The closure of Bristol Building Schools for the Future (BSF) project creates the UK's first Local Education Partnership (LEP) - a new breed of strategic partnership tying consortia to local councils for multi-deal programmes

The programme has been criticised of late for its overcomplexity, not least by its chief instigator Richard Bowker, who leaves Partnerships for Schools (PfS) this month.

Despite these tensions, the Bristol deal closed in just seven months and with the 'tightest financing seen for a UK education PFI.'

But does the deal answer all the questions that have been raised about the controversial programme?

Introduction - Building Schools for the Future

The Building Schools for the Future (BSF) programme was launched in February 2004, with the aim of rebuilding the UK's entire secondary school stock.

Like the LIFT scheme for healthcare projects, BSF was designed to cut the bidding costs by awarding successful consortia an education authority's ten-year pipeline of projects on a strategic partnering basis.

Unlike LIFT, BSF includes scope for the private sector taking commercial risk and, more worryingly for financiers, provision to finance schools on a conventional funding basis instead of through PFI.

There are another five projects at preferred bidder stage vying to join Bristol and earlier this month the scheme was rolled out to another 33 local authorities bringing the total number to 70 with a potential capital value of £40 billion.

However the scheme has not gone entirely smoothly.

The programme suffered a blow in May when Partnerships for Schools chief executive Richard Bowker quit for travel operator National Express, criticising a sector where participants were more concerned with debating structures than delivering projects.

The ability of PFI to deliver schools has also come under scrutiny.

This week the Commision for Architecture and the Built Environment (CABE) slated 81 per cent of schools built over the last five years as average or poor, with 9 of the 10 lowest-rated having been built through PFI.

The project - Bristol BSF

Despite the recent problems with the scheme itself the Bristol pathfinder project has proved a suitable poster child for the scheme.

The first four-school stage entered the market in October 2004 to a warm response, drawing PQQs from 11 bidders, which were soon whittled down to consortia led by HBG and PFI stalwarts Skanska and Equion. 

Skanska - bidding with Mill Group - eventually saw the challenge of Equion/HBOS and Skanska to reach preferred bidder in December 2005.

Skanska was then faced with the task of getting the four schools with a total of 5,000 pupils:

• Brislington Enterprise College
• Hartcliffe Education Campus
• Speedwell Technology College
• Whitefield Fishponds Community College

completed in time for the 2007/8 school year.

That aim was not helped by an unforeseen delay at one of the schools.

Rebecca Pritchard, project finance partner at the council's adviser Grant Thornton says, 'It became very clear early that Hartcliffe was lagging behind the others because of planning and other complexities and therefore was not going to be in a position to reach financial close at the same time.'

Despite the delay, the consortium was able to sign the standard form documentation on time for 30 June 2006.

Interestingly, the SPV will also be responsible for generating revenues from community leisure facilities across the four sites, including a martial arts centre from which the SPV itself will take commercial revenues.

Financing

The pathfinder's financing also attracted intense interest from banks but bore all the hallmarks of a tightening market.

The Skanska/ Mill Group consortium held a funding competition in 2005 which received bids from between 8 and 10 banks before SMBC and Barclays were selected as mandated lead arrangers financing on a bank debt basis.

Having already outbid the competition, the MLAs subsequently reduced their pricing in early 2006 to a two-figure sum above LIBOR in the face of further constrictions in the financing market.

Barclays and SMBC will provide a £122m funding package consisting of £113m in senior debt and a further £9m in reserve accounts and other facilities. The debt has a 26-year tenor from the completion of construction.

A source close to the deal describes the funding as, 'the tightest yet seen for an education PFI.'

While the figure remains confidential, market sources estimate the pricing has set a tight benchmark to follow at LIBOR plus 80-90bp falling by around 10bp post-construction.

The financing includes a committed facility for Hartcliffe school which will reach full close in September 2006.

The SPV ownership is split between Skanska (44 per cent), Mill Group (36 per cent) and Partnerships for Schools (20 per cent) on what will become the set ownership structure for BSF deals. The three will provide a total equity stake of £11m.

The consortium will receive an annual unitary charge of £14m while Skanska receives an extra £2.8m a year for providing hard and soft FM services.

Syndication - which is expected to be targeted at relationship banks - is due to be launched in October this year to allow for the close of Hartcliffe.

Conclusion - Future Perfect?

The deal will come as a vindication to the engineers of the Building Schools for the Future programme whose brainchild has been lambasted as over complex and overambitious.

The consortium and banks managed to process the new standard form documentation in quick time to close the deal in just seven months - and by a whisker-thin margin, in time for first year results.

But the outlook is not completely rosy, the tightness of the financing and the cover ratios belie a deal that was as close to a plain vanilla education PFI as the LEP structure allows.

It will be interesting to watch whether projects lacking the large PFI element or watertight investment grade sponsor of Bristol will attract the same enthusiasm from financiers.

On the other hand, with rumbles in the market suggesting banks are bidding for projects in the 60s plus LIBOR, those caveats may be put aside in the interest of securing dealflow.

As for Partnerships for Schools, Richard Bowker will be able to point to 'delivery' in his last month at the helm. The word on the street is that his replacement will be a heavy-hitter from local government.

But for the more complex hybrid PFI and non-PFI projects on the horizon, innovation in deal structure will be equally important as efficient delivery.

The project at a glance