PFI housing - Will this prototype have billion pound potential?

How the deal was put together

North East Derbyshire district council faces an ageing and in parts defective housing stock - more than 40% of its 9600 properties are of non-traditional construction many of them pre-cast reinforced concrete (PRC). It is an area of low wages and low council rents - an average of just £30 a week compared with £60 for comparative housing association stock. It has none of the cachet of inner city areas, and comes well down the list for public funds. It was these factors that encouraged the council and its then housing manager Bill Best to pursue other options. Two proposals were received. One involved a joint venture deal involving additional council owned land for housing for sale which would provide a cross-subsidy. However, it was decided to pursue the private finance initiative idea with South Yorkshire after the contract was advertised in line with European Union rules - the value of the service charges was above the ‘de minimis’ threshold. But the problem faced was that no one had ever done this before. “At each meeting with the DETR we were breaking new ground” says Paul Bradshaw, NEDDC’s health and housing director. “They had no protocols and the only alternative put forward was wholesale transfer. There were no rules and people had to feel their way through the process.” Both he and Steve Ellis of South Yorkshire HA stress the importance of partnership, including the contractor. “Lovells fed a lot of information into the proposal,” Bradshaw says. Dexia Municipal Bank was also involved and had a big input into the service contract. “A lot of discussion went on about the bank’s rights to put in new managers,” says Ellis. An important aspect of the planning centred on the service charge payments. Under the contract structure test for PFI schemes the minimum payment over the lifetime of the contract must not exceed 80% of the ‘total expected’ payment - in other words at least 20% has to be based on performance. NEDDS looked at penalty payments but for legal reasons these did not stand up. Instead incentive payments equal to 20% were agreed, paid against agreed levels of service. This is the risk element - all PFI schemes must satisfy this, and in NEDDC’s case it was important to get right so that it was able to get the 85% central government credits to cover the cost. Bradshaw has become a strong advocate of PFI for public housing. “It should be easier for housing than other sectors because of the strong HA rental stream,” he points out. He is keen to use it to regenerate more of NEDDC’s defective stock. This led them to bid for the ‘pathfinder’ schemes announced last year (see main text). “We are looking at £16m public input for schemes on three sites “ These will allow for the replacement of 700 PRC houses by 550 new homes.

PFI funding and specifications issues need resolution

Although more houses can be built with PFI than using traditional social housing grant, one problem is that there is a long term cost to public in terms of revenue funding. Another is the issue of quality. Some people have argued that PFI could have a side benefit - it could give impetus to the innovation agenda as operators will want to minimise the risk of high repairs and maintenance costs. Cathy Stoll, business development manager of Lovell Partnerships, says PFI has “got to have an influence on specification”. But if a scheme is cost critical, the traditional risk of cutting corners remains. A true comparison will need to take in long term maintenance and repairs for both a PFI approach or traditional SHG funding. One other consideration is the structure of the deal. The North East Derbyshire scheme is quite small and has been taken onto the South Yorkshire balance sheet. But larger schemes are likely to require a special purpose vehicle. There are two options. In one the local authority remains the landlord, contracting out the services and refurbishment only. In the other, the properties are transferred to the contractor under a long lease. In theory they could revert to become council tenants at the end of the lease. This lease method should allow much more money to be raised.

Design and construction standards shaping Holmewood

The North East Derbyshire/South Yorkshire housing association scheme at Holmewood may be innovative in its funding but is very traditional in its construction - and it would never make Housing Forum demonstration project status. In fact Paul Bradshaw of NEDDC is quite sceptical about the whole innovation agenda. “I have a serious concern about it,” he says. “I do not like the way new construction forms are being forced on the public sector. “All the same arguments were made by Keith Joseph and others in the past - they led to many of the disasters we now face. “The public sector should not be the testing ground for these new ideas.” But the scheme has been built to high standards. Space exceeds Parker Morris and an energy efficiency (NHER) level of 9 has been achieved. All ground floor homes have been built to mobility levels. Crime is not a significant problem, but the recommendations of Secured by Design have been followed. South Yorkshire’s green policy has been adopted, with avoidance of products containing CFCs, all windows use wood from sustainable sources and low energy gas condensing boilers have been installed. “We adopted a rigorous life-cycle costing approach,” says South Yorkshire development director Steve Ellis. “It is our best interests to ensure the homes are kept well maintained because it could affect our performance payments. PFI forces you down the route of thorough risk assessment. It has to be robust. We had much more contact and detailed discussion than on a traditional contract.”