In August 2004 a Mowlem/Robertson consortium was named preferred bidder for one of the last stand-alone school PFI projects in Britain – the Cleveland Borough Council’s grouped schools PFI scheme, writes Marc Roca.

After nine months, right on the deadline, Redcar and Cleveland Borough Council and Modern Schools (Redcar and Cleveland) signed a £48m (US$87.5m) PFI deal for the provision of three secondary schools and two primary schools in the Redcar and Cleveland area.

Modern Schools (Redcar and Cleveland) – a consortium comprising Mowlem and Robertson Capital Projects –  signed one of the last stand-alone school PFI deals. From now on, all such school deals will come under the banner of England's ambitious Building Schools for the Future (BSF) programme.

The concession, which includes hard and soft services, will run for 29 years and eight months, ending on 31 March 2035. The total cost of the project over the period is expected to be more than £250m (US$456m).

The rationale

The Redcar and Cleveland Borough Council, in Middlesbrough, needed to upgrade schools within the borough and decided to replace them with new buildings. The council also down-scaled the facilities to account for falling enrollment.

The local authority took the opportunity when PFI funding became available and identified the schools that were in most urgent need of refurbishment or replacement, holding back others for a second round – which will come under BSF.

On the choice of the PFI route, the council’s project manager Lionel Dannby, is clear: ‘There’s no other way to get funding. In fact it’s the only way the government can offer funding, so we have to follow that route.’

The outline business case (OBC) went out in 2002 and the bids for funding were sent to the department for education and schools (DfES) later in the year.

The initial OBC included a sixth school – refurbishment – but ‘when the costs were coming in, it was clear that the costs of refurbishment were similar to those of a rebuilding, and it wasn’t considered value for money to continue with it’, Dannby says. The council decided to set that school aside and deal with it in the next seven-school round of funding.

Once approved by the council, a PIN notice was issued on 21 June 2003. A year later, the Mowlem/Robertson consortium was chosen as preferred bidder, leaving Jarvis as the runner-up.

The parties

The private consortium was split 50:50 between Mowlem and Robertson Capital Projects. Its financial adviser was Investec and Norton Rose acted as legal adviser.

Mowlem will construct the new schools, and its facilities management subsidiary Mowlem Aqumen will run them.

Grant Thornton's project finance team advised the council on the deal, while EC Harris provided technical advice. Nabarro Nathanson gave legal support to the council.

Dexia was mandated lead arranger and sole lender for the project. The bank was advised by Norton Rose, which set up Chinese Walls to act for the sponsor as well.

The project

The project involves the construction of five schools in the town of Redcar – three secondary schools and two primary schools. Two of the schools, the Sacred Hearts Roman Catholic comprehensive and the Saint Benedict primary school, are voluntary-aided and share the same site.

The other schools will be built on separate sites, replacing existing facilities that will be demolished after the works. They are the Gillbrook Technology College, the Bydales Secondary School and the community primary school in South Bank.

Each of the secondary schools will have a capacity of 750 and the primaries will have 330 and 315 places, respectively. Capacity has been slashed back at the older schools because of reduced demand.

Design and construction for the schools will cost £48m (US$87.6m), including £2.4m (US$4.4m) of post-completion capital – that is work reinstating the football pitches and demolition. Adding head office and parent company costs, the total amount is £51.8m (US$94.5m), according to project manager Dannby.

Mowlem Aqumen will provide soft and hard services to the schools for 28 years, including: cleaning, waste management, security, health/safety, building maintenance, utilities/energy, asset management, grounds maintenance, care taking/portering, catering, helpdesk, general management, pest control, fire, emergency and disaster management.

Tony Jackson, project manager for Mowlem, says: ‘At the time we were bidding for Gateshead schools as well, and we have quite a large regional building company based in Gateshead (Aqumen) so it was very local for us. Also we were operating the South Tees hospital which is about 10 miles away, so we had a lot of FM infrastructure people already based in the area.’

The work

Work started on 20 April 2005, the day after financial close, and all sites are being constructed simultaneously. The primary schools are scheduled to be handed over on 18 April 2006 and the secondary schools in October 2006.

The sites are fairly even and no technical difficulties are expected.

The financing

The project is being funded by a standard combination of around 10 per cent equity and 90 per cent of senior debt.

As sole lender, Dexia Public Finance Bank provided £54.6m (US$99.6m) senior debt which it may syndicate in the future.

Equity in the project was £4.9m (US$9m), split 50/50 between Mowlem and Robertson Capital.

Mowlem’s Tony Jackson says: ‘With a deal of about £50m (US$91m) capital cost, we normally go with a lender that is big enough to actually be sole lender. Dexia has quite a flexible approach to cut-off amounts – amounts some banks don’t want to lend on their own.’

Mowlem and Dexia have a ‘long-standing and a very good working relation’, Jackson adds. ‘We have worked together on several deals, including the Exeter school PFI which closed about a-year-and-half ago and the Barnsley schools, which closed two weeks after Redcar & Cleveland’.

The hurdles

According to Jackson, one delay during the preferred bidder staged was caused by ‘a problem with affordability, and one of the schools initially in the plan had to be dropped from the scheme, once it became obvious that with that school the project was unaffordable’.

Both Jackson and Dannby point to the added complexity of a deal involving voluntary-aided schools as an issue that had to be overcome.

‘On this project there were two voluntary-aided schools, a Roman Catholic secondary and primary school,’ says Jackson, ‘so in some respects that does lengthen the PB process, especially in legal aspects, because you’ve got the governors and the dioceses coming into the negotiations.’

Dannby said: ‘When there are voluntary-aided schools, there’s a different funding regime, plus you are dealing with another party in the agreement which creates the necessity of adding more time.’

Conclusion

All-in-all, it was a fairly straightforward deal with the voluntary-aided element throwing a stumbling block in the project’s way. That, however, was surmounted and acted as a precursor to a more costly problem – the introduction of a new type of contract, the SOPC3.

Jackson says: ‘One of the things that slightly delayed the process is that when we were made PB, it was before the SOPC3 legal contract had been issued by Partnerships UK and the DfES.

‘Halfway through the negotiations, when the authority and ourselves had already agreed certain commercial risk allocations, aspects of SOPC3 were imposed on us and that actually took quite a bit of time to renegotiate.’

Dannby adds: ‘With the government changing the rules halfway through a project, it inevitably increases cost, mainly cost of fees – legal, technical, financial adviser fees. The one element of PFI that is never really being controlled in a positive way by our government is this fee generation, excessive for what is achieved at the end of the day.’

Norton Rose partner Martin McCann concludes: ‘Although this is one of the most mature PFI markets in the UK, there were still challenges for us in negotiating several aspects of the projects, in particular vandalism and insurance. I think the solution we adopted on both these deals will serve as a useful template for future education projects.’

As the last in the individual, stand-alone projects, this deal sees out the old and welcomes in the new with Building Schools for the Future which has now replaced this structure.