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PF2 'still in need of a pipeline of projects' following Priority Schools announcement, says expert

Out-Law News | 14 May 2013 | 10:28 am | 2 min. read

Only 46 of the 216 schools due for rebuilding or repair under the Government's Priority School Building Programme (PSBP) will be financed through the new 'PF2' private finance programme, the Education Funding Agency (EFA) has announced.

The schools, which together need approximately £700 million in funding, will be procured in five batches over the next 12 months. The Hertfordshire, Luton and Reading batch will be the first to be procured, with further batches to be released to the market covering the North East, North West, Yorkshire and the Midlands. A notice inviting bids from firms interested in constructing and maintaining the schools will be published in the Official Journal of the EU in June, as required under EU law.

The Government intends to deliver the remaining schools due for work under the programme using capital funding, subject to the terms of the next spending review. It will publish a delivery timetable following the spending review settlement in June, it said. It will allocate an additional £300m in the current spending review period to enable the "early start" of work on 27 of those schools, it said.

Infrastructure law expert Jonathan Hart of Pinsent Masons, the law firm behind Out-Law.com, said that the announcement pointed to a procurement methodology "all dressed up with nowhere to go".

"The latest announcement from the Education Funding Agency in relation to the PSBP indicates that PF2 remains a procurement methodology in need of a pipeline of projects," he said. "The announcement is further evidence - if any were needed - that government departments still remain sceptical as to the value of seeking project financed solutions for delivering social or economic infrastructure."

The PSBP replaced the previous government's Building Schools for the Future programme, which was cancelled in July 2010. The programme is intended to address the needs of the schools in the worst condition in the country, with funding resources allocated from a set budget according to need. Of the 261 schools due to receive funding, 42 deemed to be "in the very worst condition" or those for children with special educational needs are to receive a share of a Government capital grant to complete the work.

PF2 is the Government's proposed replacement to the discredited Project Finance Initiative (PFI). 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.

Funding for the 46 newly-announced schools will be raised through an 'aggregator' model, to be managed by a yet-to-be appointed fund manager on behalf of the EFA. The fund manager will be able to access both bank debt and the capital markets in order to pull together the public sector's share of the funding, which will then be made available to the successful private sector bidder. The Government said that it would assess the performance of this model in order to inform future investment.

"In procurement terms, this approach could well speed up things – the emphasis for bidders will be on providing the winning technical solution (and equity investment), which no doubt will be welcomed," said infrastructure law expert Jonathan Hart.

"Nonetheless, the programme has been a long time in development, so whilst a flush of optimism is long overdue, it may be unwise to be too hasty," he said.

EFA chief executive Peter Lauener said that the Government's new approach to partnerships between the public and private sector provided a "great opportunity for industry to step up to the mark".

"These five privately-financed batches, plus the additional four capital-funded batches also announced today, will help us overhaul the schools with the greatest need, ensuring young people can learn in buildings that are up to scratch," he said.

"Today's announcement builds on the excellent progress being made on the original eight batches of capital-funded schools. The first schools will be delivered ahead of the original timetable," he said.