The Further Education Funding Council moved to bolster confidence in the Government’s flagship Private Finance Initiative (PFI) after it emerged that troubled Stoke-on-Trent College had pulled out of a proposed building scheme.

The project to build a new campus for the college was one of 10 pathfinders selected by the funding council to test the PFI, designed to fund public sector capital programmes with private sector cash.

It was dropped after the college ran into financial difficulties. Managers are facing an Pounds 8m cash crisis after failing to hit more than 80 per cent of recruitment targets.

FEFC officials insisted the remaining nine English PFI pathfinders were still on course, and said checks were in place to ensure no college could embark on a private deal without proving its viability.

Government plans were given a fillip with the news that Falkirk College, between Glasgow and Edinburgh, has put the finishing touches to Britain’s first PFI project in the FE sector.

The college’s Pounds 3.6m development, in Scottish Secretary Michael Forsyth’s constituency, will provide over 300 full-time student places, specialising in business, health and care, computing, management, public administration, design and tourism.

But the Association of Colleges warned that few colleges would be able to attract private investment from the private sector.

The AOC’s policy director, John Brennan, said: “When about two-thirds of colleges are showing themselves at a trading loss their ability to drum up private sector investment on their schemes is limited.

“You have to convince the bankers or whoever lends you the money that you have good chances of financial success and viability over a foreseeable period. What the Stoke example is demonstrating is if you don’t have that you are going to have problems.”

There are concerns that private finance may prove unsuitable for funding the equipment replacement and maintenance which forms a large part of colleges’ capital expenditure. The issue is crucial for a sector facing extensive capital cuts. Both Labour and the Conservatives point to the private sector as a potential source of finance for colleges.

Labour has pledged to continue to use private finance to help fund public sector projects, although a spokesman said the party would work to reduce bureaucracy in the present system.

In England three colleges spearheading PFI schemes, Clarendon College in Nottingham, the City of Liverpool Community College and West Cumbria and Tynemouth College, are in talks with developers.

Another three colleges, South East Essex, Canterbury and Newbury, are due to start talks soon.

Philip Head, property services director of the FEFC, acknowledged that only large-scale schemes were suitable for PFI funding, but said there was “cautious optimism” about the initiative, with six colleges awaiting a second wave of bids and several more showing an interest.

He said the Stoke scheme was “on hold” pending a review by the college’s new management. “We have a financial memorandum with every college, which means that for large capital schemes they have to get our consent.”

“There are a whole range of criteria they have to fulfil. They have to prove to us that the scheme is affordable by the college, viable so it meets the Treasury’s requirements, and they have to prove that it provides value for money.

“It’s about confidence that the college has reasonable proposals.”

He said colleges in financial trouble would be unlikely to get approval for large capital schemes, although in some cases where colleges were hampered by out-of-date accommodation investment could help solve budgetary problems.

A Stoke-on-Trent College spokeswoman said: “There is no possibility that the proposals will be resurrected in the immediate future. The corporation of the college met in November when it looked at the whole situation at the college and passed a resolution not to go ahead with the third campus.”

At Falkirk College deputy principal Maxwell Sharp acknowledged a conventional borrowing arrangement with banks and building contractors would have been simpler than the PFI deal. But that would not have been politically possible.

Dr Sharp said the deal meant a significant reduction in potential risk to the college, although the cost of transferring the risk meant a PFI contract was “always bound to be more expensive” Under the deal the private sector has to guarantee the smooth operation of the Stirling centre over the 25 years of the contract and there is an agreed limit on what cost increases could be passed on to the college.

Dr Sharp said: “If the building begins to show up defects in 10 to 15 years’ time, the private sector will have to bear the major share of the cost of putting that right.

The costs of preparatory work soared to Pounds 200,000 from an original estimate of Pounds 20,000. The Scottish Office is offering colleges only Pounds 50,000 to prepare PFI bids but its crucial contribution has been to act as guarantor for the first three years of the Stirling centre - a key ingredient which ensured funds were pledged from the European Union and the local enterprise company.

Dr Sharp said the main lesson for others contemplating the PFI route is to appreciate “the sheer complexity of the contract which involves a lot of negotiation although, of course, we were breaking new ground. We found the private sector partners were very slow to commit resources until it was absolutely clear the contract was going ahead. We had assumed the finance was in place at one stage when it wasn’t.”