Donald Dewar made the announcement when he visited Broomhouse primary in Edinburgh, accompanied by Helen Liddell, the Education Minister. The school is one of more than 70 in eight Scottish authorities chosen for the cash injection under the Government's public-private partnerships (PPP).
The package will cost the Scottish Office #163;25 million a year for the 25 year lifetime of the contracts which education authorities will sign with consortia of banks, finance houses and construction companies. The funding is designed to ensure "level playing-field support" so councils are no worse off than they would be under conventional borrowing.
Mr Dewar described his statement as "a very, very important breakthrough.
For a long time we have watched as the fabric of buildings has crumbled and this is helping to put right the wrongs of many years."
He added: "It's a choice of managing effectively or doing without - and we cannot do without."
The strongest criticism came from Unison, the public sector union, which has an immediate concern for janitors, cleaners and ground staff whose jobs will be transferred to the private sector management that will run the new buildings on behalf of education authorities.
Mr Dewar gave an assurance that employment rights would be protected under EU legislation. But Unison also criticises the plans for being more expensive, and says that privately funded deals will cost council taxpayers more than under normal public sector borrowing.
The teaching unions, whose members will continue to be employed by education authorities, take a less fundamentalist line. The Educational Institute of Scotland recognises that "for the foreseeable future, public private partnerships may represent the only option available to authorities to address what is commonly agreed to be a chronic need for capital expenditure in education".
The Scottish Secondary Teachers' Association accepts PPP as "a necessary evil".
The Liberal Democrats and SNP are, however, strongly opposed to PPP funding. Nicola Sturgeon, the SNP's education spokesperson, accused Mrs Liddell of "mortgaging the future of Scottish education".
Ms Sturgeon said that ultimately privately funded schemes "must be paid for by the taxpayer and it is more costly than existing methods, yet the end result is that a public asset belongs to the private sector".
The dilemma facing local authorities is highlighted by the reaction of those authorities left out by Mr Dewar, including the SNP-run Perth and Kinross. Janet Law, the council's education convener, said she was disappointed the Scottish Office had not accepted proposals for new schools to replace Auchterarder High and Abernethy primary.
Ewan Dow, the SNP councillor for the Abernethy area and finance convener in Perth and Kinross, said he was "appalled" at a decision he claimed was "purely budgetary driven".
East Lothian and Midlothian, both Labour controlled, also had proposals rejected and expressed their dismay. East Lothian wanted funding for major IT expenditure on all its properties including schools, while Midlothian had ambitious plans which would have involved a shared campus on a new site for Dalkeith High and the town's St David's High.
Peter Boyes, Midlothian's education convener, described the Government's decision as "devastating news", while David Hamilton, convener of the council's strategic services committee, said it was a "scandal".
But Mr Dewar stressed that the use of private finance was not the only way forward. The Government had already allocated #163;185 million over three years to tackle the backlog of school repairs through the comprehensive spending review, in addition to #163;116 million for capital investment in Scottish schools over five years found by the Chancellor from his first budgets.
LOAN FILETHE LUCKY EIGHT
* Aberdeenshire - #163;14.25m to build a secondary school at Oldmeldrum, extend Meldrum primary and refurbish Banff primary to incorporate a family centre, special needs unit and nursery.
* East Renfrewshire - #163;12.5m for a new Mearns primary and an extension to St Ninian's High.
* Edinburgh - #163;80m to refurbish or replace 27 primary and secondary schools, replacing 11 primaries with five new ones and seven special schools with four.
* Fife - #163;32 million to replace Queen Anne High in Dunfermline and Cellardyke primary in Anstruther, along with extension and refurbishment of Beath High in Cowdenbeath.
* Glasgow - #163;136m to renew 27 secondaries and build two new ones - covering the city's entire secondary stock. Upgrading and maintaining IT facilities also included in the package.
* Highland - #163;13.65m for two new secondaries at Glenurquhart and Ardnamurchan, with two new primaries at Tomatin and Spean Bridge.
* Stirling - #163;16.5m to replace Balfron High.
* West Lothian - #163;27.8m to refurbish and extend Bathgate Acad-emy and Broxburn Academy, improve Whitburn Academy and remove annexes and temporary accommodation at Linlithgow primary.
All the projects are scheduled to be ready between 2000 and 2002.