The PCs were faced with unpalatable choices -- stand firm on the faith-based schools policy and likely lose the election or back away from the policy, with all of the inevitable fallout from that decision. By taking the second option, they are acknowledging that the proposal has damaged their campaign to date such that they cannot win without changing it.
It was the right call. Some may say it is too late, but it is never too late to stanch the bleeding as long as the patient is alive. What happens now? The first battle is for the frame or characterization of this announcement, a phase the PCs cannot allow to last for more than a couple of days. John Tory is arguing that he has listened to Ontarians, heard that there is no consensus in favour of this idea and he has made the appropriate correction. He will characterize this as a symbol of strong leadership, since that has been the theme of their campaign.
The Liberals will go one of two ways. If they want to keep the issue itself alive, they will call Tory's move a smokescreen and say that a majority government led by Mr. Tory could still bring in this policy with a free vote. If they want to use the issue to undercut Mr. Tory on a leadership level they will seize on his change of heart, accept it as face value and claim it demonstrates both lack of principle and judgment rather than leadership. The PCs will then have eight or so days to run the campaign they wanted to run from the beginning:
1. Run on issues more favourable to them - crime, taxes and Liberal broken promises, not health and education - that are also more likely to animate their core voters;