Consultants PriceWaterhouseCoopers have told the Government that the multi-million pound contracts are bigger than the total turnover of some firms who hope to be involved. These include firms on an approved government shortlist from which bidders are drawn.

The warning emerged as the Department for Education and Employment announced the shortlist of bidders for the pound;15 million contract to take over Islington’s education service in north London.

John Lakin of PriceWaterhouseCoopers told government officials at a meeting for potential bidders that some parties on the DFEE’s approved list were too small and “naive” to take over an education service. The consultants were asked to advise Islington by schools minister Estelle Morris.

Another consultant involved in bidding for council contracts, who did not wish to be named, told The TES that Islington’s contract could be viewed as a high risk.

He said: “There is no guarantee that schools will buy into the services, yet whoever wins the contract will be bound by school performance targets. Some of the companies who are bidding for the contract will have to double in size if they are to take on Islington.”

The bidders will be expected to submit more detailed proposals by October and the winner will be announced by the end of the year.

The potential for businesses to make money out of education was emphasised this week by Capital Strategies, a corporate finance house. It says that failing education authorities and greater financial freedom for schools could create a pound;500 million market.

As the problems of councils such as Islington have become apparent it looks likely that private companies will be brought in to run whole education services.

Nord Anglia, the education service floated on the Stock Exchange in 1997, has already won the contract to take over two services in Hackney, east London.

Capital Strategies based its calculations of a pound;500m education market on the value of these services, and an assumption that maybe a dozen councils would be identified as underperforming.

But the estimate is being treated with caution by some companies. Tim Emmett of the Centre for British Teachers said he was sceptical. “The issue remains as to how many education authorities will have services contracted out. I don’t think any of us are in a position to know that yet,” he said.

A spokesman for the Local Government Association said he welcomed the involvement of councils in the bids. “But once the service has been improved, it must be returned to the elected council and not remain outside in the hands of a private company,” he said.

The organisations on the DFEE’s shortlist to take over Islington’s education service are: Arthur Andersen with Birmingham Council and APS Keele; Cambridge Education Associates with Hammersmith and Fulham Council; the Centre for British Teachers with Essex Council and Windsor and Co; and Nord Anglia. These bids are understood not to be under criticism.