The Government is to turn to private funding to finance the building of hundreds of schools in a move that could free up capital for the expansion of free schools.
Chancellor George Osborne is expected to give the green light to 100 schools to be built under the private finance initiative (PFI), despite dismissing the funding mechanism as "discredited" while in opposition.
The Department for Education has been forced to turn to PFI, in which private companies fund and own public buildings and then rent them back to the "tenant", after it saw its capital budget slashed by 60 per cent in last year's comprehensive spending review.
Despite tighter capital allowances, education secretary Michael Gove has pledged to rebuild or refurbish around 700 schools since scrapping the #163;55 billion Building Schools for the Future (BSF) programme.
Proposals to build the first 100 of these schools using PFI are currently being considered by the Treasury.
If approved, they are expected to pave the way for a wholesale return of PFI to fund new schools.
The move could also clear the way to a greater capital investment in Mr Gove's free schools policy, which has officially received just #163;50 million of investment in its first year.
A source involved in the Government's school-rebuilding initiative said: "There is a massive need for capital investment at the moment, and if 100 schools can be built using PFI, then you are creating additional money - freeing up resources - to fund free schools.
"It is unlikely to be used to fund academies because they are part of their own framework and are funded through a direct grant."
In his review of schools capital and BSF, Sebastian James, group operations director of Dixons, recommended that free schools should be paid for from a separate DfE pot.
The James review stated: "Demand-led programmes, such as free schools, are most sensibly funded from the centre and a centrally retained budget should be set aside for them."
But the decision to return to PFI has left some pressure groups, such as the British Council for School Environments (BCSE), concerned that it could lead to more poorly-constructed schools being built.
BCSE chair Ty Goddard said: "We understand the need to look at all options to invest in school facilities. But, like BSF, we can't make the same mistakes of the past.
"Some PFI schools are considered the worst in Britain. We must aspire to deliver the best of British schools."
Around half of the schools built under BSF were funded through PFI. The DfE said no final decisions had been made for capital allocation from 2012 onwards.
A spokesperson added: "We need to build schools more quickly and efficiently. That is why we commissioned Sebastian James' independent review of long-term school building.
"We will be responding to its recommendations shortly and will be setting out a capital investment programme for 2012-13 onwards in due course."
THE PFS LEGACY
ENTER THE EFA
The proposals to return to PFI come as the Government announced the closure of Partnerships for Schools (PfS), the delivery body for Building Schools for the Future.
The work of PfS will be carried out by the Education Funding Agency (EFA) within the Department for Education.
It is feared the expertise to carry out privately funded deals will be lost as PfS employees are thought unlikely to agree to work within the DfE as civil servants.
PfS had been credited with making significant savings in the private finance deals it secured. This will now be left to civil servants with little experience in the field.
In a written ministerial statement announcing his decision to axe the quango, Mr Gove said the move would allow more resources to be directed to the front line.
"Following Sebastian James' proposals for a new system for managing capital expenditure and the wider reform of arms-length bodies, I have decided the time is right to bring together, in a single agency, the allocation and management of revenue and capital funding, including the delivery of capital programmes," Mr Gove said.
Peter Luaener, currently chief executive of the Young People's Learning Agency, which oversees the funding of academies, will take over as EFA chief executive.