King's College London and the United Medical and Dental Schools are looking to clinch the biggest deal so far under the Government's Private Finance Initiative worth Pounds 125 million.

The two institutions, which include the amalgam of St Thomas's and Guy's hospitals, are expected to merge next year, and plans for new buildings along the Thames have taken on more significance since the Budget, when Chancellor Kenneth Clarke said that PFI should become the main capital funding mechanism for universities.

The Government's private finance panel has chosen the project as the only one in the HE sector to be given "category A priority". "That means they are very keen to see the PFI project go ahead," said Richard Haycocks, head of the PFI unit at project consultants Ernst & Young.

If the project does proceed, and a final decision has to be made by July, it will be three times the size of the Greenwich University accommodation deal struck last November with construction giant Wimpey, which was the first PFI project to be approved in the HE sector.

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Six consortia have been invited to make detailed bids, out of the 30 that made initial inquiries. HEFCE has already approved an alternative Pounds 125 million publicly funded project proposed by the colleges, which will see the development of Cornwall House near Waterloo and the old Guy's Hospital site near London Bridge.

The successful private finance consortium will have to provide additional services over and above the basic construction and financing of the new building. Lynn Carlisle, co-ordinator of the PFI project, said the colleges would be looking for proposals for campus management.

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Mr Haycocks, who is also advising on smaller PFI projects involving Edinburgh University and London's Queen Mary and Westfield College, said the battle between the consortia could spark "a sort of design competition".

Dr Carlisle said the project was proving popular with developers partly because some valuable West London buildings belonging to King's College will be refurbished for non-educational uses.