A “fine” of nearly half a million pounds last November came as no surprise to Cambridge Education Associates which runs schools in Islington, north London.

It was the third year running that CEA had missed key education and performance targets and had to forgo a large proportion of its management fee.

The targets were always considered unrealistic and the expected loss of management fee was factored into the contract price.

What did cause surprise - and consternation - at the company’s Islington head office was the bad publicity which followed last year’s announcement.

One headline in particular - “pound;500,000 fine for private firm running schools” - on November 10, was galling. “We have always lost half the management fee since the contract started,” said Lela Kogbara, assistant director of finance and performance management at CEA Islington.

“Having profiled every single pupil in the borough, we knew the targets were not achievable, so it’s not a big deal in that sense,” she said. “But for some reason people have been particularly interested in 2003.”

One reason might be the series of bad news stories about private-sector involvement in the running and building of schools which hit the headlines last year.

In April, WS Atkins announced it was pulling out of a pound;100 million contract running education services in Southwark, south London, two years into a five-year term. Essentially, the company admitted, the contract had been changed in such a way that not enough money could be made.

In May, the teaching unions were outraged when Jarvis Education Services was awarded a three-year pound;1.9m government contract to help turn around 700 failing secondary schools. The firm was an offshoot of Jarvis plc, the track maintenance company at the centre of an investigation into the Potters Bar rail crash.

In October the record of Serco, running the biggest public-private partnership, Education Bradford - worth pound;360m over 10 years - came under scrutiny. The Government allocated pound;3m extra to help schools in special measures, but appointed an independent body to oversee how it was spent.

And also in October, work refurbishing 27 schools in Tower Hamlets in east London - in a contract worth pound;120m - was halted on the spot when the financially troubled Dutch parent company of a British subsidiary, Ballast, withdrew financial support.

Private-sector involvement in education falls into two categories. In public-private partnerships (PPP) companies act as consultants or take over wholesale the running of education services. Under the private finance initiative (PFI) companies obtain finance to build, repair and maintain schools which repay like a mortgage, typically over 25 or 30 years.

The controversial record of some of these contracts in the past year has cast doubt on their future both politically and financially. But an analysis by The TES reveals the Government has learned lessons from the failures, and a more co-operative relationship between the public and private sector is being developed.

A consensus is emerging that the market for private companies to cash in on education is set to expand, but it will change in subtle but essential ways.

The PFI for raising capital to build and repair schools is virtually the only show in town. Although the cost of raising capital on the financial markets is more expensive than through public borrowing because of the higher interest rates charged, the Treasury has made it plain that public funds are not available to cover the vast sums required.

Its Building Schools for the Future capital programme for the renewal of secondary schools will allocate more than pound;2.2 billion to schools in 20056, but at least half of it must be through PFI schemes.

In PPPs the managerial expertise of the private sector in some areas is being slowly recognised as a valuable complementary service to help some struggling local education authorities.

But the radical experiment of private companies being parachuted in to take over the running of an entire education authority is unlikely to be repeated. LEAs which were compulsorily “outsourced” following poor Office for Standards in Education reports include Islington, Southwark, Waltham Forest, Hackney, Bradford and Walsall.

The policy of compulsory “outsourcing” of LEAs, introduced in the late 1990s and early 2000s, has gone “belly up” in the words of Martin Rogers, co-ordinator of The Education Network, an independent policy unit for LEAs.

Between 1999 and 2002 the Department for Education and Skills called for “intervention” from the private sector in 24 LEAs following bad Ofsted reports. “Although results in authorities like Islington, Hackney and Bradford have improved, the fact is the private sector has not been seen to make that much of a difference,” said Rogers.

“If the Government wants to pursue this market in education services, this market plainly lies in voluntary arrangements between authorities and private companies - on a not only voluntary but happy basis - such as in Surrey; and also not-for-profit arrangements such as Hackney.”

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