Experts have warned that the withdrawal of PFI credits for schemes to build 5,000 affordable houses and refurbish a further 1,900 could spell the end of PFI in the housing sector and beyond.
A joint letter to local authorities from Department for Communities and Local Government director-general for housing and planning Richard McCarthy and Homes and Communities Agency chief executive Pat Ritchie this week confirmed that schemes across 13 councils would lose PFI support.
PricewaterhouseCoopers partner Richard Parker said: “This is the death of PFI for housing. It’s killed and buried it at the same time.”
“This is the death of PFI for housing. It’s killed and buried it at the same time.”
Richard Parker, PWC
Under the previous government, PFI credits were ringfenced. But since the Comprehensive Spending Review they have been treated as part of departmental budgets.
Grant Thornton government and infrastructure advisory partner Phillip Woolley said the change was critical and could effectively mean the end of PFI in housing.
“The government says PFI remains a valid route for procurement. But what this shows is when you take away the ring-fencing from PFI credits, PFI is not an option for the sponsor departments because they have to consider it against other commitments.
“That is probably the end of PFI for social housing. I think there is a risk that it affects bidders’ appetites to commit a lot more resources to this market.”
A National Audit office review of housing PFI carried out this summer was highly critical of the instrument’s ability to deliver value for money.
Mr Woolley said this would ensure strict tests on future use of PFI. He is advising councils to explore new funding models including joint ventures, tax increment finance, prudential borrowing, the New Homes Bonus and intermediate market rents. He said contractors and developers should do the same.”
The future of PFI in health was “limited”, he said, while in education it would be subject to the outcome of the Capital Review due in December.
“Highways PFI is going ahead but with significant savings and seven waste schemes were cancelled in the spending review,” he added.
Panmure Gordon construction analyst Andy Brown said it was likely the coalition would find a replacement for PFI, but there was a transitional period.
“There is certainly more uncertainty around the PFI format,” he said. “The government has come up with a £200bn infrastructure plan, of which £150bn will come from the private sector. There needs to be a system in place to attract the private finance.
“There is not a huge level of activity [in housing]. This could make it easier to cancel projects.”
The housing projects that lost funding had been accepted on to the government housing PFI programme but had not had their outline business cases accepted.
The government also confirmed 25 contracted PFI schemes would go ahead and a further 13 in procurement, worth £1.2bn, would be funded. The 13 schemes in procurement will see 4,344 homes refurbished and 3,280 built, but will be subject to cost saving, with a report due in December.
Ms Ritchie said: “I am pleased that despite having to make some tough decisions following the spending review, DCLG is able to commit support for these housing PFI schemes which have the potential to make a real difference to local communities.
“We will work with those councils which have received disappointing news to look at any ways in which their objectives might be supported through a non-PFI route.”