schools without council permission. Unlike Islington, Bradford does not penalise Serco if it does badly; instead, the company gets extra money if it does well.

Other troubled councils have found ways of involving the private sector without handing over control. Leeds formed Education Leeds with Capita as a "strategic partner". Capita also provides "strategic management" to Haringey, another London borough. It poached Nottingham's director of education to run the operation - though edubusinesses routinely claim that they can do everything much better than councils can, they seem to rely for their expertise on tempting away, with higher salaries, local government's top management.

Other councils managed, like Rochdale, to avoid the embrace of edubusiness altogether. South Tyneside got its help from Hartlepool, and Doncaster from Warwickshire. Bristol created an advisory board, under the director of the London University Institute of Education.

The most bizarre company to get involved in running education is now negotiating its way out of its £20m-a-year contract with the London borough of Southwark. W S Atkins is an engineering company and its previous involvement with education has been limited to putting up school buildings and looking after them. Quite why anyone thought this qualified the company to provide support for the teachers in Southwark's schools remains a mystery. Whatever is the case, the borough says the company has presided over a fall in standards, the company says the borough did not give it enough money, and it is all ending in tears. Once they have negotiated an end to the contract, education staff will return to being employed by Southwark.

Though edubusiness is still involved with many of these councils, it now seems to be tacitly accepted that handing the lot over to a business does not work well. Capita has a particularly patchy record - in Haringey, for example, its "strategic management" left peripatetic music teachers unpaid for several months.

Edubusiness's other licence to print money, the Private Finance Initiative, is also in trouble. Ministers still frequently insist that they will only permit a local council to spend large sums of money on schools if the council, in effect, hands over their management to a private company. The private company lays out the capital and then takes it back in charges over 20 to 30 years. But there is a growing rebelliousness among councils, fuelled by a catastrophe in the London borough of Brent. Brent Council spent five years negotiating with construction companies over a PFI deal which fell through, and throughout that time the council's schools were allowed to rot. PFI does not look as much like a surefire winner as it did in the hopeful early days of new Labour.

Edubusiness has reacted to adversity in typically robust style. The problem, say the companies, is not that businesses have been given too much control of our education system, but that they have not been given enough. In privatised council education services, and in schools with PFI projects, they become the effective management of the school. They take decisions about priorities, about staffing levels, about equipment, even (in Islington) about which schools close and which stay open. But there is one thing that still remains, whatever happens, in public hands: the employment of teachers. The only way companies can gain control of that is by sponsoring a city academy, which entails putting in their own money and not expecting a financial return on their investment. That is not what new entrepreneurs such as Kevin McNeany, who founded Nord Anglia and is now a millionaire several times over, went into business for.

So the new message from three edubusinesses - Nord Anglia, Cambridge Education Associates, and the not-for-profit charity CfBT - is that to make privatisation work well, they must have control of teaching and learning, and employ the teachers. "This could take private sector involvement in education to a new level," Vincent McDonnell, Cambridge Education Associates' operations director, is quoted as saying.

It looks more like throwing good money after bad. Education was supposed to be transformed by sprinkling private sector gold dust over it. Since the prediction failed to come true, the proposed solution is to smother it in the stuff.

Edubusiness also wants control of the sort of buildings that schools have. Doing up existing buildings is a dodgy commercial proposition: there is always the chance that you will find something you didn't take into account when costing the job. So if the job is to be done under the PFI scheme, companies now insist that they must tear down the existing building and build a new school.

Giving it more power will not rescue edubusiness. A recognition of its limitations just might. Edubusiness has not failed completely. Some councils whose education departments were in serious trouble - Islington, Bradford, Waltham Forest - have seen real benefits. But the companies became convinced by their own and new Labour's rhetoric into believing that they could perform miracles of which the palsied public sector was incapable. They were deemed to be better managers of everything simply because theirs were private hands, which made profits.

If we stop despising the public sector, we can have all the benefits of edubusiness, while at the same time keeping our education system democratically accountable.