Housing Private Finance Initiative (PFI)

Frequently asked questions (FAQs) about housing PFI – December 2006

Q1: What is PFI?

A1:The private finance initiative (PFI) is an important part of the Government's strategy for delivering high quality public services. It involves a partnership between the public and private sectors to deliver facilities and services – in this case to design, build, manage and maintain at least 400 homes for affordable rent.

Q2: Why are we involved in PFI?

A2: Back in 2003 we realised that, unless we took bold action, we faced a worsening homelessness crisis due to a steep rise in housing need (up from an annual shortfall of 194 additional affordable homes in the 2001 housing needs survey to over 800 in 2006).

In addition, we had to deal with:

• insufficient Housing Corporation social housing grant (SHG) to provide more affordable homes;
• the abolition of local authority social housing grant (LASHG); and
• capital receipts from stock transfer running out.

This position remains the same today and, with over 4,600 households currently in need of accommodation on the housing register, we decided to make ‘meeting housing need’ one of our corporate priorities.

Q3: What will the Council get out of the scheme?

A3: If everything goes to plan we will get:

• 100% nomination rights to at least 400 good quality homes for affordable rent for 30 years;
• further nomination rights beyond that time (probably 75% for the following 30 years);
• a mixture of one, two, three and four bedroom houses, flats and bungalows spread throughout the district, including about 80 properties in villages;
• some housing specifically for young people and temporary accommodation; and
• the ability to pay our PFI contractor according to their performance.

Q4: What has the Council already agreed?

A4: On 19 July 2005, Full Council agreed to:

• proceed with the housing PFI scheme;
• provide free land for at least 100 homes; and
• make an annual revenue contribution of £195,000 (index linked from April 2004) for 30 years.

Political support for the scheme was reiterated with an increased majority in June 2006.

Q5: What stage are we at now?

A5: The Government has formally approved our outline business case (OBC) and we have received a substantial allocation of Government subsidy, known as PFI credits. We have therefore started the process of choosing our PFI contractor. However, for Communities and Local Government (CLG) has made the PFI credits are conditional on the Council providing at least half the land needed, i.e. for a minimum of 200 homes, before the formal tender stage.

Q6: How much is it costing the Council?

A6: There are three main areas of cost:

set up costs - estimated at £1.039 million;

the Council’s free land (capital contribution) - estimated at £4.2 million; and

• our annual revenue contribution - approximately £210,000 for 30 years at today’s prices.

The total estimated cost to the Council is about £11.5 million at today’s prices. This works out at about £960 per home, per year, for 30 years.

Q7: How does this compare with other types of scheme?

A7: Some schemes don’t cost us anything, such as those using Housing Corporation social housing grant (SHG) on private land or under our nil subsidy section 106 (S106) policy. However, these schemes can’t produce enough affordable homes to meet our overall housing need. If we used SHG to build on free Council land, the equivalent cost would be about £1,770 per home per year. Alternatively, if we used prudential borrowing in lieu of SHG, this would cost £2,200. PFI is therefore the best value option for providing more affordable homes over and above mainstream SHG and S106 programmes.

Q8: Why is it such a good deal for the Council?

A8: In financial terms, PFI is very heavily subsidised by the Government through PFI credits, so it compares favourably with other ways of funding more affordable housing (see A7). It also gives us more control over the location and quality of the homes and the level of services provided to our customers.

Q9: So why are we the only Council looking at PFI?

A9: We’re not! There are currently 35 housing PFI schemes across the country, of which 16 have signed contracts, 13 are in procurement (including us) and six are developing their OBCs. 16 of these are the new build (Non-Housing Revenue Account) type that we are working on, with schemes underway in Brent, Croydon, Cheshire, Kent, Leeds, Derby, Guildford, Medway and Woking.  These figures don’t include any new applications made as part of ODPM’s fifth bid round, which closed in March 2006.

Q10: Can we meet our housing need without PFI?

A10: No. We usually receive about £1 million in Housing Corporation SHG per year, which is enough to deliver some 25 affordable homes. In the recent bid round we have been given an exceptionally good allocation of £7.2 million to provide 175 homes over two years, but this level is unlikely to be repeated.

The Council’s nil subsidy S106 policy is beginning to deliver extra homes, albeit slowly due to the length of negotiations. Our target, excluding PFI, is to deliver 100 affordable homes per year during 2006/07 and 2007/08, rising to 120 in each of the following two years. This is well below the need for over 800 additional homes needed per year (according to the emerging housing needs survey) and there are over 4,600 households in need of accommodation on the housing register. PFI is only part of the solution, but without it we will fall even further behind meeting housing need.  

Q11: Why is the land so important?

A11: Land has always been the key issue for the success of our scheme.  Normally in PFI deals councils provide all the land.  The Government has made a special exception in our case so that we only have to provide half the land, with our PFI contractor providing the rest. Market testing has shown that the number and value for money of bids will be affected by the amount of land that the Council can provide. In other words, the more land that we provide, the better the chances of having a successful scheme. This is why our PFI credits are conditional on providing at least half the land:

• The Council will provide development land for 100 homes from its existing ownership at nil capital cost.
• Development sites for up to a further 100 homes will be provided at open market value from land owned by the District and County Councils.
• Our PFI contractor will be required to provide the rest of the development land for at least 200 homes.

Q12: Why is PFI good for the tenants?

A12: PFI will provide good quality homes for many people who would otherwise remain on the housing register.  Unlike other privately funded solutions (such as private sector leasing), most tenants will have the security of long-term housing association tenancies. The PFI contractor will have incentives to provide good quality housing management and maintenance services, and rents will be set at affordable levels in accordance with Housing Corporation target rents.

Q13: Will the Right to Buy apply?

A13: No, because Right to Buy does not apply to housing association tenancies; nor would the Right to Acquire apply because there is no funding from the Housing Corporation.

CLG is currently piloting a scheme called Social Homebuy, which enables housing association tenants to buy a share in their home.  This is discretionary at the moment but it could be extended in the future.  If CLG extended it to cover PFI, this would be covered by compensation clauses in the contract.  Mainstream SHG funded and S106 schemes would also be affected if CLG decided to extend Social Homebuy any further.

Q14: What are the next steps?

A14: Now that the Government has approved our outline business case, the next steps are to:

• secure planning permission on the Council's development sites; and
• choose the shortlist of bidders to become our PFI contractor.

Q15: Will local people have a say?

A15: Yes, a major consultation process was carried out during the summer of 2006. Local residents and other stakeholders are also being consulted as part of the planning process. Because the Council is applying for planning permission from itself, all of the applications will go to the planning committee instead of being decided under delegated powers.