Can PFI bring more investment to the social housing sector?

We shouldn’t forget these include funding building safety works, improvements to existing stock and decarbonisation, as well as new homes. A Lloyds Banking Group white paper this summer proposed two investment mechanisms based on public-private partnership to help deliver more homes for social rent.

We have seen investment in for-profit registered providers increase over recent years. And the National Wealth Fund (NWF), Barclays and Lloyds recently announced that those banks will offer lending to support retrofitting social homes backed by financial guarantees from the NWF, with more funders expected to follow.

The new options under consideration are many and varied. The sector can be an attractive option for investors, given ongoing demand, steady income streams and positive social impact.

But what about existing structures – can these be repurposed to bring more investment into the sector? Here we look at a more traditional public-private investment partnership structure: the private finance initiative (PFI).

PFI has had some bad press in recent years and hasn’t officially been used for new projects since October 2018.

But it enabled over 700 critical infrastructure assets to be built and maintained to a high standard, without affecting the public balance sheet. Without it, we would not have the schools, hospitals, roads, social housing stock and even LED streetlights we have today.

The model worked by transferring the risk of constructing and operating the asset to the private sector, in return for a monthly payment called the unitary charge.

Construction costs were tightly managed and the services provided to a high standard, with deductions against the unitary charge if not.

The model has been successfully replicated, and improved, in many other countries, including across Europe, Australia and Canada.

The PFI contract is long and, some would argue, overly complicated. But it does work and work well when all parties buy into the partnership element properly.

A key finding of a leading review into the PFI sector was how pivotal the relationship between the public and private sector can be to the ultimate success or failure of such an initiative.

The project can break down if not carefully managed, which is why it is so important to genuinely engage in a partnership built on collaboration – something the social housing sector does well.

Alternative versions of the PFI model have developed over time, with a view to enhancing the benefits it can offer to support net-zero objectives and embed greater ESG commitments.

Most notably, in the Welsh Mutual Investment Model (MIM), the Welsh government has more involvement and input into the contract terms, as it is a shareholder, and gets “cash back” on any profits.

It also includes a series of requirements to support local employment and investment.

The new government has signalled its intention to look to private sector money to support the delivery of much-needed new infrastructure in the UK.

Some in the social housing sector have called for social housing to be officially considered as infrastructure, to open up longer-term planning – perhaps a synergy with the long-term housing strategy the government has promised.

Such investment is likely to involve a partnership of some kind between the public and private sector.

To persuade the private sector to invest in PFI, the government needs to provide a clear pipeline of projects and stronger messaging of support around the longevity of the model.

Whether new investment comes as an iteration of PFI, MIM or a new structure (such as the infrastructure investment partnership put forward by the Future Governance Forum), the government needs to be bold if PFI is a tool it wants to rely on.

There is no simple solution to getting the social housing sector the funding it needs to deliver on its key objectives.

Traditional debt funding and grant will remain fundamental, but it will be interesting to see how new or rejuvenated structures can contribute in the coming months and years.

Helen Hunter and Stephanie Townley, partners, Addleshaw Goddard