Friday, 26 May 2017

Minister acts after watchdog finds project costs ballooned by £700m

Housing PFI in doubt as Shapps launches review

Housing private finance initiatives will be reviewed by the government following a damning report which showed the total cost of signed off projects was £694 million more than expected.

The National Audit Office report revealed that the total cost of projects doubled to £1.39 billion, with 21 out of 25 schemes receiving extra government funding between the submission of outline business case and contract signature.

Housing minister Grant Shapps responded to the findings by saying the autumn spending review would look at whether housing PFI offers value for money.

The report, which criticised the Communities and Local Government department for failing to assess projects for value for money, also found all of the 25 projects had seen significant delays.

A total of 12 schemes saw cost increases above estimates in the initial business cases of more than 100 per cent.

Mr Shapps said: ‘We can and must do better. Housing PFI plays a useful role in improving existing homes and providing new homes in areas of housing need, but we also have a responsibility to ensure every pound we spend is spent wisely because of the huge deficit in public finances we have inherited.’

Two schemes, the second phase of a project to refurbish 4,000 properties in Islington, north London, and Manchester’s Miles Platting scheme to refurbish 1,500 homes, both cost more than £160 million, compared to less than £60 million outlined in their business cases.

The NAO report said the CLG had failed to evaluate housing investment models or collect data to demonstrate that PFI was better value for money than other options for improving stock, including stock transfer or creating an arm’s-length management organisation.

Several councils reported that their choice of PFI was based on government policy and the CLG’s funding structures rather than on value for money.

The report also said local authorities and contractors had expressed concern about whether the CLG and the Homes and Communities Agency had the expertise among its staff to work on PFI.

The CLG told the NAO the main reason for underestimating costs in early rounds was that housing was a new PFI sector and therefore ‘experience did not exist’, said the report.

Amyas Morse, head of the NAO, said the CLG should now carry out an evaluation of the value for money of the programme.

He said: ‘The department should assess, as a matter of priority, whether its current and planned PFI projects are delivering value for money.

‘It should at the same time, assess all its past projects. This assessment should be based on hard numbers as well as qualitative factors.’

The CLG told the NAO that it has now developed guidance to improve cost estimates and procurement times.

The government announced earlier this month the withdrawal of £160 million of unspent PFI credits as part of plans to reduce the budget deficit. A CLG spokesperson said the decision will not affect projects already underway.

Opinion - Ian Davitt

The are six main reasons housing private finance initiative projects end up costing more than planned:

  • Project creep - Business cases are often submitted before councils finalise the services they want from tenderers. With PFI credits confirmed by the Homes and Communities Agency, these services can be ‘over-developed’ to levels which the credits will not support.
  • Fixed price premium - Purchasing fixed price and on-time delivery carries a price premium, which is not always taken into account by councils when calculating PFI credit requirements.
  • Contingent pricing - Bidders include high contingent costs in their tender pricing if councils are reluctant to confirm matters that can impact on cost, such as the presence of asbestos in buildings to be demolished.
  • Time delays - If construction inflation is running at 4 per cent a year, a delay of six months on a £100 million project adds £2 million to the cost.
  • Loss of cross-subsidy - Developers are no longer prepared to make up-front financial commitments on post-regeneration land values and profit share.
  • Cost of financing - Banks’ lending margins have risen from less than 1 per cent before the recession to around 2.5 per cent now. This increased financing cost requires a higher PFI credit.

Ian Davitt is national head of housing and social care PPP/PFI at accountancy firm Grant Thornton UK

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