THE education market could be worth pound;5 billion a year to private-sector firms within three years, believe economists.

Capital Strategies, the corporate finance house which advises several education firms, predicts the value of private contracts in the sector will double by 2003.

The main cause of change will be councils either being forced or volunteering to hand over services to the private sector, which is expected to generate between pound;500 million to pound;1bn a year.

And schools, under the new “Fair Funding” regulations, now have greater control over their budgets, and are expected increasingly to buy services from private firms rather than local authorities.

This will add another potential pound;1bn to the market, which Capital Strategies has estimated currently to be worth pound;2.5bn, including contracts for school catering, transport and careers services. Public spending on education this year stood at pound;36.5bn excluding training.

Ministers have repeatedly emphasised that schools and local authorities should not be dogmatic in rejecting the private sector, which had the potential to provide cheap and effective supprt for schools.

Matthew Owen, an executive at Capital Strategies, said although firms would be attracted by potentially high revenues, it remained to be proved whether education would be profitable for business.

Public-sector organisations were not profit-making, and therefore could bid for contracts at the level of their costs. Private companies would have to accept contracts at or below this level, yet still make a return.

However, recent indications are that companies - and investors - remain confident that they can achieve those returns.

A Capital Strategies index of the performance of 40 education and training companies quoted on the Stock Exchange has more than trebled in value in the past four years.

And two months ago, the Government announced that several firms with turnovers running into hundreds of millions of pounds had been approved to enter the market for providing services to failing local authorities.

Gale Waller, a policy officer at the Local Government Association, said that its members accepted the concept of increasing private-sector involvement in school services - provided schools were sure the chosen firm could offer a better service than their local authority.