PFI may be on the way out, but Hammond was careful not to condemn all public-private partnerships. What will replace it?
Fiscal Phil, as the chancellor likes to call himself, used his Budget to go on a very politically targeted spending splurge: the NHS, universal credit and income tax cuts were the main beneficiaries, but there were some significant announcements for construction too.
The government knows that to hit its 300,000 homes a year target it has to turn to affordable housing, and that – combined with wobbles in the housing sales market – makes it an attractive sector for private investors
The big headline grabber was “Chancellor abolishes PFI” after Philip Hammond said the government would not enter into any more Private Finance Initiative (PFI) projects, marking the end of an era spanning more than two decades. Long criticised for binding taxpayers to expensive contracts with private firms, PFI was first dreamt up by John Major’s government in the early 1990s but it was turbo-charged under the Blair/Brown administration – hence Hammond’s dig that binning these contracts would be “putting another legacy of Labour behind us”.
There was a time when practically all the major contractors had a hefty PFI workload – infrastructure, hospitals and schools were the big areas of activity. Contractors liked the procurement model because they could sign up to 25-year contracts giving them a long pipeline, while the public sector could get much-needed investment without the borrowing appearing on the government’s books. Then there was the lucrative secondary market in contractors selling off PFI concessions.
But there was a down side: contractors that costed risky PFI jobs too low paid a high price. Some may remember how, way back in the early 2000s, Laing came unstuck on the National Physical Laboratory PFI job, racking up multimillion-pound losses and eventually having to sell its construction arm to O’Rourke. And, of course, more recently Carillion went down with two big problem PFI hospital jobs on its books – Midland Met and Royal Liverpool.
Carillion’s implosion cemented the public’s poor opinion of private companies running public assets and services, which gained more traction with the National Audit Office’s damning report just days later containing the eye-watering estimate that the public sector faces a £200bn bill for PFI contracts over the next 25 years. Its research also showed that hospitals cost 70% more than those funded directly by the government.
In truth, PFI has been on the way out for some time – after reaching a peak around 2006, it was reinvented as PF2 in 2012 but only a handful of projects materialised under the new banner. Perhaps the bigger question is what will replace PFI? Hammond was careful not to condemn all public-private partnerships – and you can understand why: he may have had a tax windfall to distribute in this Budget but the public purse cannot stretch to funding all the public infrastructure the country desperately needs. For that we will need a new model that allows private sector investment to step in.
The chancellor also called time on another well-established scheme: Help to Buy. It will now definitely be wound up after 2023. But actually, a two-year reprieve for Help to Buy was probably the best result private housebuilders could have hoped for, albeit the scheme is now limited to first-time buyers and with regional price caps. Share prices fell slightly on the news that the scheme would be scrapped from 2023 – but they were soon back above pre-Budget speech levels. From a business perspective, this change to Help to Buy has already been priced in. Essentially, it could have been so much worse: it was predicted that if Hammond had decided to scrap it from 2021, share prices would have taken a 20% hit. But for now everything stays the same and the plan is to limit the eligibility to first-time buyers after 2021. Even better, nearly £9bn of extra funding has been allocated to the extra two years – one option had been for the government to simply stretch out existing funding to cover the extended life of the scheme.
Longer term, the announcement means that housebuilders have time to adjust their business plans and look for new opportunities. Many will be eyeing affordable housing as a new opportunity. Since the 2017 housing white paper the government has been prioritising homes of all tenures not just for private sale. That move received a boost with the final Letwin report, published to coincide with the Budget, which proposes forcing developers on large sites to build a variety of housing types.
The government knows that to hit its 300,000 homes a year target it has to turn to affordable housing, and that – combined with wobbles in the housing sales market – makes it an attractive sector for private investors. Already big names such as private equity firm Blackstone and insurer Legal & General have staked a claim in this space, and there are plenty of private housebuilders expanding their “partnership” businesses working in the sub-market-price housing market, which is lower risk and delivers quick returns.
Of course, this is a space traditionally occupied by housing associations, and they may not be too happy at a sudden influx of private sector competition. Concerns over estate regeneration schemes that harness private developers will no doubt resurface, and it will be for the new players to convince us all that they can build up communities, not just bolster the bottom line. So just as we seek a replacement for PFI, it looks like private finance is primed to step in and build more affordable homes.