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Schools finance model to create ‘level playing field’ for contractors

The Education Funding Agency has said the funding model for £700m of privately financed priority schools will help create a ‘level playing field’ for contractors bidding for work.

It released details of the aggregator model that will be used to raise almost £700m to fund the rebuilding of 46 schools at its aggregator bidder day on 28 June.

Construction News revealed that the EFA would use a central debt fund model to finance a proportion of priority schools in April.

EFA private finance deputy director Dan Rudley told Construction News the master aggregator – a financial institution – would access the financial markets, including long- and short-term debt, to raise 90 per cent of the funding requirements.

Mr Rudley added that the EFA has a “realistic expectation” to issue to OJEU notice for a master aggregator at the end of July and a nine-month procurement process would follow.

“We were left with the challenge of delivering the projects in relatively tight time scales. The aggregator gives a certain delivery route”

Dan Rudley, EFA

“Prior to now, most of this type of project has been reliant on long-term bank debt. But that long-term bank debt was not available at reasonable rates, for a variety of reasons,” he said.

“We were left with the challenge of delivering the projects in relatively tight time scales. The aggregator gives a certain delivery route.”

For contractors bidding for the privately financed batches of schools, the aggregator “means we have taken finance out of the equation.”

Mr Rudley added that it creates a “level playing field” but warned that contractors must achieve an investment-grade credit rating to win work.

“We expect batch bidders to attain a triple-B credit rating at least,” he said.

When bidding, contractors must also submit a ratings pack to an accredited credit rating agency and get their bid rated.

“There is no advantage to getting more than a triple-B rating, it’s pass/fail,” Mr Rudley added.

Aggregator structure

The aggregator will enter into a funding procurement agreement with the EFA that will require it to fund each of the five batches of private finance schools.

According the model developed by financial adviser HSBC and the EFA, the aggregator will use its own knowledge of the financial markets to determine the best funding strategy for the PSBP.

But the EFA expects the aggregator to access a mixture of short- and long-term bank debt, publically issued bonds and privately placed bonds to raise best-value and low-risk funding for the schools batches.

Mr Rudley said it remains to be seen whether the aggregator would invest its own capital in the model, but it is a possibility.

In accordance with private finance 2, the aggregator will supply each batch with up to 90 per cent of the necessary funding.

The remaining funding will be equity provided by the public sector, approximately 2 per cent, and the main contractor, which is likely to put in around 8 per cent.

Schools batches are required to accept aggregator funding and the aggregator is obliged to fund each batch.

Under the private finance 2 model, the public sector will provide around 2 per cent equity and the main contractor will put in approximately 8 per cent equity.

The indicative credit rating presented at the bid stage will serve to give the EFA confidence that the contractor can take on long-term bond finance from the aggregator without having to refinance the batch themselves at a later stage.

Mr Rudley added that the EFA is confident in its funding model. “We’re keen to tests this model and see if it works – we expect it will – and come back with data to inform future funding decisions.”

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