The PFI marathon
Only 10 councils are in contention for the sixth round of housing PFI, but if they want to get their hands on the funds they will have to dig deep and chase down £1 billion of investment themselves. Keith Cooper reports
The starting gun for what could be the final round of the housing private finance initiative was fired by the Homes and Communities Agency last July. The prize for each of the 10 councils on the programme is a share of £1.7 billion in government funding.
But they will have to sweat for their cash: the hurdles they must clear before winning their slice of PFI credits are numerous. Authorities must convince investors to stump up more than £1 billion of debt while drawing up business plans - due to be submitted in July this year - which impress the HCA and a Treasury that has spending cuts on its mind. All this in a post credit-crunch environment with a general election around the corner.
The PFI programme was set up shortly after the Labour government took power in 1997 as a way of encouraging the private sector to help finance public schemes such as housing regeneration projects, schools and hospitals. This, the sixth round of the housing PFI programme, is the first the HCA is overseeing from the start. It is arguably the most ambitious yet. The agency has intentionally only approved projects which are large in scale - over £100 million - many of them complex; four bids come from councils with no previous experience in the Byzantine arts of PFI procurement.
Authorities face heavy demands. In exchange for a share of the £1.7 billion of PFI credits, councils are pledging to create almost 8,000 new homes, refurbish 1,212 and convert 408 flats into much-needed family homes.
This round of housing PFI could be the last chance for councils to secure government funding for major regeneration projects. The possibility of a seventh round will be in the hands of the next government. It will be up to the HCA to prove that PFI is a cost effective way of delivering housing and regeneration - this makes the success of the round six councils even more crucial. So what should the 10 hopefuls keep in mind as they strain for the finishing line?
They should make the creation of a well-structured business plan their priority, says Ian Davitt, national head of housing and social care public private partnerships/PFI at consultancy Grant Thornton, which is advising several authorities. ‘The round six projects will be in a competitive environment of both bidders and bank finance. Those [outline business cases] which are best structured and properly costed are most likely to attract the most market appetite.’
Councils could save millions by exploiting the depressed housing market conditions - but only if their schemes are not beset by delays, Mr Davitt adds. ‘Construction inflation is predicted to be flat in the immediate term but projects which take too long to reach the market could miss this opportunity.’
The approval process for round three PFI projects was delayed by around four months after the 2005 election, he adds.
Kevin Hanlon, project director for housing and property at Partnerships UK, a Treasury-sponsored advisory agency, names borrowing costs as the key factor for round sixes. ‘Funding costs have been the critical cost for the last 18-24 months. This is where the big increases in costs have come. Councils need to be aware of funding markets and banks.’
The market for PFI funding is also competitive, Mr Hanlon adds. ‘There is a lot of PFI out there: the building schools for the future programme and waste.’
Steve Trueman, chief operating officer at the HCA, agrees councils on round six should keep tabs on the lending market. ‘We are asking local authorities to major at an early stage on their approach to planning and procurement and likely fundability, because of the external economic climate.’
The HCA estimates the 10 councils will collectively need private investment ‘north of £1 billion’ and the agency will take steps to ensure they can get their hands on it. It is hoping to draw the European Investment Bank into the UK housing PFI market, for instance. The process of negotiating a PFI deal is complex as it requires the joint agreement of contractors and government, private and public sector investors. EIB funds could be available within two to three years if it can be tempted into the market - just when the debt will be needed. ‘[This] may ease pressure on the cash lenders,’ adds Mr Trueman.
Uncertainty
Some fear the general election may derail the PFI procurement process. However, this is not a view shared by the HCA. ‘The [housing] minister has signed off the 10 new round six schemes,’ Mr Trueman says. ‘We consider the process to develop and approve them as day-to-day business and shouldn’t have to go back to the minister’s office.’
Ian Perry, who chairs several PFI consortia including Cheshire-based Avantage, says investors will carefully pick which councils to work with because bidding for contracts is expensive. ‘We have not lost one yet but it costs hundreds and hundreds of thousands to bid.’
To stand the best chance of wooing investors, local authorities must show that they have staff capable of the task, that they are committed to the project, and that their plans are realistic, he adds. ‘Some [PFI projects] are very ground-breaking and not deliverable.’
Leeds, like Cornwall and Birmingham councils, is one of several experienced authorities in round six. Michelle Anderson, senior project manager at Leeds Council, says plans should be clear, realistic, and have tight timetables to reduce costs. Conversations with investors and contractors should be started early, she adds.
Leeds is also keen to see a seventh round of PFI. ‘Housing PFI has brought significant resources to the city that would otherwise not be available. This has allowed the authority to invest in some of its poorest and most disadvantaged areas. We would welcome the opportunity to secure future rounds of PFI funding as a key source,’ Ms Anderson says.
The HCA would also like a seventh PFI round to be agreed in the next government spending review, according to Mr Trueman. ‘I certainly think there would be great benefits in another round of projects,’ he says. ‘PFI is able to provide long-term, lasting change on those estates. We had more bids than we could resource. The need is still there.’
How Northampton coped with a half empty PFI pot
Northampton Borough Council is one of the four PFI newbies to get the go-ahead from the Homes and Communities Agency. Originally the council bid for £200 million of the Homes and Communities Agency’s PFI pot to regenerate four housing estates, but it had to scale down its plans when it received an indicative pledge of half that amount from the agency.
The round six programme was heavily oversubscribed - the HCA received £4 billion of bids for its £1.8 billion budget (only £1.7 billion was made in total indicative allocations). After an extensive review of the project, the focus of the authority’s business plan was narrowed to the two most rundown estates. ‘The authority wants to achieve the maximum impact on the area rather than spread the jam thinly’, says Lesley Wearing, the council’s director of housing.
The planned Northampton East scheme now includes 356 refurbished homes, 72 flats knocked into 36 houses and the replacement of 218 social homes. The fact the authority will be competing for private funds against far more experienced counterparts has not escaped Northampton’s attention. The main selling point for its scheme is its simplicity, Ms Wearing argues. ‘We don’t have to do sideline market sales. It is purely a way of getting properties decent and regenerating estates. We are hoping that that is what will make us attractive.’
It is true that other PFI newcomers have opted for far more complex schemes to test drive their PFI prowess. First-timer Hull Council is attempting the sixth round’s largest PFI scheme. It will see 1,040 homes demolished and 1,700 new ones created, 1,020 of which are for sale or low cost homeownership.
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