Government set to bail out flagship PFI housing deals

The government is facing more difficulties with the PFI as councils are asked to stump up extra cash to rescue £450m of flagship PFI housing schemes.

Several authorities have made it clear that, unless they receive a greater government subsidy, they can no longer afford the payback cost of the eight planned Pathfinder projects.

The government, increasingly embarrassed by the long delays to these flagship schemes, is under strong political pressure to concede ground and the DTLR is believed to be reviewing its policies.

The Pathfinder schemes were first unveiled in 1999 as a means of using private money to refurbish council housing. Under the initiative, the properties are transferred to private ownership for a 25-30-year period.

The nub of the problem facing the councils is that the amount of subsidy the councils receive is decreasing. This is because the subsidy is linked to interest rates – which are currently falling.

When the Pathfinder schemes were first conceived the interest rate was running at 5-6% and the councils could expect to be entitled to a 90% subsidy. Now that the interest rate is running at 4.5%, they can only expect to receive 75-80% of the cost of a scheme.

Several councils claim that they should not be penalised because of the vagaries of economic policy and the government should make up the difference.

Ben Denton, a director of Abros, a financial adviser specialising in PFI projects, said with interest rates on a downward trend, local authorities faced mounting costs.

He said: "It's not really for local authorities to gamble on interest rates. Central government will have to make up the shortfall."

Other local authorities have called for the funding mechanism to be rethought with a fixed rate of interest.

A senior project member on one of the eight Pathfinder schemes acknowledged that local authorities had approached the DTLR looking for extra funding. A spokesperson for the DTLR also admitted that it had received "some enquiries regarding additional PFI credits".

She said a decision on the issue was pending.

Manchester council, which is running one of the schemes, is believed to be one of the authorities that has put pressure on the government.

Derek Martin, assistant director of housing at the council, said:

"We are in detailed discussions with DTLR over finalising our PFI scheme."

The Manchester scheme, which is the most advanced of the Pathfinder projects, is evaluating bids from consortiums, but authorities with less advanced procurement processes are also wary.

Sandwell council in the West Midlands, which is proposing a £50m council refurbishment scheme, said a decision on asking for more money would be made after the bidding process was finished.