The Salford School Solutions reached financial close last week on the £40 million (US$76m) PFI scheme - the Group Schools PFI (2) - a scheme to rebuild two new schools in Salford, northwest England

Under the terms of the deal Salford Schools Solutions - a 50:50 JV between NIBC Project Investments and Hochtief - will rebuild Buile Hill High School on its existing site and Harrop Fold High School on the Hilton Lane site.

The winning consortium followed a rocky road to financial close, starting off as an entity led by Jarvis' now defunct PFI bidding team before its acquisition by Hochtief. 

Development of project

Salford City council received approval from the Department of Education and Skills in February 2004 and on 17 February 2004 released a PIN asking for a private partner to enter into agreement to rebuild and maintain three schools:

• Buile Hill High School - rebuilt with 1050 places
• Harrop Fold High School - rebuilt with 1350 places
• Hope High school - rebuilt with 1050 places 

However over the course of the negotiations, one of the schools - Hope High - was deemed to exceed the council's budget and cut from the tender.

The original four bidders shortlisted for the deal in late 2004 were:

• HBG
• An Interserve-led consortium
• Jarvis
• Kaijima

In early 2005 Kajima pulled out because of what it described as 'affordability issues', while HBG also withdrew before submitting a final bid.

The deal left the council with the option of the Interserve consortium or Jarvis, the latter of which had won an earlier deal to build and operate the Salford Special Schools PFI in 2002, but was alreading running into severe financial difficulties.

In December 2004, Jarvis' PFI arm was acquired by Hochtief as part of a portfolio of four projects - the rest of which had already reached preferred bidder stage. Under their new ownership the ex-Jarvis team steered their bid to win the Salford contract in November 2005.

Construction on the two schools - which have a combined area of around 18,000 square metres - is scheduled to start in December 2006 and to be completed by September 2008.

After construction Mitie will carry out the hard and soft facilities management for the remainder of the 25 year-contract.

Financial

Both Hochtief and NIBC project investments hold a 50 per cent equity share in the project company Salford School Solutions.

The capital cost of construction is around £40m (US$76m), while the value of the overall contract over 25 years is around £150m (US$282m).

NIBC is the sole MLA on the deal and supplied a senior debt tranche of £36m (US$68m). The balance of the financing is around £3.2m (US$6m) in mezzanine debt and equity.

The debt: equity ratio is an estimated 91:9.

Conclusion

The £1.5 million that Hochtief reputedly paid for Jarvis' bidding arm in December 2004 continues to look extremely good value. Not only did the deal give Hochtief access to projects already at preferred bidder stage in both Scotland and Northern Ireland, it also granted the German giant market entry to the key English PFI market.

The deal also marks a formal end to the Jarvis saga, and will leave many reflecting that it was the scale of company's ambition rather than a flawed structure in individual deals that led to its downfall.

The project at a glance