Contractor and facilities management company Jarvis took a gamble last November when it signed the first school project to be built under the Private Finance Initiative. It decided to risk having to fund the whole £12.5M project itself if its banks pulled out.
The project in question is the Sir John Colfox school at Bridport in Dorset - a PFI scheme which began procurement under the Conservatives.
Jarvis is one of the few construction companies with a strong enough balance sheet to take on the financing of such a project. At the end of its last financial year its net assets were worth just over £30M, and although some of this is earmarked for acquisitions there is also enough to support a project the size of Colfox. 'Our ability to fund the project ourselves was very much a factor when we were chosen as preferred bidder,' says Jarvis director David Freeborn.
Tight time scales were at the heart of the decision which led the company to sign the concession for the construction of the new school. After becoming preferred bidder for the project early last year Jarvis was under pressure to get moving on site by the winter.
Colfox school is already overcrowded, with 850 pupils crammed into buildings designed to handle 650. By 2000 the school's population will climb to 1,050 making the construction of a new school a necessity if education standards are to be maintained.
Colfox has suffered from poor maintenance and an unhelpful layout. Pupils have to pass through some classrooms to reach others, windows are broken, roofs leak, dining rooms are too small and there are no sixth form teaching facilities - not the best of learning environments.
Jarvis decided to take the risk of having to finance the whole project itself because final negotiations on contract terms were dragging on. The new facilities have to be finished to cope with the autumn 1999 intake and delays were starting to make this look ambitious. The main problem was that contractor's banks, led by Bank of Scotland subsidiary Capital Bank, feared Dorset could wriggle out of paying Jarvis the operating charge which will ultimately pay off their loans.
The legislation in question was the Local Government (Contracts) Bill. This was drafted to reassure bankers that councils would not try to escape from paying operating charges to PFI consortia by claiming that deals struck were 'ultra vires' - beyond their legal remit.
The Bill was still on its way through Parliament as the deadline for signing the Colfox concession approached. Jarvis' banks wanted to hold out on releasing loans just in case there was a last minute hitch. As a result the contractor bit the bullet and decided to commit the necessary £12.5M, should the Bill fail.
The Local Government (Contracts) Bill became law just before Christmas, and the banks are now expected to release loans for the project, reducing Jarvis' financial involvement to a small equity contribution.
The new school is designed by structures consultant Hyder Consulting and architect Terence O'Rourke and comprises three main buildings covering 10,000m2, linked by a central corridor. It will stand at the corner of the playing fields next to the existing buildings, which will be demolished and replaced by playing fields.
In a sense, building a new school in two years is relatively easy although work is constrained by the fact that the site is within the existing school boundary.
Timings have to be programmed to avoid disrupting school activities. 'During the construction programme the school will lose most of its playing field,' says Jarvis Construction project director Ken Gill. Consequently, one of Jarvis' first tasks is to build an all weather playing surface to replace the area lost. Potentially dangerous work such as the demolition of the existing school also has to take place during the holidays when pupils are out of the way.
As operator of the school Jarvis will receive an availability payment from Dorset County Council. This means that if classrooms have to close because of a leaky roof or broken windows, payments will be reduced.
Ensuring the council's ability to pay Jarvis throughout the 30 year concession was a major issue that had to be resolved during negotiations between Jarvis, the council and the Department for Education & Employment.
Jarvis' payments will come via the county council from funds allocated by central government. But the company and its banks were concerned that risks would increase if the school opted out of council control and went for grant maintained status. If government money bypassed the council and went straight to the school, problems could arise if the grant maintained body ran into financial difficulties.
The feeling was that a school, with its limited financial resources would be more likely to default on payments if it ran into financial trouble. 'The risk is that instead of having a contract with a local authority you have a contract with a school which has a weaker covenant,' says Coopers & Lybrand partner Simon Humberstone, one of Dorset's advisers for Colfox.
In the end the government was persuaded to ring fence money allocated to the county as payments to Jarvis over the life of the concession. This ensures that payments go directly to Jarvis without going through the school's books if the school went grant maintained.