After seven years of planning and having overcome several setbacks, Bridgend County Borough Council's £24 million secondary school PFI for the town of Maesteg, South Wales finally closed on 6 October

Locally, the project forms part of the regeneration plan for South Wales' Lynfi valley.and covers the procurement a 25-year PFI concession to build and operate a new 1200-place secondary school on a brownfield ex-colliery site.

In wider terms, the single-secondary school deal is the latest move in the strategy of Babcock & Brown (BB) which has specifically targeted small equity investments UK PFI and LIFT schemes.

BB is planning to package a number of investments into the Babcock & Brown Public Partnerships (BBPP) vehicle which is due to float on the LSE later this year and raise an estimated £300 million.

Background

The project was approved for support in 1999 and involved a design, build, finance and operation scheme that would provide a single, new-build comprehensive school on reclaimed land on a former colliery/washery site in Maesteg.

In developing the scheme, Bridgend CBC originally intended to procure the new Welsh Medium school as a refurbish and operate PFI on the existing Upper school site.

The council then decided that refurbishing the school as part of the PFI deal would not be the most cost effective way of achieving their objective and proceeded to undertake a phased refurbishment using their own sources.

Bridgend CBC issued the ITN in August 2001 and in December 2001 received bids from a consortium led by HBG, an Interserve-led consortium and Maesteg School Partnership - a consortium of Babcock & Brown, Cofathec Heatsave and Cowlin Construction.

After a delay in the procurement process of approximately 12 months after the ITN evaluation, Interserve's offer was rejected while HBG pulled out just prior to BAFO leaving the BB consortium sole bidder.

At the beginning of 2004, the Minister for Finance, Local Government & Public Services affirmed the Welsh Assembly's commitment to the project when an increase to the provisional funding for the project was agreed for £24 million.

In September 2004, the council submitted their full business case and received an increase of £3.1 million in PFI credits as a result of price inflation, changes to the discount rate and minor adjustments to the scope of the project.

Cowlin Construction will build the school while Cofathec will provide hard and soft FM services.
The SPV entered into a project agreement with the authority for 25 years and then to subcontract appropriate obligations to various subcontractors in order to meets its overall service obligations.

Financing

SMBC provided the debt funding for the Maesteg PFI project and provided a senior debt facility to Maesteg School Partnership.

The assembly requested that an interest rate buffer be introduced to take account of interest rate changes following design development.

The unitary charge to cover accommodation and facilities management of the replacement school under the agreement is £2.4 million per annum but that figure would vary on the final interest rate.

The project was funded by a mix of approximately 91 per cent bank debt and 9 per cent risk equity capital.

Conclusion

The idea for the project, after some setbacks has taken seven years to reach financial close after its initial conception in 1999 and is the councils first Welsh medium secondary school.

The project which has overcome a major change to the redesign and reclamation scheme, procurement delays and HBG pulling out after the BAFO has secured debt funding from SMBC, needing just the one bank to provide funding due to the small amount needed.

Wales has not seen the scale of PFI in new schools as England has, with only five schools being built through the initiative so far but critics worry over the future of such schemes, arguing that PFI's will take away public services from tax-payers as well as costing more in the long term.

For Babcock & Brown Maesteg forms a small piece in a much wider mosaic, the 22-project BBPP vehicle combining UK PFI, UK LIFT and Australian PPP stakes. The success of that IPO will determine whether the groundwork put in by the investment bank into Maesteg and similar small-ticket deals will have been worthwhile.

The project at a glance