Government spending: what Gordon Brown won't be doing for you

• £300m of spending on transport that the government said would be spent this year won’t be until 2011

• The government is struggling to spend £1.7bn in the housing sector until a way is found to replace the section 106 process

‘These are exceptional times and require exceptional measures. It requires action now to help people, and action now to build a stable economy. We have made our choice.” So said chancellor Alistair Darling in his pre-Budget report (stroke emergency Budget) last November. And the action he announced was the government’s biggest economic stimulus package since the Second World War.

The plan was to take £3bn of capital investment earmarked for 2010/11 and spend it in 2008/09 and 2009/10. Most of the money was to go on construction projects in education, housing and transport, and the aim was simply to offset the fall in private investment, with all that that implied for Britain’s social wellbeing and Gordon Brown’s chances of re-election.

Although the initiative was broadly welcomed, there were murmurs that Whitehall departments might not be able to spend the cash in time to realise the dream of a v-shaped recession (it was certainly too late for the 71,000 people who had already lost their jobs in the construction industry). Darling was having none of that defeatist talk: “I’ve looked at these programmes in detail, and I know they can be delivered on this revised timescale,” he said.

Three months later, there is next to no sign of Darling’s £3bn. So far only the widening of the A46 between Newark and Widmerpool in Nottinghamshire will go ahead in the next financial year. Some programmes, for example the £5bn initiative to build further education colleges, are delayed by up to a year. Others, such as a £300m package of measures unveiled by transport secretary Geoff Hoon two days after the Budget, and billed as investment “for the next year to stimulate the economy”, have quietly been rescheduled for after 2011, when the worst of the recession is expected to be over. The fate of £1.7bn intended for additional affordable housing is unclear; the Homes and Communities Agency says it is confident it can spend the money, but admits that it is still assembling the mechanism to do so.

Compounding the misery, the PFI has seized up. The resort to private finance is a legacy from the last recession, when the banks were seen as part of the solution. Now they are the villains of the piece, and projects worth £9.5bn have been put on hold. So if the government is serious about building Britain out of recession, it is going to have to work out how to do it – and quickly.

The search for answers

“Public sector money doesn’t seem to be coming through any more quickly,” says Richard Whittington, head of construction at KPMG. “Not only has government got to put the money up, but it’s got to make the measures for delivery quicker.”

The government is working on plans to get the PFI back in business, its most urgent problem, and an announcement is expected within the next fortnight. One suggestion is to bring in state ownership of risk. Michael Ankers, the chief executive of the Construction Products Association, argues that the government should underwrite lending on any PFI project “that is floundering owing to the inability to get funding, despite the best efforts of the parties involved. They ought to have underpinning from public funds to keep them on track”.

Stuart Webb, partner and head of transportation at EC Harris, agrees that the PFI must be rethought, possibly by selling shares in schemes to the City. “The government’s spending stimulus to build roads, schools and hospitals could be put in jeopardy unless the ground rules are changed,” he says “Who knows? There could come a day when PPP could be part of an initial public offering.”

The government may be reluctant to underwrite pfi contracts as they will come onto the balance sheet. But it might well prove a kickstart

Richard Whittington, KPMG

As KPMG’s Whittington says, state underwriting would be a “temporary solution”, but he adds: “Anything that gets contracts into action will be beneficial. The government may be reluctant, as once a contract is underwritten it will come onto the balance sheet. But it might well prove a kickstart.”

Whittington adds his voice to complaints that go back 10 years about the sheer effort involved in bidding for PFI schemes. “The system, particularly on PFI, is tending to become more long-winded. Anecdotally, I’ve had firms say it’s costing them three or four times as much as a traditional deal.”

Procurement flaws have led to delays on the Learning and Skills Council’s (LSC) programme to renew further education colleges. Here a review is under way to slow down the rush of colleges that are applying for money.

There is also a perception that the government is directing its money at photogenic new-build projects rather than more mundane refurbishment schemes where the money could have more impact. This is evident in transport in particular, where many of the projects to receive spending will not start before 2011.

“Maintenance doesn’t sound very exciting, but you don’t need planning permission, and most of the contractors are in place as they’re on long-term framework contracts,” says Alasdair Reisner, head of industry affairs at the Civil Engineering Contractors Association (CECA). “It’s work that can be done immediately, and it gets money straight to SMEs.”

He suggests that the Highways Agency may already be doing this, without an explicit go-ahead from central government. “It’s not something they’ve said they’re doing, but they seem to be putting more money through their maintenance contracts.”

The conclusion the industry is drawing from all this is that the government could get its money spent, and that that money would relieve the funding drought – but it needs to take its foot off the hosepipe first.

What was to have been spent when

Education

What they were already spending

• £45bn Building Schools for the Future (BSF) programme, which equates to about £2.5bn per financial year.
• £7bn primary capital programme will equate to £1.75bn spending in 2009-11.

The accelerated spending

We’ve been asked to cut 8% off of the price of a college, Which on a £20-25m building is going to mean changing its appearance and going back through planning. We’re looking at a year’s delay

Contracting source

• £800m brought forward, largely for primary capital programme and local authority funds for improvements to secondary school buildings
• £442m to accelerate support for about 25 further education college building schemes and 50 higher education building projects.

The reality

• For the further education programme, new schemes have been frozen until March, although sources say some projects may be on hold for a year. The LSC, the body responsible for the £5bn building programme, confirmed in January that it had been forced to place large parts of the programme on hold. The reason given was a lack of immediately available finance, even though the pre-Budget said it would receive accelerated spending.

There is a freeze on expressions of interest from colleges, and many projects that have planning permission and were to start on site this year have been stopped pending the outcome of the review.

A source at one contractor said: “We’ve been asked to cut 8% off of the price of a college, which on a £20-25m building is going to mean changing its external appearance and going back through planning. We’re looking at a year’s delay, and the architect doesn’t know whether to keep its team on the project or stand it down.”

It is understood that the LSC has told colleges that it will not pay the costs of keeping themselves connected to their supply chains while they wait to see whether a project will go through this year, meaning that some will probably stand their teams down. One source on the programme said: “There are some colleges that feel able to pay teams up front to keep things moving, but there aren’t many in that position.”

The problems are partly caused by a surge of colleges applying for funds and the lack of a system for choosing which should have priority. Also, each college must put up half of its own costs, and their ability to do so has been hit by a drop-off in land receipts.

• In the case of BSF, research from Barbour ABI revealed last week that 240 PFI education projects, worth £2.3bn, many of which came under the programme, were on hold. The picture is not one of unadulterated gloom – the Tameside BSF project recently reached financial close – but many others are not so fortunate. For example, a £350m Salford scheme is more than 15 months late in appointing a preferred bidder. The problem is that the lack of private finance is choking a procurement process that has been resoundingly condemned for its complexity and cost.

• The primary capital programme, which is due to begin in April, is an area where the stimulus could be delivered – although much will depend on the procurement methods used. The government has indicated that it is prepared for the money to be given directly to councils rather than through the more protracted procurement arrangements of BSF. However, although the programme itself will help the industry, it remains to be seen whether the acceleration will hit home. The announcement of which schemes will receive fast-track funding has been extended from January to March as applications are still coming in.

Transport

What they were already spending

More than £20bn a year on road and rail improvements, including work on the £16bn Crossrail project.

The DFT has proposed to give additional funding to the project ‘to start as early as 2011/12’. There is no mention of the project starting sooner

The accelerated spending

The Department for Transport’s (DfT) plans to spend £700m on increasing capacity on motorways and critical highways, including the upgrade of the A46 and 200 new carriages on the rail network

A further £300m was announced in November by Geoff Hoon, the transport secretary. This was to be invested this year on improving access to airports and ports, including:

• Up to £165m on a road link between Manchester airport and the A6
• £54m to enhance the North London rail line
• Up to £60m on traffic management systems on the A12
• £30m to improve access to Birmingham Port on the A160/A180

The reality

None of the schemes covered by the £300m look set to go ahead before 2011.

• The Manchester airport link has not yet received planning approval. A briefing document, seen by Building, was circulated on 16 January to 4NW, a “regional leaders forum” of council officials and business leaders responsible for promoting development in north-west England. This says the expected start date is summer 2011. Even this is “considered optimistic”, says the document, compiled by Dave Colbert, a regional transport adviser at the leaders forum.

The document reveals concern over whether the councils involved will be able to find their share of the funding. The document says the regional funding allowance (RFA), local authorities and third parties would need to find a minimum of £160m to meet a £325m project. The guidance says: “The DfT acknowledges that the proposal will need careful consideration … with the current RFA programme already significantly over-programmed, this will not be an easy decision to make.”

• The A12 improvement works are subject to similar concern. A report from the East of England Regional Assembly’s transport forum on 10 February says the DfT has proposed to give additional funding to the project “to start as early as 2011/12”. There is no mention of the project starting sooner, and the regional authorities have not even agreed to that date. The report goes on: “It is felt important to note that the region should be trusted to make the decisions on the regional priorities as it has been doing through the RFA process and not have them imposed by central government.”

• The improvements to the north London line are due to happen between 2009 and 2014, but it seems that the £54m announced by the government will not be spent until after 2012. The final project, to improve access to Birmingham Port, is still at options stage; the CECA says it is not aware of any start date.

• The one success of the government’s accelerated transport spend appears to be the A46 upgrade in the east Midlands, which is worth between £400m and £500m. This was originally scheduled for delivery in 2011, but is now due to start in summer this year. This has been made possible by an early contractor involvement deal, which means Balfour Beatty and engineer Scott Wilson can start before the full finance is tied down.

Although this is good news for the firms involved, it will not help the rest of the firms in the civil engineering sector.

What has been described is working. But is it enough? Patently, no. we need new tools to move forward with sites or they’ll be mothballed

Stephen Teagle, Galliford Try

Housing

Accelerated spending

The spending package that the communities department announced in September proposed:

• £300m shared equity scheme Homebuy direct
• £200m mortgage rescue scheme
• £100m income support for mortgage interest
• £400m for 5,500 more social homes

Pre-Budget report

• £200m on decent homes programme
• £150m to build 2,000 more social rented homes
• £175m for major repairs to council housing stock
• £100m for key regeneration projects
• £100m for the RDAs

The reality

The Homes and Communities Agency (HCA) is in talks over new routes of delivering funding as the current model is holding up delivery.

The government’s spending is to be delivered in two tranches. First is the £1bn package launched in September that was intended to get more homes built and, by bolstering the mortgage market, sold. The second was a £725m package in the pre-Budget report that focused on improving council homes.

The moves have been broadly welcomed by the housing sector, in particular the creation of “shared equity” housing for sale, the decision to make it easier for grant to be spent on affordable homes, and work on new methods of funding regeneration. But most commentators also agree on another point – it is not enough.

Most of the money being brought forward will be in the gift of the HCA, which will spend it on bringing social housing up to the decent homes standard, new affordable housing and restarting stalled regeneration projects. Sir Bob Kerslake, chief executive of the HCA, says the agency is on track to spend all of the money in the allocated time but was not able to supply detailed figures. The decent homes programme, in particular, is easier to speed up because it does not rely as heavily as other areas on matched private funding.

But at the heart of the efforts to bring forward spending has been a recognition by the HCA that the amount of direct public subsidy paid for each home had to be increased or none of the money could be spent. David Eastgate, chief executive of Hyde Housing, says: “We’re certainly seeing much more flexibility from the HCA on grants – and in a number of instances, yes, this is enough to get schemes going again. However, we’ve still all got schemes stuck which were based on a mixed-tenure model.”

It is this mixed-tenure model that is providing the biggest headache to the government. In the boom years the sale of private homes was used to subsidise the construction of affordable homes on the same site, allowing the government to reduce grant rates and follow its policy of creating mixed communities. In particular, half of the affordable homes in the boom years came from section 106 contributions. Those days are gone.

Some say this model is broken, and Kerslake does accept it is difficult. The HCA is trying to solve the problem by providing infrastructure funding, taking equity stakes, and buying land, and it is in negotiations with a number of big housebuilders and housing associations to sign deals. But Kerslake accepts that these new models will take time to work out. He said: “We can help registered social landlords quite quickly but private builders are more complex.”

Stephen Teagle, managing director of affordable housing at Galliford Try, agrees it is sorting out this new model that is key. He says: “What has been described is working. But is it enough? Patently, no. The sector does need some more assistance – we need new tools to move forward with sites or they’ll be mothballed.”