There are a raft of changes affecting housing PFIs. But as Steve Trueman, head of housing PFI at CLG, explains local authority enthusiasm is still strong.

The deadline for local authorities to express an interest in the sixth round of housing PFI was 31 October. By close that day we had received a total of 24 Expressions of Interest (EoIs), adding up to an application for £4bn of PFI credits – over double the £1.8 bn made available for the Housing PFI Programme by the Treasury through the comprehensive spending review (CSR) process. Clearly this brings its own challenges though is an excellent response from local government; far better to be over subscribed than under subscribed.

During the bidding period we encouraged local authorities to come and talk to us and were impressed with the quality of thinking around projects and the strategic approach which lay behind them and also the level of understanding of the mechanics of PFI as an investment and procurement route. Hopefully this will translate into quality bids. Our assessment process runs until the new year and we anticipate visiting most if not all the authorities to clarify issues connected with their bids and to give them a chance to impress us!

Though we’re starting the assessment process at CLG we’ll be completing it as part of the new Homes and Communities Agency (HCA) – the team and responsibility for delivering the programme transfers on 1 December. Significantly then, announcing and taking forward a new round of the housing PFI programme will be amongst the HCA’s first tasks and we will be working with new colleagues there to formulate recommendations and get a regional perspective on the schemes put forward.

Clear steer

Our detailed bidding guidance issued in August this year re-enforced some key messages about the housing PFI programme and gave a clear steer to local authorities in those areas where we are modifying our approach.

The guidance confirmed that the programme would continue to have an emphasis on those projects which sought to transform the fortunes of unpopular local authority neighbourhoods and estates. These are often characterised by poor design and time expired stock where a significant of element of demolition, replanning and re-design is likely to a feature of any successful, long-term solution. When I think of what such projects might look like I think of Lambeth’s Myatts Field North estate: a project on the current PFI programme where the council is about to call for final tenders from its two bidders. The council hopes to completely re-configure this 1970s built estate and re-provide high quality homes on a tenure blind basis together with quality open space and a comprehensive neighbourhood management solution.

We also said that there would continue to be room on the programme for projects which add to new supply totals particularly hose centred around the provision of extra care housing. Extra care housing schemes have been a particularly successful component of the current programme with Croydon, Leeds, Kent and Cheshire going from OJEU to close in a little over two years. The first Kent project also has an innovative approach to procurement with the County leading the procurement on behalf of 10 district councils, a model Kent are replicating with their second scheme, currently in development, and a model some sixth round authorities will follow.

The EoIs we have received are in line with this thinking. The majority are concerned with neighbourhood based regeneration centred on improving or replacing existing council housing. There are also a good number of bids looking to provide additional affordable rented housing, much of it extra care provision funded either through an authority’s housing revenue account or outside it – the so called ‘non HRA’ PFI route.

For round six we said that we want to see projects on a significant scale – a capital value of £100m plus. Our thinking was that projects on at least this scale would optimise the bidding market’s response leading to value for money and the associated benefit of proportionate set-up costs for local authorities and bidders alike – it doesn’t cost proportionately more to procure a large scheme than it does to procure a smaller one. We didn’t set an upper limit since we didn’t want to constrain local authority ambitions and some of the proposals are especially significant. There’s a sense in which the neighbourhood based schemes ‘cost what they cost’, i.e. an integrated solution which involves demolition, re-planning and redevelopment can’t readily be scaled back unless outputs are compromised and the integrity of the proposition undermined.

Some of the particularly ambitious new build schemes on the other hand, whether general needs or extra care, might be ‘scalable’ and might be reduced in scope – and cost – whilst remaining viable and worthwhile projects for the local authority. This is one of the things we’ll be discussing with authorities when we meet.

Climate change

In the current economic climate we need to ensure that we are working closely with authorities looking to close or approaching financial close and monitoring the position taken by funders in terms of appetite and margins. We are working pro-actively with authorities to anticipate and resolve issues as they develop. We’ve seen margins increase and funders clubbing together to provide finance but schemes are still closing in housing and across the other local government sectors.

On schemes with a market sale element, particularly where this is making a cross subsidy contribution to the cost of the PFI scheme in some way, we are again tracking the market in terms of current and future forecasts of what’s selling and at what prices. If a fresh look needs to be taken at the modelling of some projects, we need to be sophisticated enough and have an adequate understanding of the market to play a full part in those discussions.

Looking ahead of course, the round six schemes won’t be attempting to secure funding nor will the private sector be looking to build and sell houses for some years, by which time commentators are suggesting we should be coming out of the ‘U’ or the ‘V’ and with market conditions having become more settled. In the current climate a particular difficulty with projects that have lengthy development and procurement timeframes is reasonable and sensible business case modelling at an early stage on the basis of which Government support is confirmed.

Subsequently, a commercial position then needs to be underwritten by bidders on the basis of assumptions and risks that will crystallise at some point in the future. In the case of the former, government will need to take a flexible approach with local authorities, which perhaps sees some upside sharing should modelling assumptions prove conservative and pessimistic. In the case of the latter the same applies but perhaps with the need for flexibility over development timeframes should local markets prove less responsive than predicted. In addition, authorities might suggest that there are different ways of structuring the development side of projects which helpfully provide some de-risking for bidders leading to improved VfM.

Time lines

Clearly as projects get bigger and more complex, there will be a concern that they will inevitably take longer and thus be more expensive to develop and procure – on both sides – for that reason if no other. The HCA will need to maintain a commitment to work with authorities to bring bids costs down and to shorten time in development and procurement. We’ve suggested that scheme timetables should allow at least nine months for development of an Outline Business Case and that the procurement timetable should be based on a procurement target time (OJEU to close) of between 24 and 30 months for straightforward new build schemes and between 31 and 36 months for the more complex regeneration schemes.

To those outside the sector this will still sound a long time though clearly these timeframes must take into account consultation, design and planning requirements and processes and are the front end of contracts which will run – hopefully trouble free – for 25 or 30 years. Procuring authorities must be sure, as must government, that schemes are scoped properly and procured effectively in order to deliver value for money and high quality homes, communities and services for tenants and residents.

There are 39 schemes in our current housing PFI programme. We expect that they will improve the quality of 28,000 council homes and directly provide an additional 3700 affordable rented homes. The sector is now reasonably mature and round six will add a significant number of new schemes to the programme. As the programme and the PFI Team move out of CLG and into the new HCA the emphasis needs to be on working to deliver existing projects and developing new ones within a PFI framework which is now widely understood and supported by the bidding market and the local authority sector.