Special report: housing’s public finance initiatives approach maturity

Past controversy

The PFI model has attracted considerable controversy in its decades-long history, in part due to the scale of these charges but also, according to consultants, the rigid terms of some of the earlier contracts.

“PFI: the rip-off that just keeps taking” is the headline of one 2023 report by the Labour Research Department, a trade-union based research body. It cites historic cases of hospital trusts being charged £5,500 for a new sink and a police force paying £884 for a chair.

Over the years, troubles with housing PFIs have forced the resignations of senior officers and the bail-out of projects running into the millions of pounds.

In 2013, Housing 21 reported a loss of £12.3m on its housing PFI contract, and made provision for up to £20m to rectify issues over the next three years.

In 2020, Together Housing Group had to loan £28m to its subsidiary, Pendleton Together, the SPV for a housing PFI in Salford, to fund the replacement of dangerous cladding.

A spokesperson for Together Housing says: “Following our loan to Pendleton Together Operating Limited, the project has progressed considerably. The cladding has been removed and much of the remedial work internally and externally completed. A new, safe cladding system has been installed on some blocks and the project is set to complete by December this year.

“Ahead of the project’s completion, it would be unwise to comment on lessons learned, however reflecting on this will, as expected, be part of our agenda in due course.”

Meanwhile, a spokesperson for Housing 21 says: “Since 2013, as part of a settlement with Oldham Council, Housing 21 carried out a number of rectification works, which received high levels of satisfaction from Oldham PFI residents. The Oldham PFI contract is now performing well and will be overall profitable.

“We have a good working relationship with Oldham Council and we continue to deliver the highest service to residents to timescales which far exceed national and industry standards. Our most recently published tenant satisfaction measures placed Oldham as the number one PFI for time taken to complete a repair and within the top six of all PFIs across the country for satisfaction with repairs. This year, we are expected to achieve overall satisfaction levels of 94 per cent.”

Lessons learned, and opportunity?

Consultants and lawyers tell Social Housing that much of PFI’s bad press is due to “messy” earlier contracts which were later refined through “standardisation”. While the government’s PFI programme was axed by Philip Hammond when he was the Conservative chancellor in 2018, they believe it could be revived to attract private investment for new housing projects.

“The UK essentially created PFI,” says Sam Thurgood, associate director at real estate consultancy CBRE. “The first contracts were very individually created but became more standardised over the years, and that brought massive improvements.”

“PFI has got an unnecessarily bad reputation,” adds Simon Tanner, head of asset transformation at CBRE. He worked on some of the earliest PFI contracts. “One of the issues is that it was the only deal in town, and it was overused and used inappropriately in some cases. It hasn’t been perfect and one model doesn’t solve everything.

“But we’ve seen nothing like that kind of investment since the Victorian era and that was all from the private sector. There is a huge amount of scope for simplifying contracts,” Mr Tanner says.

Wayne Butcher, a director in the public services advisory team at professional services firm Grant Thornton, says there is a “huge raft” of very successful projects for every one that has gone wrong. “The current fiscal position means there is very limited funding available from the public sector, so we do need to look at alternatives such as private finance. It will need to evolve and take some of the characteristics of PFI that have worked.”

One of the key advantages of the housing PFI model was the financial risk it transferred from the public to the private sector, according to Mr Butcher. PFI contracts bind their SPVs to fixed costs for project deliveries, regardless of costly unanticipated problems which crop up over the long course of a contract. “It’s a case of, ‘That’s for you to go and sort out’. You can’t revisit the cost of the contract.

“The standardised contract was very clear on that risk transfer and protected the public sector from risk, and that’s where you get your value for money,” Mr Butcher says.

After Mr Hammond finally abolished the PFI programme in 2018, telling parliament he was “putting another legacy of Labour behind us”, Treasury papers described it as “inflexible and overly complex”.

But as the UK moved on, other countries embraced the PFI model and so attracted the private sector investors that like it. “There is plenty of capital that could be unlocked in these kinds of investment models, but it is going abroad to other countries where PFI is still used. It is a model that works as long as you keep it simple,” says CBRE’s Mr Tanner.

“When you look around the world, other countries are making a real success of the opportunities PPP [public-private partnership] affords, for example Canada, Ireland, and as far afield as Australia,” adds Stephanie Townley, a partner at Addleshaw Goddard.

Helen Hunter, a partner at the same law firm, says there is “absolutely loads of private finance interest” in housing PFI. “There are a number of challenges as to how building more homes to meet demand can be funded, given that the government isn’t going to fund itself.”

But what do the local authorities with active housing PFI projects think of it? Would they apply for it again if it became available?

To find out, Social Housing contacted the seven councils with contracts due to expire in the next seven years. This is the period of time the government suggests councils need to prepare for the expiration of their contracts.

Housing’s expiring PFIs in focus

Tower Hamlets Council’s housing PFI contract with the Barkantine Heat and Power Company (BHPC) is the first to expire in October. The BHPC, owned by EDF Energy and its subsidiary Dalkia, provides gas-fuelled heat and power to residents on the Isle of Dogs, a school and a leisure centre. Council papers from 2024 show it has agreed to extend its contract with the PFI SPV until October 2027 while it carries out an “asset condition survey” and works up a “decarbonisation and expansion” strategy. The east London authority did not respond to a request for comment.

A spokesperson for Dalkia/EDF Energy says: “We are in dialogue with Tower Hamlets Council concerning the extension of the concession agreement and as such it would not be appropriate to comment.”

Lewisham Council’s 20-year PFI contract with Regenter B3 to manage and maintain 1,829 of its homes in Brockley is due to come to an end in 2027. According to council papers, it plans to bring the management of homes in the SPV back in-house. “There is no contractual clause allowing the PFI to be continued and no money from the Treasury to support the extension of the contract,” the papers say.

Brent Council’s PFI contract with Hyde-owned SPV Brent Co-Efficient to develop and manage 384 homes is due to expire in 2028. Hyde will retain ownership of the homes, leaving Brent with “nomination rights for a number of the properties”, a council spokesperson says. “With some years yet to run on the contract, we are not yet in a position to say if the PFI or a similar model should usefully be reinvigorated.”

Newham Council also has a housing PFI contract due to expire in 2028. Its contract is with Swan Housing Association, which became a subsidiary of housing association Sanctuary in 2023. A spokesperson for the authority declined to comment on its plans for the expiration of the contract.

Derby Council says its inner-city housing PFI project’s 30-year contract with Riverside, which runs out in 2030, has “delivered the expected outcomes” of providing 150 extra social housing units and helping it to regenerate the area.

While the unitary charge payments had been a “major risk” – as they were pegged to an unpredictable rate of inflation over decades – the city authority would consider PFI again. “The model could be repeated to further boost housing supply, providing this ‘new’ PFI funding was in addition to, and not ‘in place of’ alternative government grant-funding mechanisms,” a spokesperson says.

Sandwell Council says that its housing PFI, which is also with Riverside and is due to run out in 2031, is “currently performing in line with contract expectations”. “The key lessons learnt from this partnership are that regulated monitoring and robust policies are critical to the success of such undertakings,” a spokesperson for the authority tells Social Housing.

“This type of arrangement could be used to add to and maintain the housing supply. However, more detailed assessment of other options is required to determine which model, be it PFI or grant, offers the best value for money.”

Riverside says its housing PFIs have “performed very well”. “Each contract is very different, but both the Sandwell and Derby projects have generated very positive results for the neighbourhoods, both in terms of properties and general upkeep and behaviour in the areas,” a spokesperson adds.

Coventry Council, whose Coventry New Homes for Old PFI contract with Anchor Hanover Group is due to expire in 2032, did not respond to our request for comment.

All the councils that responded say they have already started preparing for the expiration of their contracts. While the Infrastructure and Projects Authority (IPA), which supports the public sector with contract expiries, recommends that preparations begin seven years in advance, most councils we spoke to have not given themselves as much time, or have not had the chance to. The seven-year requirement was floated for the first time only five years ago. (As of 1 April, the IPA combined with the National Infrastructure Commission to become part of the new National Infrastructure and Service Transformation Authority, a unit within HM Treasury.)

The pressure to manage contract expiries has become a new, and perhaps the final, test for the PFI batch that began in the 1990s and ended in 2018.

Relationship management

A 2021 Public Accounts Committee (PAC) inquiry into managing the expiry of PFI contracts warned that “mismanagement of the expiry process” risked public bodies “footing large bills” for rectifying problems which their SPVs had been paid to fix under its contract.

In its evidence to the inquiry on contract expiries, Leeds City Council said SPVs’ “willingness to provide information” on PFI assets had been “problematic”. (There is no suggestion that the comments apply to its contract with Yorkshire Housing and no other SPV is named directly.) The IPA told Meg Hillier, the committee chair at the time, of a “notable asymmetry of skills and experience” between the private sector “professional asset managers” involved in PFI projects and a “fragmented” public sector.

Following “significant consolidation” among PFI investors, just 10 held more than half of the equity in all projects, while more than 400 authorities continued to manage the public-sector side of contracts, the IPA response added. The Cabinet Office told Social Housing that the IPA offered “expiry health checks” to all PFIs within seven years of expiry and had carried out 200 so far.

More recently, the government-commissioned White Fraiser Report in 2023 found a “prevailing view across the PFI industry” that there was “significant scope for disputes” about how contracts defined the conditions that project assets were required to be in when they expired.

Such disputes have inevitably led to some public bodies and SPVs adopting increasingly entrenched positions and soured some relationships.

CBRE’s Mr Tanner says: “In the main, there is a pretty good relationship between the private and public sectors.”

Addleshaw Goddard’s Ms Townley adds: “PFI has done well when there has been a really strong relationship between the public and the private sectors. There’s been good communication, clear direction, engagement and a clear strategic purpose.”

But Caroline Mostowfi, a partner at law firm Devonshires, says public bodies should be asking themselves in good time “what they want things to look like when a contract expires, and will the project deliver on this?”.

A new wave of PFI?

While housing PFI has undoubtedly attracted significant private sector investment both here and abroad, the chances of a new batch under this government seem finely balanced.

The likelihood of a rejuvenated housing PFI programme in the UK certainly wouldn’t be increased by bad press from contract expiries gone wrong, adding even more financial pressure to an already struggling sector.

It will ultimately be up to the government to define what any new era of public-private partnerships will look like. Lessons learned from the maturing programme of PFI will be vital in designing the right models for the future.

Partner perspectives

A Leeds City Council spokesperson says: “The private finance initiative (PFI) has brought about transformational change for residents by replacing poor housing with high-quality, sustainable homes and improving lives through stronger, more self-reliant communities along with safer, cleaner and greener spaces, which would otherwise not have been realised at the time.

“The relationship on Little London, Beeston Hill and Holbeck has proved successful, with our approach seeing the team nominated at this year’s Partnerships Awards in the Best Operational Contract category. This has been achieved through maintaining open and honest relationships, leading to performance standards being maintained and any issues resolved amicably.

“While communities have benefited from the PFI arrangements, the council’s future preference would be for a grant model that did not entail the lengthy contractual arrangements, complexities and additional costs linked to PFI contracts. However, PFI was the right and only route at the time, providing a mechanism to bring in funding to facilitate much-needed investment into public assets.

“Much has been learned from the council’s experience of housing PFIs, especially in having robust contract management throughout, provided by a dedicated and qualified team and networking with other local authorities. A strong relationship with the Infrastructure and Projects Authority (IPA) has also been beneficial, and the IPA training has proved very helpful for ensuring best-practice contract management and PFI expiry preparation across the housing PFI team.

“The establishment of our central PFI expiry team is helpful in preparing for contract expiry, and ensuring lessons from other Leeds City Council contracts are learnt and best practice followed.”

Rob Parkes, executive director of finance and governance at Yorkshire Housing, says: “We are responsible for facilities maintenance and day-to-day repairs at the Swarcliffe estate in Leeds. This is managed under a PFI contract with Leeds City Council and Yorkshire Transformations Holdings Limited.

“Yorkshire Transformation Holdings has operated successfully and is continuing to refurbish and maintain homes at Swarcliffe.

“As a not-for-profit organisation, we invest all the money we receive from Swarcliffe into improving existing social housing and building new affordable homes. With over 150,000 people on housing waiting lists across Yorkshire, this is the right thing to do.

“Leeds City Council own the homes at Swarcliffe and will continue to do so when the contract ends in 2035.”

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