Capital finance for schools deals another blow to PF2, says expert

Jonathan Hart, an infrastructure law expert with Pinsent Masons, the law firm behind Out-Law.com, said that many in the construction and project finance industries were likely "throwing their hands up in despair" at suggestions that the £2 billion infrastructure scheme may be directly financed. The Government had previously indicated that the project would be the first to be procured using new 'PF2' approach to private financing of public infrastructure.

"The Ministry of Defence has already turned its back on PF2 structures for its future accommodation deals," Hart said. "These latest suggestions from the Department for Education (DfE) and Educational Funding Agency suggest that they might not share the confidence of the Treasury that the private sector is capable of undertaking the heavy lifting required by PF2. If the Government is going to go to the capital markets itself, then one might be left with the uncomfortable question as to how the PF2 model is ever going to be used. If not now, then when?"

"Last December's announcements from the Treasury in relation to PF2  may have caused some grumbles from the private sector about the way in which the structures of deals would be changed, increased government interventionism in the running of project companies and the challenges for project sponsors of seeing their equity runs diluted. But PF2 did, at least, represent a way forward," he said.

The BBC reported earlier this week that the Government was investigating the possibility of directly financing the PSBP, which is intended to address the needs of the schools in the worst condition in the country. It is already financing work on 42 schools deemed to be "in the very worst condition", or for children with special educational needs. InfraNews has since claimed that the DfE will launch an equity and debt fund to finance the programme. The stories follow reports by the Local Government Agency (LGA) that many head teachers had no idea when vital rebuilding work would begin on their schools, while others had been told that contracts would likely not be awarded until 2015.

The Government named the 261 schools which would receive funding under the PSBP in May 2012. At the time, Education Secretary Michael Gove indicated that work would begin immediately so that the first new schools built under the programme could open in 2014. Schools were selected from 587 applicants for repair, rebuilding or refurbishment under the programme based on their need. The PSBP replaced the previous government's Building Schools for the Future programme, which was cancelled in July 2010.

PF2 is the Government's proposed replacement to the discredited PFI form of project financing. Among other changes, PF2 will see the Government take on the role of a project shareholder holding a maximum stake of 49%. This will allow the public sector to recover a share of the profits made by projects in the same way as private sector investors. Institutional investors, such as pension funds, will also be encouraged to take a stake in projects.

Infrastructure law expert Jonathan Hart said that the PSBP should have been "top of the pile" for seeing PF2 used.

"Many potential bidders for PSBP have been ready to start addressing the challenges of securing bank commitments to their bids and – in line with the Government's intentions to secure new sources of institutional investment – to start looking at new ways of bringing pension and insurance fund investors on board," he said. "There must be some question as to whether this enthusiasm is misplaced or premature, at least."

Earlier this month the Government announced that it was abandoning a planned private finance arrangement for trains on the new Crossrail route. The public sector will now finance the estimated £1bn cost of providing a new fleet of trains and maintenance facilities on the cross-London line, in order to ensure that services "can open as scheduled", it has said.