The Pimlico School in central London was to have been the first to benefit from the four-year-old Private Finance Initiative. The project was to have comprised a 1,450-pupil school and luxury flats in place of the current building which has serious faults.
However, the withdrawal of the construction company, Taylor Woodrow, will come as a blow to Government attempts to give up control of capital spending on schools, curbing public spending.
The company cited time-consuming and costly bids as the reason for withdrawing. A spokesman for Taylor Woodrow, which is pursuing PFI projects outside education, called the system "too bureaucratic".
Building firm Mowlem has taken its place, joining a consortium of three other companies that hopes to complete a deal to rebuild the 26-year-old comprehensive, one of the most successful in Westminster, by the end of this year.
The design of the school building, an almost entirely glass and concrete structure, was thought to be revolutionary when it opened in 1970, but is now generally considered unsuitable for modern teaching methods. Staff and pupils complain that classrooms are too hot in summer and too cold in winter. Prominent architects are now leading a campaign to save it from the bulldozers.
The private finance scheme received the backing of Shadow Home Secretary Jack Straw, who is chairman of Pimlico governors. Labour has now embraced the raising of private sector cash to help refurbish schools but remains unconvinced that PFI is the best means of doing it.
The PFI works on a hire-purchase basis. Schools buy buildings and services over a lease period, during which the private sector is responsible for maintenance.
When it was relaunched to include schools a year ago Education and Employment Secretary Gillian Shephard predicted that more than Pounds 1bn would be contributed over three years. To date the PFI, which was devised to finance the building of new schools and repair crumbling classrooms, has failed to provide funding for a major school project.
The Colfax school in Bridport is now set to become the first beneficiary with a Pounds 9.5m project to build a new school due to be signed in April. The Department for Education and Employment, which expects at least one other project to come to fruition by the end of the year, says the PFI scheme has been slow because of the work involved in putting a deal together.
The principal obstacle, according to the bankers who helped devise PFI, is that schools have no investment money. Sir Christopher Bland, chairman of the Private Finance Panel, which co-ordinates the scheme, acknowledged that it could be a slow starter and has pressed the Government to relax local authority spending rules that restrict capital expenditure.