Deteriorating financial markets have led to a decision to replace £1.3bn of private finance on the Priority School Building Programme with direct funding, according to its capital director.
Mike Green also stressed the use of a more “prudent approach” through an “innovative” aggregator model – a central fund run by a financial institution to raise £700m of finance – was vital to “getting each of the five batches away”.
The Education Funding Agency announced on Friday that 46 schools in five batches will be rebuilt under the government’s new approach to public private partnerships, known as private finance 2.
These schools have a total funding requirement of approximately £700m.
He stressed the move to a capitally funded approach was not a sign of a lack of confidence in the new PFI, private finance 2, saying “our confidence in the PF2 model is high” and that it was a more efficient route to private finance.
The EFA capital director also threw down the gauntlet to the industry, saying there was “a challenge to the market to help us to make this work”.
Construction News reported in October last year that the EFA was looking at an alternative to private finance, but the Department for Education said at the time that “we are not replacing the private finance element of the PBSP with capital”.
Mr Green said that was the view in October but that the markets had deteriorated significantly, which also led to a decision to pursue the aggregator model.
He said the current climate meant there was a “lack of availability of suitable long-term bank debt”.
“We have been giving this quite a lot of consideration behind the scenes and we have only recently made the decision that’s been announced today,” he continued.
“We’ve talked to lots of people, looking at rates of other projects, and I think the deterioration is clear.
“Without using the aggregator we would not have confidence we could get each of the five batches away on the basis of what appears to be availability of bank debt at the moment.”
Mr Green said the £300m of capitally funded schools announced today would hit the market in the next six months under the existing EFA academies framework. More capital is expected to be announced at June’s Comprehensive Spending Review.
Contractors were already calling for more information on how the central fund, first revealed by Construction News last month, would work.
Wates education chief Steve Beechey said the industry needs information on the equity arrangements and remaining contract documents to allow bidders to prepare their solutions.
Mr Green said there would be more information available at the bidders’ day on 28 May when the £122m Hertfordshire, Luton and Reading private finance batch will be launched, with an OJEU notice to follow in June.
He said the aggregator will provide the senior debt, which means the government had “effectively taken away from bidders at batch level the need for them to find the finance”.
The EFA is yet to finalise a date for the aggregator procurement, but said it expected it to be signed off “some months prior” to financial close on the South-east schools batch.
Mr Green conceded the aggregator – which will be a financial institution with experience in the debt and capital markets – would come at a price, but said it should also enable them to borrow at cheaper rates.
He declined to forecast what savings could be made overall, saying it would fluctuate with the markets.
“Whether or not that proves to be the case remains to be seen,” he said.
He added that the EFA expected a debt to equity split “similar to what we’ve seen in the past” with some equity from the bidders and some from the public sector, in line with the PF2 model.
Mr Green also said the aggregator will provide a model that can be used in the future on other schools.