Two years late, schools project is still in detention

Teething problems delayed the Government's plan to rebuild 3,500 secondaries. And now the credit crunch is biting.

Armando Di-Finizio was in "a big panic". It was the grand opening of Bristol Brunel Academy, the secondary school at which he is the principal. Aside from first-day nerves, the pressure was intense for two reasons: this was the first institution opened under the government's £45bn Building Schools for the Future (BSF) programme and Gordon Brown, still immensely popular barely two months into his premiership, and Ed Balls, the Schools Secretary, were "roaming about somewhere on site".

Mr Di-Finizio was particularly worried that many of the pupils' parents had not picked up the free school uniforms that had been provided over the summer. He was relieved when the children came through the gates suitably attired to greet their prestigious guests.

This was last September. By then, 100 BSF schools should have been built, the Government having announced its intention to refurbish or reconstruct England's 3,500 secondary schools four years earlier.

The sheer scale of this ambition was the result of a dare by the then-schools standards minister, David Miliband, to his civil servants. Having secured the education department extra funds from the Treasury for the 2002-03 financial year, he promised civil servants similar investment in the future if they could come up with a radical way to spend it. Word has it that officials dreamt up the idea of revamping the entire secondary school estate over too many drinks at a hotel bar during Labour Party conference.

Few in the private sector were surprised that such an audacious programme experienced teething troubles. Most even praise the progress made since Tim Byles was appointed chief executive of Partnerships for Schools, the agency responsible for BSF, in November 2006. When he arrived, only one deal had been signed with the private sector: now there are 19 contracts and 12 more schools have opened since Bristol Brunel.

But there remain problems – the credit crunch is starting to bite even in this Government- backed flagship project. In anticipation, the Government, through Partnerships for Schools, is looking into changing much of BSF's debt structure. The private sector is also finding the length of bidding for a project – about 18 months – inhibitive as costs, such as lawyers and architects fees, are £2m a year. There are fears that these costs will lead to what is already a small market – no more than 30 companies are interested in playing leading roles in BSF – shrinking further. Finally, due to end by 2020, the programme is at least two years behind schedule.

A BSF project is formed through a "Local Education Partnership". Private sector consortiums bid against several rivals to form a partnership with a local authority and Partnerships for Schools to build or refurbish and maintain an area's schools over a number of years. This guarantees a steady stream of work for the construction company and IT providers that typically make up the consortium. Some of these partnerships are huge: a Land Securities Trillium-led consortium, for example, won a £600m contract for Kent schools.

Although government money is secure, the private sector still has to raise cash from the debt markets to build about half of the schools through the Private Finance Initiative (PFI). Essentially, the PFI sees the consortium pay to build and operate the asset, and the public sector pays this plus profit back over the length of the contract.

Getting that bank debt is proving difficult: "We've seen some hardening of position from some lenders," says a BSF source, who adds that a lender in one scheme had to be replaced because of its terms. "Some have taken themselves temporarily out of the market to lend. Others won't expose themselves to lending more than £30m to £35m, so if £90m is required, you will need three banks to agree the loan."

The Government is looking at a solution that would see short-term loans for several partnerships "warehoused" together. These two-and-a-half year loans would simply pay for the construction of schools and, when the debt market improves, would be refinanced so that they become longer term, 25-year PFI-type structures. The source adds that local authorities have powers to borrow and "several are seriously considering" taking up that option and then lending it on to their private sector partners. That way, when there is a refinancing, the local authorities would gain much of the upside.

Byles, the Partnerships for Schools boss, confirms: "We are looking seriously at the way the schemes are financed. We are thinking about more flexible sources of debt finance, shorter-term funding and refinancing during the [construction] process."

A longer established concern is the length of time taken to bid for contracts. A Partnerships for Schools review this year promised to reduce the average time from invitations to bid to signing a contract down from 82 weeks to 75 weeks. "Two months is not going to make a whole lot of difference in the scheme of things," huffs a construction industry source. "More time needs to be taken out of the process if we are to build the schools that the Government wants built."

Paul Lester is chief executive of VT Group, which is on the £325m Lewisham BSF. He argues that Partnerships for Schools and local authorities should be aiming to get contracts signed within 12 months: "They should choose preferred bidders much quicker, and that would save on unwanted expenditure and obviously save our team time to work on something else should we lose a bid."

Lester admits that the problem with this is that the public sector might be concerned that choosing a bidder more quickly would probably mean that many contract details would not be thrashed out. This could mean that the private sector, with its public counterpart over a barrel, is tempted to improve their terms. However, in such a small market, the private sector needs to keep local authorities sweet, otherwise a consortium risks gaining a poor reputation which could lead to it losing more than bids. A one-in-three win ratio must be hit if companies are to offset the costs of bidding, say several BSF sources.

Byles is working on speeding up the process further and says he is adamant that the programme will be completed in the 15-year timeframe that was initially envisaged. However, he mischievously chuckles: "It depends when you start the 15 years."

Given that Bristol Brunel opened late last year, that would suggest 2022, two years behind the original target. A spokeswoman for Partnerships for Schools confirms: "By 2020, we expect most local authorities to have completed their full BSF programme. The remaining authorities will already have some new and refurbished schools completed and be in the final stages of renewing their remaining estate."

Given the problems, two years late would be quite a result.