Are private firms the saviours of dilapidated student digs? Jonathan Rutherford considers the impact of PFIs.

Higher education is joining the schools and health private finance initiative markets as a lucrative source of long-term revenue for business, and nowhere is it more popular than in university accommodation. Seventeen ÖйúAƬ institutions have signed PFI deals for student residences, among them Brighton, Greenwich and Oxford Brookes universities and Falmouth College of Art.

The PFI aims to fund the building and running of expensive infrastructure and public services. Debt and equity used to finance a project are repaid from revenues generated by the project. The Conservatives started the PFI in 1992 as a device to limit public borrowing. In 1997, Partnerships UK was set up in the Treasury to promote and extend the PFI. Although new Labour has championed PFIs, questions remain about who owns and is accountable for them and about their affordability in the long term.

In October 2002, the Office of Government Commerce reported 524 PFI schemes with a capital value of ?22.9 billion. The sum is based on public-sector estimates for capital expenditure, which are, on average, just 22 per cent of the full cost of PFI projects. The cost of the extension to Wythenshawe Hospital in south Manchester, for example, is put at ?65.6 million, but Alfred McAlpine, a construction company involved in the scheme, says that total revenues will be ?550 million over 35 years, plus additional equity returns through renegotiating its loans after completion. Add to this advantageous land sales and asset transfers, and the cost to the public of such projects rises even higher.

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There are 81 education PFI projects in England, most of them in schools, at a value of ?1.5 billion. But Dave Batty, director of the PricewaterhouseCoopers project finance team, estimates that by 2005 there will be more than 1,000 public-private partnership schools.

PFIs involve many partners, from banks to facilities management firms. Reflecting their rising power, a growing number of financial institutions are forming long-term partnerships with construction and engineering firms. These have turned themselves into support services infrastructure management companies to reap the higher returns to be found in the PFIs and outsourcing markets. Another example of the complex deals being struck is arms manufacturer Vosper Thorneycroft's recent acquisition of Westminster Education Consultants, a supplier of school inspection services. Vosper Thorneycroft also owns Careers Management Group, which provides Connexion services in London and the south.

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Big accountancy firms are also ubiquitous. KPMG has negotiated public-sector deals worth more than ?7.5 billion using PFI and public-private partnerships. Law firms are significant actors as universities outsource more services. Eversheds has more than 90 ÖйúAƬ institutions and 230 colleges as clients.

As the PFI market develops, business is demanding the standardisation of contracts and bidding procedures. The drive for economies of scale is encouraging the "bundling" of schemes across services such as housing, schools and social services into single large packages. Partnerships are becoming self-standing companies. Government policy is also encouraging the creation of a corporate welfare network in which the high bidding costs favour large corporations.

In addition, PFIs are "entangling" public services in the capital markets. Historically, bank debt funded PFIs, but bonds are proving an attractive form of long-term financing. Bonds require an international rating. To get a good rating and cheaper funding, companies insure their bond issues with monoline insurers. The European bank Dexia bought the monoline Financial Security Assurance in 2000 for $2.6 billion (?1.62 billion). Dexia has acted as arranger and lender in more than 20 PFIs. For Pierre Richard, chief executive of Dexia's management board, "public-sector clients are a mineI we are just beginning to exploit them". Bonds need an active secondary market that will persuade investors to take on new assets in the primary market knowing that they will be able to sell them on if necessary. Last year, PFI projects created a secondary market. More liquidity in PFI bond financing will foster the global trade, and hence ownership, of PFI project debt.

The PFI market is shrouded in commercial secrecy, funded by arcane financial packages and vulnerable to mergers, acquisitions, fluctuations in capital markets, bankruptcy and corporate ambition. The European Services Forum is lobbying for public procurement in services to be part of the General Agreement on Trade in Services, which would further liberalise the secondary market in PFIs.

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Questions remain about the long-term accountablility and affordability of PFIs. The government has promoted them in education at a time when the Department for Education and Skills has reported huge year-on-year underspends in its budget and the Treasury's current account surplus for 2000-01 was ?23 billion. In local authority deals, central government covers only 75 per cent of capital costs. Who will bridge the gap 20 years down the line? How will universities pay when the companies running their student accommodation raise their fees?

Jonathan Rutherford is a reader in cultural studies at Middlesex University. This is a version of a paper for the February 22 Soundings journal conference on "Alternative Modernisations: Markets and the Public Sphere". For details, contact Sally@lwbooks.co.uk