As the Number Ten Policy Unit sifted through various proposals which had been sent in, and added a good number of its own, the newspapers were alive with leaks. Gillian Shephard, the Education Secretary, braced herself to fight off more radical proposals from the team that brought her fast-track opting-out for church schools and nursery vouchers.

At a conference of grant-maintained heads in Birmingham (see page 4) she appeared to distance herself from the Prime Minister’s reported plan to set up a selective school in each large city using private sector finance.

“The Government is entirely in favour of selection,” she said. It helped widen choice and lever up standards. That was why she was proposing to raise the proportion of pupils schools could select on ability from 10 per cent to 15 per cent.

Mrs Shephard pointed out there was nothing to stop industry putting up funds for new grant-maintained grammars under existing arrangements. But she made it clear applications would be considered in the light of surplus places in the area. No application to set up a new selective school has yet been successful.

Earlier she told the conference it was nonsense to suggest the Government had some hidden agenda to force all GM schools to go selective. “GM status suits all types of schools,” she said. “I know that some of you became grant-maintained to preserve the comprehensive nature of your schools. And if a school is happy with its present character, that’s fine.”

Setting up new grammar schools is one of a range of proposals to increase diversity being considered for the Tory manifesto. Others include giving local authority schools more freedom by forcing LEAs to increase the share of funds that goes directly to schools. Taken to its logical extreme, this would mean that all schools would become self-governing and local education authorities would fade away. Such a fundamental change would need legislation, which could be set out in a White Paper later this year.

Giving all schools the freedom to run their own affairs is more in line with the Prime Minister’s thinking than returning to a fully selective system, which he would consider unfair and divisive. He is believed to favour new selective schools in large cities because the effect on other schools is more marginal and because these are the areas where state education most needs a boost.

Under the plan, extensively leaked earlier this week, parents, businessmen and community groups would be invited to team up and put forward a proposal to set up a new grant-maintained school using private sector finance.

But the only major scheme announced so far - to rebuild the 1,450-pupil Pimlico School in the London borough of Westminster - is exceptional because it is on a prime site and the developers could recoup their investment.

The chief problem with attracting private sector finance into schools is providing sufficient return on capital. For a selective school, there would also be worries about long-term prospects.

David Hart of the National Association of Head Teachers said: “The Government places far too much reliance on the Private Finance Initiative. I don’t believe industry wants to be involved in something that would become so intensely political.” He referred to the city technology colleges, where poor support from industry meant the whole project had to be scaled back.

Even Sir Robert Balchin, chairman of the Grant Maintained Schools Foundation and one of the Prime Minister’s chief sources of educational ideas, said the experience of CTCs showed the Government would have to find large sums.