Eversheds’s Tim Costello looks at whether PFI has a part in helping to fulfil the ambitious housing targets

It is quite clear that housing will resume its place alongside education and health as a priority for government, as was the case in the decades after World War II. This is a definite change of emphasis that the new prime minister has made. It was set out in the Green Paper, Homes for the Future, with a target of 240,000 net additional homes per year by 2016. In addition, the establishment of the Homes and Communities Agency will join up the delivery of housing and regeneration, bringing together the functions of English Partnerships, the Housing Corporation and some activities currently carried on within the DCLG.

The recent Comprehensive Spending Review (CSR) reinforces the prime minister’s expressed intentions saying: “The government believes that everyone should have access to a decent home at a price they can afford in communities where they want to live and work.” The Review provides for planned increases in public spending on housing from £8.8bn in 2007/08 to £10bn in 2010/11.

The cost of housing is an increasing problem for first time buyers in the open market sector and has the potential to affect adversely the whole economy. What happens in the social housing sector has an influence on the open market sector. Many social housing projects involve the development of new housing for sale. This, at the same time, provides a subsidy for social housing and increases the number of houses available for sale on the open market.

There seems no reason to doubt the good intentions of the government in this area and the increased funding should survive a change of government. However the difficulty will come in delivery. As anyone working in the field of PFI recognises every day, the planning system is a huge impediment. It is a measure of its power that, despite delivering the most expensive housing in the world, it is so resistant to change. The recent reforms were ineffective in simplifying the process and improving the building of new houses. One questions whether implementation of the reforms in the current planning White Paper will be any more successful.

Housing PFI involving stock held in the Housing Revenue Account (HRA) is more complex than any other sector in PFI. The difficulties stem not only from having tenants in situ but also occupiers who have exercised their right to buy. Most HRA projects will involve an element of development of new housing for sale on an open market or affordable basis. This means that they are expensive to bid, especially if the local housing authority does not specify the master planning.

It must not be forgotten that there have been, and will continue to be, at least as many non-HRA PFI projects as well as schemes which, although not subsidised with PFI credits, are delivered through public private partnerships. These are normally all new-build and more straightforward.

The decline in the number of new NHS projects has caused a number of PFI bid teams to consider housing PFI. Bidders have probably been encouraged by an increase in the number of housing PFIs reaching financial close, after a very sluggish start to the flow of completed deals. Indications are that bidders are being cautious, especially if there is another consortium appear well placed to be awarded the contract. For this reason local housing authorities are well advised to prepare well for their projects. This not only streamlines their own procurement and delivery costs but is likely to give potential contractors the confidence to bid.

An issue with housing PFI is that with HRA schemes and many non-HRA schemes, RSLs – mainly housing associations – are best placed to provide housing management. In practice the local housing authority can only achieve optimal transfer of risk if housing management is included in the services required. The RSLs who have participated in the projects closed to date have mainly only one project to their name. As RSLs are successful on more than one scheme, competition for projects will improve.

Competitive streak

The introduction of the competitive dialogue procedure at the beginning of 2006 has affected housing PFI projects just as it has projects in other sectors. In particular the requirements to ensure that there is effective competition at the time of calling for final tenders; and forbidding post final negotiations affecting risk and price combine to compel a local housing authority to get further in tying down the details of the eventual contract than was possible under the negotiated procedure.

In practice, the difference may not be as significant as might be imagined. Experienced users of the negotiated procedure had come to realise that it was essential to resolve most issues before choosing a preferred bidder. Furthermore, at least in projects where the preferred bidder had been ethical, much of the negotiation leading up to financial close achieved relatively small changes in position. Indeed these were generally out of all proportion to the time and expense involved. Under the competitive dialogue, where such negotiations could result in a failed procurement, there will be an incentive on preferred bidders to be more pragmatic. This should result in a shorter procurement time.

For local housing authorities, there are likely to be more detailed negotiations before a preferred bidder is identified but less work afterwards. For bidders the costs of unsuccessful bids are likely to be higher. Local housing authorities will not have the resources to take three bidders to final tender and will recognise that, if they tried, they would be likely to have at least one bidder drop out. To be left with a single participant in the competitive dialogue before call for final tenders is not fatal but commercially undesirable. There is likely to be a practice of reducing the participants to two as soon as possible after receipt of detailed solutions.

In PFI delay before financial close increases procurement and bidding costs and delay after financial close will give rise to compensation events which are (and have been) extremely costly for the local housing authority. HRA projects will normally involve an element of regeneration. Whether existing stock is being refurbished or replaced, dwellings that have been sold to those exercising their right to buy will often have to be bought in. Some may be purchased by private treaty but it will be necessary to have a compulsory purchase order as a backstop. Often public rights of way will have to be extinguished. Obtaining the necessary orders will often involve a public enquiry. This process needs to start early so as to ensure that the orders are enforceable before financial close.

Planning is always a concern. An application for outline permission will normally be a prerequisite for obtaining a compulsory purchase order. Even an outline application is not necessarily straightforward. Perhaps understandably, local authority planning departments do not appreciate the reality that the local housing authority, and not the eventual PFI contractor, is commercially the developer. This is so, even though the eventual detailed permission may be granted on the application of the contractor. There is no understanding that the cost of everything is effectively born by the local housing authority. This can cause debate and delay which sometimes seems to be endless and has the capacity to make projects unaffordable.

PFI has proved a reliable vehicle for delivering housing projects. Schemes have been notably successful in turning round unpopular estates with social problems. The concept of upgraded estates with refurbished HRA dwellings, new HRA dwellings and private housing for sale being tenure blind seems capable of ensuring that the improvements will endure long after they have been completed. HRA tenants on such estates are guaranteed that for the life of the PFI contract they will not suffer the lack of repair and poor conditions that have blighted so much stock in local authority control. The value of the long-term involvement of an RSL, experienced in maintaining the value of its own stock, cannot be over-emphasised. In future projects it is likely that the RSL member of the consortium will take a more prominent role, making itself responsible for all aspects of management including lifecycle replacements and responsive repairs. They are better placed to manage and understand the risks involved in being responsible for damage caused by tenants and others. It is clear from the CSR that government is determined the planned expenditure will be directed not only at providing physical improvements but building a sense of community, civic pride and belonging.

If projects are to be delivered on a truly tenure blind basis, the involvement of a conventional house builder for the developments aspects of the project can be problematic. Some RSLs have experience in this area and are willing to take on this role.

Prospects for the future

The reassessment of the provision of adult social care is likely to produce a continuing flow of non-HRA PFI projects as well as those funded without PFI credits. This reflects the policy of the government to empower people to live independent lives regardless of their age. This means that residential care homes are being replaced with extra-care housing where the residents can be offered the social care they need in their own homes rather than in an institution.

The prospects in the housing sector seem set only for improvement. The CSR confirms the continued and growing availability of public funding. The number of completed deals should at last begin to develop a critical mass of experienced building contractors and RSLs capable of being competitive in the market. The know-how of local housing and social services authorities ought to contribute to best practice and ensure that the cost of bidding is kept to the minimum, although it will always be high. If, unexpectedly, the proposed reforms to the planning system actually eased the process, the future would be even brighter.