Concerns over cost and timetable led to £1bn PF2 schools cut

Concerns over the speed of deliverying private finance schools as well as the cost of the private capital were key reasons for the £1bn reduction in the government’s flagship private finance schools programme, Building has learned.

Last week, the Eucation Funding Agency (EFA) capital director Mike Green blamed a “deterioration in the long-term debt markets” for a more than £1bn reduction in the privately-financed element of the Priority School Building Programme (PSBP).

However, government sources told Building this week that the cost of private capital and the concerns over the speed of delivery of PF2 schools were also factors in the change, with finance experts saying there has been no noticeable deterioration in debt funding markets since the December autumn statement.

Richard Threlfall, head of infrastructure at KPMG said he believed the EFA’s justification for the change was a “red herring”.

Green denied that the reduction in the £1.75bn privately-financed element of the programme to just £700m was caused by a negative reaction by potential investors to the PF2 model, launched by the chancellor George Osborne in December last year to replace the controversial PFI funding system.

The more than £1bn reduction will be partially made up by a £300m injection of new capital funding.

The EFA said last week the £700m PF2 programme will fund 46 schools, released in five batches, with the first batch, covering Hertfordshire, Luton and Reading, to come to market in June.

Four further batches will be released within the next 12 months (see box below).

The announcement last week comes after the Department for Education admitted in March it was struggling to attract sufficient private finance into the PSBP and was exploring a range of options, including the bond markets and the European Investment Bank.

Green said the downgrade of the privately-financed element to just £700m was due to “deterioration in the debt and funding markets”. He said there was a “high level of confidence” in PF2.

As Building revealed last week, the EFA will raise the funding for the privately-financed schools by procuring an “aggregator” body to provide the debt funding for the schemes. The EFA said the body would be able to access the bank debt and capital markets “to secure the best deals for the taxpayer”.

Under traditional PFI, each of the bidders for the contracts would have had to raise finance to fund the construction themselves.

The EFA is expected to unveil more details of how the aggregator will work on Monday 20 May.

The procurement of a financial institution to run the aggregator will run alongside the procurement of contractors for the first batch of PF2 schools. Green said the EFA’s target was to get the aggregator deal signed “some months” before reaching financial close on the procurement of the batch.

If you would like to register your interest for the Herts, Luton and Reading Bidders Day on 28 May then please email your Name, Title, Organisation, Contact Number and Email Address to PSBP.HLR@education.gsi.gov.uk