Schools that opt out may be awarded loan rights

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Grant-maintained schools are to be allowed to expand by borrowing on their assets, under legislation being planned by Gillian Shephard, the Secretary of State for Education.

The move to put grant-maintained schools on the same footing as local authorities, which can raise loans through banks, is certain to prove controversial. It could lead to banks taking over capital assets, such as playing fields, if the schools got into financial difficulties.

A development fund would be established centrally to allow Mrs Shephard to give the grants for more buildings as part of the Conservative philosophy of offering more choice to parents.

Directing funding, which she believes could help to overcome Labour and parental opposition to grant-maintained schools, was pioneered by John Redwood, the Thatcherite Secretary of State for Wales, although the fund will be limited.

The proposed grant-maintained schools Bill is part of a package of measures now being drawn up by the Cabinet committee on future government legislation, chaired by Tony Newton, Leader of the House, for the next Queen's Speech.

Mr Newton has told colleagues to put in bids for Bills which will be both popular and put Labour on the defensive for the last full session of Parliament before the general election.

The measure is still under discussion between Mr Newton and Mrs Shephard but it is certain to get the go-ahead from the Prime Minister.

Tory party sources confirmed John Major intends to make education and "choice" a corner-stone of his campaign for a fifth Conservative term of office.

Mrs Shephard has told colleagues she wants to give the grant-maintained schools a boost to improve their management. She is convinced it will put Labour on the defensive. Labour sources have privately admitted that Tony Blair's decision to send his own son to a grant-maintained school some miles from his London home has done serious damage to his support within the party, although it may have enhanced his position with the voters.

David Blunkett, the shadow Education Secretary, welcomed the Tory challenge over grant-maintained schools presented by the Bill. "We can beat them on the issue," he said.

Mr Blunkett is reviewing Labour's plans to bring grant-maintained schools back under democratic control, but sources denied reports that he was planning to propose a commission, including parents, to run the schools.

Sir Timothy Lankester, permanent secretary at the Department for Education, told the Public Accounts Committee earlier this month that the Government would like to be able to give grant-maintained schools new fund-raising powers.

Further education colleges have already been given the power to do this. The move is believed to be part of the Chancellor of the Exchequer's private finance drive. There are big problems with school buildings, including several grant-maintained schools, after years of neglect on capital spending.

Cabinet sources have also confirmed that Mrs Shephard is pressing ahead with a separate plan to give other state schools in England direct capital grants to expand according to their popularity, overriding local education authorities, many of which are Labour controlled.

Civil servants at the Department for Education yesterday described the reports as "speculative".

Opponents say the main drawback would be that as some schools expanded, others would be thrust into a spiral of decline with dwindling pupil numbers and funds.