Councils angry that paying off housing debt means automatic loss of PFI subsidy
Councils struggling to get private finance initiative schemes off the ground have issued the government with fresh demands for a rethink on subsidy.

Under current rules, councils’ entitlement to PFI subsidy ends when they have paid off their housing debt. However, high levels of receipts from the sale of council houses mean many councils will pay off their debts years sooner than expected.

Consultant Graham Moody said: “At worst, councils could have no subsidy and the full cost of a scheme to pay for.”

A group of 21 councils, housing associations, lenders, bidders and consultants has written to the government urging a rule change. It follows a similar letter in July (HT 1 August, page 14).

The problems could stop many councils from choosing PFI at a time when the government is strenuously defending the procurement method as good value. In the past fortnight ministers including Gordon Brown, Paul Boateng and John Prescott have all made speeches defending the use of PFI to renew run-down public services.

Sandwell council PFI manager David Tatman estimates that, due to increased levels of right-to-buy receipts, the council will be debt-free by 2023. If this happens, Sandwell will lose all subsidy even though it has at least nine years of its PFI contract still to run.

“Further right-to-buy increases would make the situation even worse,” Tatman said. “We are concerned that we will not have enough to pay the contractors at that time. We need assurances that the Office of the Deputy Prime Minister will address the problem.”

A spokeswoman for the ODPM said: “The ODPM is aware that there are concerns about the affordability of some schemes and is therefore considering whether there are alternative options.”

North-east Derbyshire council estimates the complex subsidy rules will deprive it of £3m.

Concerns have also been voiced by bidders that the process is too costly. It can cost up to £1m simply to bid for a PFI housing scheme.

As a result of this sort of entry barrier, other options – such as bidding for refurbishment work following stock transfers – can appear more attractive due to the lesser degree of risk and simpler negotiation process.

A number of councils have privately admitted that they are experiencing severe difficulties in attracting sufficient interest from potential private-sector bidders.