PFI
The Private Finance Initiative is a procurement approach through which central government provides financial support for long term partnerships between the public and private sectors.
PFI projects in the housing sector will deliver additional affordable rented homes and the transformation of local authority housing estates and neighbourhoods and are scoped to include up front capital works and long term associated services. In return for providing the above, the private sector receives payment, linked to its performance in meeting agreed standards of service provision. The funding for these projects is given by central government in the form of what are known as PFI "credits". PFI is basically just a different way of purchasing. The local authority still does the buying, just as it does at present.
Each PFI project is different depending on local circumstances. However there are some common threads that run through all projects, which are described below.
The local authority will sign a contract with a private sector 'Operator' which will typically last 30 years. Over the first part of this contract, usually three to five years, the Operator will refurbish, re-provide or build new homes. During this period and for the full length of the contract the Operator will provide services, which are currently provided by the local authority. These will include repairs and maintenance and perhaps rent collection, tenancy management, care-taking and security. The exact services included may vary from project to project.
The Operator is paid for the work over the course of the contract and on a performance basis. The authority will design an "output specification" which is a document setting out what the Operator is expected to achieve. If the Operator fails to meet any of the agreed standards it will lose an element of its payment until standards are improved.
The Operator is frequently a commercial organisation known as a Special Purpose Vehicle (SPV). This is a group of companies who have joined together to form a single organisation specifically for the purpose of bidding for a PFI contract. Depending on the scope of the contract the SPV is likely to include:
- A bank or funder
- A constructor
- A Registered Providers of social housing (including former Registered Social Landlords)(housing association) or facilities management provider
The owners or shareholders in the SPV provide part of the capital funding required as equity or ‘sub debt’ and will manage the risks passed to the SPV by the local authority through the PFI contract by entering into a series of sub-contracts with, for instance, a construction sub-contractor, a repair and maintenance sub-contractor and a housing management sub-contractor.
The procurement process
Before a PFI contract is agreed there have to be detailed preparations and negotiations between the procuring local authority and the private sector. The PFI procurement process is complex and can take a long time. It requires a high level of commitment on the part of all those involved in or affected by the project. This is to maintain momentum and interest in the project through the process leading up to the time when work actually commences. Some of the key stages of the PFI process are shown below.
Securing government support
- Local Authorities are invited to bid for PFI credits by the HCA through periodic bidding rounds.
- The HCA assesses schemes and Ministers decide which authorities will receive support through the next stage of the process.
- These authorities work up an "Outline Business Case" (OBC), which is a comprehensive description of the main issues addressed by the project together with a robust financial model which demonstrates value for money, affordability and calculates the level of support the project is eligible for.
- The OBC is submitted to an Inter-departmental Project Review Group, chaired by HM Treasury, who independently decide whether the project should be allocated PFI credits and allowed to proceed to the market. This ‘gateway’ is designed to ensure the readiness of schemes going to market.
Finding a private sector partner
- The authority places an advert for the scheme in the Official Journal of the European Union (OJEU).
- Local Authorities then go through a process of pre-qualifying and selecting a short list of potential bidders for the project.
- Documentation for tendering is drafted. These documents, collectively known as an Invitation to Submit Detailed Solutions (ISDS) include a Payment Mechanism, Output Specification and a draft legal document.
- Once bids have been received the council will evaluate them. At the end of the tender process they will have chosen a "preferred bidder". They may also choose a "reserve bidder" in case negotiations with the preferred bidder fall through.
- The Contract is signed and begins shortly afterwards.
- The development of the OBC can take a year; the formal procurement can take a further 2/3 years. This sounds and is a lengthy period of time though development and procurement needs to encompass all the design, planning and consultation processes which are necessary precursors to entering into a 30 year contractual relationship.
The current programme
Including the sixth round, there are 49 schemes in our current Housing PFI programme. We expect that they will reduce the number of non-decent homes by around 27,000 and deliver over 4,000 additional social rented units, including extra care facilities.
In October 2008 24 local authorities responded to the invitation to bid for some of the £1.8bn made available for PFI in the 2007 Comprehensive Spending Review. 10 successful schemes were announced on 17 July 2009.
Housing PFI round six - successful authorities
Contact details
Philip Grant
Housing PFI Team
020 7881 1057
philip.grant@hca.gsx.gov.uk
Last updated: 13 April 2010