It's difficult to understand, creates reams of paperwork and takes a very, very long time. No wonder the housing world hasn't warmed to PFI. But don't despair: here, Chloe Stothart brings you three ways to cut the complexity
what does "PFi" stand for? mountains of paperwork, huge legal bills and years of negotiation, it would seem. The first private finance initiative, signed last April, took more than four years to get off the ground as problems with stock values and haggling strung out the process. Bidders have pulled out of other schemes, reducing competition for the deals (HT 18 July, page 11). All this made PFI relatively unappealing to housing.
The pack standardises parts of housing PFI agreements, which should cut paperwork, legal fees and negotiating time. In addition, the ODPM has changed a number of housing regulations to improve the payment of PFI credits – the government funding for PFIs. The pack takes several of the problems that hit the first PFIs – including stock surveys that did not spot hidden costs and loss of homes through the right to buy – and tried to find a set of ways to address them. How it works
The pack addresses five areas: the loss of homes through right to buy sales, outputs, performance, payment and risk. For example, it lists the standards the buildings must meet, such as the decent homes standard, or how often gas appliances must be inspected and what constitutes a breach of that rule. It also includes formulas for calculating payments and how to reduce the payment to the contractor when homes are sold through right to buy. These reflect the reduction in works they will have to undertake, but take into account fixed costs contractors have, such as interest on loans. The paper breaks down the various costs that contractors have – those that cease when a home is sold and those that continue throughout the contract – to help authorities and contractors work out changes in pricing after a right to buy sale. The final paper lists the possible risks in a PFI contract, such as tenants refusing contractors access to their home to carry out the works or the need to move tenants, and gives the steps the contractor should take under the circumstances. The pros
The changes have met with a positive reception from most of the housing world. “Anything that forces people to carry out more thorough evaluations of the business case is a good thing,” says Amanda Davies, finance director of Parkside Housing Group, part of the Reading PFI scheme. The guidance should be particularly useful for PFIs to refurbish housing (housing revenue account PFI), which often involve consortia and sometimes only use private sector firms, leading councils to want watertight performance agreements. Richard Parker, the head of housing public-private partnerships at PriceWaterhouseCoopers, helped the ODPM and 4Ps to design the pack. The standard agreements will shorten negotiation on parts of the PFI. “In the first instance, the guidance could reduce total procurement costs by up to 30% and as more projects come onstream, delivery timescales and costs should fall further – but people have to use the pack appropriately,” he says. The cons
Although the standardisation of the agreements should reduce complexity and speed up projects, PFI is still a paperwork-intensive business. Some in the sector feel that a different agreement would benefit PFIs for new build housing (non-housing revenue account PFI). Graham Moody, managing director of consultant GMA, says the first new build PFIs in Derby and north-east Derbyshire managed to settle on simpler agreements with the housing associations undertaking their PFIs. He says the procurement pack should build on these agreements for new build PFIs, so there would be two standard agreements – the agreement proposed in the pack for refurbishment PFIs and a slightly different standard agreement for new build. The changes in the pack could bring down the affordability threshold for PFI from £20m, but small PFIs could still be prohibitively expensive.
The mini PFI is designed for small, new build PFIs done by a housing association where the conventional PFI agreement would be too expensive and time-consuming. “PFI is only really cost effective for projects of £20m or more,” says consultant Andrew Drury, who designed the scheme. “What we are trying to do is lower the threshold at which PFI becomes cost-effective by simplifying the process of bidding and contracting.” The scheme is based on social housing grant agreements. Typical 150-page legal documents could shrink to just a few pages. How it works
It retains as many of the elements of existing social housing grant type agreements as possible rather than writing new conditions into the PFI contract. For example, it relies more on the scheme standards and regulatory conditions of the Housing Corporation than on the lengthy termination and compensation clauses of a PFI deal. In social housing grant schemes, associations bear the risk of cost increases and time overruns much like a PFI. The main legal cost would be conveyancing, as in social housing grant schemes. Mini PFI helps to close the gap between the cost of conveyancing, which goes up house by house and is therefore cheaper in smaller schemes, and PFI contracts, which tend to be more economical for larger projects because they cost a similar amount to produce regardless of the number of homes. The association would receive payment over 30 years, as in a PFI. The pros
The use of social housing grant type conditions will cut down the paperwork, time and cost. It has the added comfort of bringing councils and housing associations back onto familiar contractual territory. Ian Graham, head of housing projects and of the PFI group at law firm Trowers and Hamlins, says the conveyancing on a 25-home social housing grant scheme could cost £3000 to £4000, whereas a PFI agreement could cost 10 times that sum. The mini PFI could plug several funding gaps. It could help councils fund the smaller schemes they would once have paid for through local authority social housing grant. In addition, says Drury, many housing associations fear that one of their other sources of funding, Housing Corporation grant, will increasingly be directed towards the four housing growth areas. PFIs worth as little as £1m could be viable under this scheme instead of the £20m threshold under conventional PFI, says Drury. The cons
The government also sees PFI as a tool for large deals. The Treasury’s Meeting the Investment Challenge paper makes it clear that it does not regard PFI as the best option for schemes worth less than £20m – exactly the type of schemes mini PFI is designed to help. The question is whether the potential cost savings of mini PFI would change its mind on this point. Government also seems keen on a standard PFI contract and mini PFI would be a deviation from this standard. There is also the issue of performance. For some, the regulatory regime of the Housing Corporation would be sufficient to deal with a mini PFI, but others feel the strict control of PFI is a strength. One consultant says: “For me, the discipline of PFI is about government funding going into projects with more rigorous analysis of project economics.” Mini PFI relies on social housing grant and Housing Corporation rules so it only works for new build schemes where the contractor is a housing association. It would not work for refurbishment schemes where there is no housing association partner.
In education and health, where PFI is more established, transactions are often bundled together. Joint PFIs are also growing in popularity – Oldham and Rochdale councils have submitted a joint PFI bid. A third possibility would be to pull together different types of PFIs, such as health, housing and education, in one community. The pros
Bundling projects together would mean PFIs could reach the large numbers of homes needed to achieve economies of scale, attract contractors and please the Treasury. Oldham and Rochdale estimate that they will roughly halve their costs by pursuing a joint PFI. Rob Farnos, PFI project leader for Oldham’s ALMO First Choice Homes, says: “Rather than spend two lots of £500,000, it would be one lot of £600,000. It’s a bit more than a single project as there will be some more work because it involves two authorities but it’s not as much as two separate projects.” The joint bid maximises the number of homes and could also give the chosen contractor the opportunity to work on the councils’ market renewal pathfinder scheme – making the deal more tempting for contractors and hopefully ensuring a greater number compete for the deal. The cons
Bundled NHS projects work best when very similar projects are tied together as specifications and agreements can be standardised. Doctors’ surgeries do not differ much but housing projects are far more varied. The government has ruled out any imminent adoption of the LIFT model used in the NHS to tie PFIs together, although this is not to say that some variation on the bundling idea would not get airtime in future.
But now the government, consultants and a group of councils and housing associations have proposed a number of changes to make the process more straightforward. First off is the PFI procurement pack designed by procurement agency 4Ps and the ODPM; it's currently in draft form but is set to be published next month. Second is the "mini PFI", an agreement based on social housing grant conditions that is intended to make PFI cost-effective for small schemes. Mini PFI was designed by consultant Andrew Drury for a 26-home PFI by Bassetlaw council and he will speak about it at the National Housing Federation's finance conference next Wednesday).
Finally, there is bundling together lots of similar PFIs to make them cost-effective. This idea is popular in the NHS but in its infancy in housing, even though some councils are already bidding for joint PFI schemes in an attempt to achieve economies of scale.
So, how do these three ideas work and what are the pros and cons?
ODPM/4Ps procurement pack
What is it?The pack standardises parts of housing PFI agreements, which should cut paperwork, legal fees and negotiating time. In addition, the ODPM has changed a number of housing regulations to improve the payment of PFI credits – the government funding for PFIs. The pack takes several of the problems that hit the first PFIs – including stock surveys that did not spot hidden costs and loss of homes through the right to buy – and tried to find a set of ways to address them. How it works
The pack addresses five areas: the loss of homes through right to buy sales, outputs, performance, payment and risk. For example, it lists the standards the buildings must meet, such as the decent homes standard, or how often gas appliances must be inspected and what constitutes a breach of that rule. It also includes formulas for calculating payments and how to reduce the payment to the contractor when homes are sold through right to buy. These reflect the reduction in works they will have to undertake, but take into account fixed costs contractors have, such as interest on loans. The paper breaks down the various costs that contractors have – those that cease when a home is sold and those that continue throughout the contract – to help authorities and contractors work out changes in pricing after a right to buy sale. The final paper lists the possible risks in a PFI contract, such as tenants refusing contractors access to their home to carry out the works or the need to move tenants, and gives the steps the contractor should take under the circumstances. The pros
The changes have met with a positive reception from most of the housing world. “Anything that forces people to carry out more thorough evaluations of the business case is a good thing,” says Amanda Davies, finance director of Parkside Housing Group, part of the Reading PFI scheme. The guidance should be particularly useful for PFIs to refurbish housing (housing revenue account PFI), which often involve consortia and sometimes only use private sector firms, leading councils to want watertight performance agreements. Richard Parker, the head of housing public-private partnerships at PriceWaterhouseCoopers, helped the ODPM and 4Ps to design the pack. The standard agreements will shorten negotiation on parts of the PFI. “In the first instance, the guidance could reduce total procurement costs by up to 30% and as more projects come onstream, delivery timescales and costs should fall further – but people have to use the pack appropriately,” he says. The cons
Although the standardisation of the agreements should reduce complexity and speed up projects, PFI is still a paperwork-intensive business. Some in the sector feel that a different agreement would benefit PFIs for new build housing (non-housing revenue account PFI). Graham Moody, managing director of consultant GMA, says the first new build PFIs in Derby and north-east Derbyshire managed to settle on simpler agreements with the housing associations undertaking their PFIs. He says the procurement pack should build on these agreements for new build PFIs, so there would be two standard agreements – the agreement proposed in the pack for refurbishment PFIs and a slightly different standard agreement for new build. The changes in the pack could bring down the affordability threshold for PFI from £20m, but small PFIs could still be prohibitively expensive.
The mini PFI
What is it?The mini PFI is designed for small, new build PFIs done by a housing association where the conventional PFI agreement would be too expensive and time-consuming. “PFI is only really cost effective for projects of £20m or more,” says consultant Andrew Drury, who designed the scheme. “What we are trying to do is lower the threshold at which PFI becomes cost-effective by simplifying the process of bidding and contracting.” The scheme is based on social housing grant agreements. Typical 150-page legal documents could shrink to just a few pages. How it works
It retains as many of the elements of existing social housing grant type agreements as possible rather than writing new conditions into the PFI contract. For example, it relies more on the scheme standards and regulatory conditions of the Housing Corporation than on the lengthy termination and compensation clauses of a PFI deal. In social housing grant schemes, associations bear the risk of cost increases and time overruns much like a PFI. The main legal cost would be conveyancing, as in social housing grant schemes. Mini PFI helps to close the gap between the cost of conveyancing, which goes up house by house and is therefore cheaper in smaller schemes, and PFI contracts, which tend to be more economical for larger projects because they cost a similar amount to produce regardless of the number of homes. The association would receive payment over 30 years, as in a PFI. The pros
The use of social housing grant type conditions will cut down the paperwork, time and cost. It has the added comfort of bringing councils and housing associations back onto familiar contractual territory. Ian Graham, head of housing projects and of the PFI group at law firm Trowers and Hamlins, says the conveyancing on a 25-home social housing grant scheme could cost £3000 to £4000, whereas a PFI agreement could cost 10 times that sum. The mini PFI could plug several funding gaps. It could help councils fund the smaller schemes they would once have paid for through local authority social housing grant. In addition, says Drury, many housing associations fear that one of their other sources of funding, Housing Corporation grant, will increasingly be directed towards the four housing growth areas. PFIs worth as little as £1m could be viable under this scheme instead of the £20m threshold under conventional PFI, says Drury. The cons
The government also sees PFI as a tool for large deals. The Treasury’s Meeting the Investment Challenge paper makes it clear that it does not regard PFI as the best option for schemes worth less than £20m – exactly the type of schemes mini PFI is designed to help. The question is whether the potential cost savings of mini PFI would change its mind on this point. Government also seems keen on a standard PFI contract and mini PFI would be a deviation from this standard. There is also the issue of performance. For some, the regulatory regime of the Housing Corporation would be sufficient to deal with a mini PFI, but others feel the strict control of PFI is a strength. One consultant says: “For me, the discipline of PFI is about government funding going into projects with more rigorous analysis of project economics.” Mini PFI relies on social housing grant and Housing Corporation rules so it only works for new build schemes where the contractor is a housing association. It would not work for refurbishment schemes where there is no housing association partner.
Bundling transactions and joint bids
What is it?In education and health, where PFI is more established, transactions are often bundled together. Joint PFIs are also growing in popularity – Oldham and Rochdale councils have submitted a joint PFI bid. A third possibility would be to pull together different types of PFIs, such as health, housing and education, in one community. The pros
Bundling projects together would mean PFIs could reach the large numbers of homes needed to achieve economies of scale, attract contractors and please the Treasury. Oldham and Rochdale estimate that they will roughly halve their costs by pursuing a joint PFI. Rob Farnos, PFI project leader for Oldham’s ALMO First Choice Homes, says: “Rather than spend two lots of £500,000, it would be one lot of £600,000. It’s a bit more than a single project as there will be some more work because it involves two authorities but it’s not as much as two separate projects.” The joint bid maximises the number of homes and could also give the chosen contractor the opportunity to work on the councils’ market renewal pathfinder scheme – making the deal more tempting for contractors and hopefully ensuring a greater number compete for the deal. The cons
Bundled NHS projects work best when very similar projects are tied together as specifications and agreements can be standardised. Doctors’ surgeries do not differ much but housing projects are far more varied. The government has ruled out any imminent adoption of the LIFT model used in the NHS to tie PFIs together, although this is not to say that some variation on the bundling idea would not get airtime in future.
Source
Housing Today
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