Rethinking the business case for new schools

Posted September 19, 2017

  • State government
SGS Economics and Planning new schools

Australian cities will continue to face a growing demand for school places in their established areas; most notably in their inner areas, as urban renewal activities underpin ongoing population growth.

Unfortunately for state (and private) school planners, land prices in established areas have risen dramatically over recent decades; meaning that securing school sites is costly. Moreover, a new generation of school buildings is required as:

  • Sprawling campuses are financially impossible to deliver, and
  • Surrounding communities are increasingly demanding access to school facilities for after-hours/ non-school activities.

These issues are of increasing concern to government and to communities. Under each State’s Education Act, all children are entitled to a high-quality public education if their parents choose to send them to a state school. This entitlement covers all ages across the pre-, primary- and high-school-age groupings.

The fundamental impact of the base case

Traditionally in business cases seeking capital funding for new/expanded school projects, alternative investment options are assessed against a ‘base case’ option. The specification of this base case option is very important because all the costs and benefits of moving from this base case to each of the alternative project options are systematically identified, assessed and measured to establish how each of the project options perform.

SGS Economics and Planning Andrew Mc Dougall

Some may think it’s just theoretical nonsense, but the specification of the base case can fundamentally affect the assessed viability of new and expanded school projects.

— SGS Principal and Partner Andrew McDougall

Our team has worked with state government agencies to examine how the specification of this base case option fundamentally affects the business case for school funding proposals. In this work, the following base cases were developed:

Base Case 1: Do Nothing

Under this option, government would simply not provide any further places for students. Theoretically, this would cause overcrowded schools to ration school places, with potential reductions in places for some age groups. For example:

  • Primary schools might reduce the number of kindergarten places (if provided) offered to ensure all children can be accommodated in Years 1 to 6
  • High schools might limit Year 12 places to ensure all young people can complete school up to Year 11, causing some students to miss out on Year 12.

The intention of developing this base case was to identify the incremental costs and benefits of meeting legislative requirements under each of State’s Education Act.

Base Case 2: Do Minimum

Under this base case, the government would install demountable buildings to increase the supply of student places for the lowest capital cost. Often this is the default base case option. However, in adopting this base case, it is assumed that available school sites have the physical capacity to accommodate demountable buildings even though this is often unworkable (and it displaces alternative uses of school space such as playground areas).

What are the costs and benefits of establishing new/expanding existing schools?

If new school places are funded (i.e. the project option), the incremental costs and benefits will vary depending on which base case is applied.

Base Case 1: Do Nothing

A project which is assessed against a ‘Base Case 1: Do Nothing’ has the following incremental costs:

  • Capital works costs (once off)
  • Ongoing capital asset costs (school maintenance, cleaning, utilities, etc.), and
  • Ongoing school operations (teacher salaries, overheads and administrative costs).

The main benefit of the project providing additional school places is that no child misses out on school; meaning that legislative compliance is maintained and higher education attainment is achieved. This improved education attainment is associated with higher lifetime earnings, with there being a measurable difference in average lifetime earnings for people who have completed Year 12 compared, for example, to people who have only completed Year 11.

Moreover, there is also evidence that: a) children who attend pre-school are better equipped to deal with the challenges that school presents, positioning them better to thrive throughout their school years; and b) school students benefit from studying in a modern and up to date school, with the improved quality of infrastructure underpinning better education outcomes for all enrolled students, not just those who would have missed out on a place in under Base Case: Do Nothing.

Base Case 2: Do Minimum

If Base Case 2: Do Minimum is applied (i.e. a base case of installing demountable buildings), costs that are relevant to the project include only the incremental capital works and ongoing capital asset costs. That is, under both the base case and project options, student places are assumed to meet demand.

The benefits of the project include:

  • The expected educational benefits to children studying in purpose-built, up to date facilities, as opposed to learning in demountable buildings. Australian evidence [1] shows that up to date school infrastructure can result in higher quality teaching, which leads to improved test scores in children, which in turn leads to higher earnings later in life.
  • Children being able to go to a school closer to where they live, reducing travel costs; i.e. if demountable buildings cannot be provided locally due to the sheer physical capacity constraints at available school sites.

Quantitative impacts on project performance

While SGS cannot provide the official results of the cost benefit analyses undertaken, we can reveal that the specification of the base case had marked impacts on the assessed viability of the new/ expanded school projects tested. One project tested moved from generating a benefit cost ratio (BCR) of approximately:

  • 0.2 when the Base Case 2: Do Minimum was applied; meaning the costs considerably outweighed the quantified benefits, to
  • 1.4 when the Base Case 1: Do Nothing was applied; meaning the quantified benefits considerably outweighed the costs.

Clearly these different results would impact the likelihood of project funding. It is therefore imperative that school funding agencies think hard about how they position their projects, especially in established areas where the Base Case 2: Do Minimum option is physically impossible to deliver.

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For further information contact:

Andrew McDougall

Principal & Partner

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