Northampton's £235m (US$412m) schools deal was the last major education PFI to be procured before the launch of the BSF (Building Schools for the Future) programme. As one of the last conventional PFI secondary education deals to be closed, it serves as a transitional project prior to the arrival of its bigger replacement

Closed on 22 December 2005, Northampton's grouped schools deal weighs in as a deal that will compete with its BSF cousins which are soon to follow. As one of the biggest PFI deals in British education ever to be signed - and the largest since 1998 - the DBFO project involves the construction or refurbishment of no less than 41 schools across Northamptonshire, central England.

A consortium of Babcock & Brown, construction firm Galliford Try, and Amey will build 11 new schools and refurbish a further 30 schools. Construction is to be carried out over almost three years. 

Northamptonshire County Council was awarded £116m (US$203m) in PFI credits, while project sponsor B&B reached financial close with Sumitomo Mitsui Banking Corporation  (SMBC) and NIB Capital for a £186m (US$326m) project financing facility.

For Laughlan Waterston, who worked on the deal for SMBC, Northampton Schools PFI is acting as 'a front-runner of the BSF programme'.

Waterston says: 'Although this project was not procured under the BSF programme, in many ways it is very similar to a BSF project and can be seen as a transitional scheme - between traditional schools PFI and BSF.

'While there is no LEP structure or public sector shareholding, the contract used was based on the BSF standard contract, and the size and nature of the project itself with a major refurbishment element is similar to some BSF schemes.'

The project, which was procured just before BSF was structured and approved between 2002-2003, also stands out because of its very large size and particularly for its more than 80 per cent proportion of refurbishment.

For Jeffrey Rubinoff, parner at Freshfields and legal adviser to the consortium, the refurbishment of 30 schools is also 'the riskiest area'. He adds: 'It was a major challenge organising such a complex programme over such a lengthy construction period.'

Background

The project originates in February 2002, when Northamptonshire County Council decided to change the education tiering system in the area and approved the proposal to move from a three-tier schooling system - lower, middle and upper schools - to a two-tier system - primary and secondary schools.

The proposals included plans for the existing 75 schools to become 59 schools, and as part of the reorganisation most of the massive building and refurbishment programme for the schools estate came under a major batched PFI project.

A total £116m (US$203m) of PFI credits were secured for the project, which makes one think of a BSF because it covers the majority of an area's schools - and in fact it would have surely been a BSF scheme if the programme had been finalised by then.

A further £6.6m (US$11.5m) of other government funding was allocated, together with £25m (US$44m) of grants towards church schools and over £20m (US$35m) for the development of an academy at a school site.

The project was launched by OJEU in December 2002 as one of the second wave of UK schools PFI projects and in 2003 a shortlist of three bidders was selected to submit an ITN, including Babcock & Brown, Jarvis and Canmore. In February 2004, BAFO bids were submitted by B&B and Jarvis - which was soon to fall into troubled times - and the former was selected as preferred bidder in July 2004.

B&B's consortium originally included Ballast as the construction contractor, however with Ballast going into administration, the Australian company announced in January 2004 that Galliford Try would replace Ballast and Amey BPO Services would take over the FM activities.

The project

This scheme is an integral part of Northamptonshire County Council's transition to a new tiered educational system, with new-build projects amounting to 80 per cent of the workload and the remainder being the upgrading of existing facilities.

The project is developed by the Northampton Schools Limited Partnership SPV - a project company owned in a 100 per cent by Babcock & Brown (PPP).

The £235m (US$412m) project involves the construction of 11 new schools in the Northampton area - five secondary and six primary - as well as work on a further 30 schools, which will be refurbished almost simultaneously over a 32-month maximum construction period. It also includes the provision of soft and hard services over a 32-year concession period.

The contract started on 31 December 2005 and Galliford Try started on construction work in January. Amey, which will supply facilities management and life-cycle solutions for the 32 years, is also already on site providing FM for the existing schools.

With so many of the sites - 30 in total - undergoing refurbishment, the construction risk profile was greater than a standard new build approach owing, among other things, to the possibility of discovery of unexpected defects during the refurbishment, programming issues and less clarity on completion criteria.

Freshfield's Jeffrey Rubinoff says: 'It was challenging to find a risk share that could be priced sensibly in order to give council confidence. For example, we had to reach a balanced compromise on an issue such as vandalism in schools.'

Financing

Financial close was reached on 22 December 2005 with SMBC and NIB Capital as co-arrangers and Babcock & Brown as 100 per cent equity holder.

SMBC's Laughlan Waterston says: 'Sumitomo was supporting the bid from the start. It was later, after the PB award in early 2005, when we brought in NIB as co-lead arranger to assist with underwriting.'

Total debt amounted to £186m (US$326m) and was underwritten by both banks on a 50:50 basis. It is divided between a main tranche worth £180m (US$315m) and an additional stand-by debt facility of £6m (US$10.5m). Equity was around £20m (US$35m), leading roughly to the standard 90:10 debt:equity ratio.

The tenor is 30-and-a-half years, while pricing was undisclosed for competitive reasons but was described as a typical PFI market margin around the 100bp mark.

A further £20m (US$35m) were 'remaining capital contributions from authorities', says Waterston. 'Overall the local authorities will provide £60m (US$105m), but £20m (US$35m) was the maximum amount they could make available for construction.' The deal is expected to be worth around £850m (US$1.5bn) to the consortium over the contract period.

Technical, legal and bank due diligence were particularly lengthy. SMBC's Laughlan Waterston comments: 'It all took a long time to structure, due diligence for so many projects takes time. You have to put together many plans and designs, land titles, site decontamination issues…etc'

'Getting on top of the legal due diligence for the project was a huge task, particularly given the number of certificates of title required.' he added.

Bank due diligence was undertaken with Norton Rose as legal adviser, Gleeds as technical advisor, Heath Lambert as insurance advisor and PKF as model auditor.

Another major hurdle and cause for delay, according to Freshfield's Rubinoff, was the introduction mid-negotiation of a new form of schools standard contract.

The parties involved in the deal had then to agree, during the preferred bidder stage, that the form of the project agreement would be changed from the SoPC format to a newly-released - May 2005 - DfES Schools Standard Contract.

Rubinoff says: 'We needed to go back to the council for it to confirm that it was possible to proceed with the project. It also had to confirm the financial affordability of a project of such scale, and during all this time negotiations were on-hold.'

This new contract, which is similar in format to the BSF standard form, confirms the transitional status of the Northamptonshire PFI scheme. Rubinoff adds: 'The deal and its contract agreement reconciles both the old PFI and BSF, to the extent that BSF schemes - which are more like an umbrella arrangement - will use the DfES contract in many of its individual projects.'

Conclusion

With BSF already in place, the interest in Northampton's scheme does not stem from what will soon be seen as a nostalgic look back to how schools were procured in the past - but moreso from its large scale and complexity.

Even if it resembles the near-extinct standard PFI project in the UK education sector, the scheme's size and complexity bring it a lot closer to the BSF deals which are now being awarded - three up till March 2006 and at least four before the summer.

So this deal that initially missed the BSF boat is effectively the closest you can get to a BSF financial close - the first of which has yet to be reached - without it actually being one.

Bristol and Bradford BSFs - the first to be awarded and which should close by year-end - could certainly learn from the experiences of the similarly-sized Northampton deal, particularly from the new type of contract used, refurbishment complexities, difficult risk allocations and the close collaboration needed by all parties to close such a deal.

The future, though, will be monopolised by the ambitious BSF projects - a multi-billion pound scheme aiming to rebuild or renew every secondary school in England over the next 10-15 years - which will surely present challenges of its own.

Skanska, Bristol's preferred bidder, should be the first to work it all out and reach the eagerly awaited pathfinder BSF financial close. Only time will tell how the market will roll out.

The project at a glance