With the launch of the third round of the UK’s Housing PFI schemes approaching, the experiences from Islington Housing PFI 1 Scheme are especially relevant. PFI housing projects have unique risks, and the allocation of these are more complex than a classic PFI build deal. Disparity between tenants and housing means a stock survey and methodological risk pricing are crucial to reaching an agreement.

Background

The £74 million Islington Council’s PFI 1 housing scheme was London’s first housing PFI deal, it was signed on the 31 March 2003 and full service started on the 12 May 2003. This marked the first closure of a PFI housing contract for refurbishing, maintaining and managing council housing in the UK.

The application for government PFI funding was submitted in spring 1999, receiving an allocation of PFI credits. Islington Council signed the 30-year contract with Partners for Improvement Ltd, a consortium comprising of United House Solutions, Hyde Housing Association and Halifax Bank of Scotland (under Uberior Infrastructure Investments) working with Unitary and Rydon Property Maintenance. The consortium had been named preferred bidder five months before on the 31 October 2002.

This SPV is responsible for the management and improvement of 1,000 street properties that equates to some 1,800 council and 550 leasehold homes. The three other unsuccessful shortlisted contenders for the PFI contract were Ballast (Ballast plc and Innisfree with Signpost Housing Group and Nordeutsche Landesbanke), and Homes for Tomorrow Two (Circle 33 Housing Trust and Wilmott Dixon with the Royal Bank of Scotland).

The project was initially scheduled to begin on the 17 March 2003, and despite the slow progress in the last phases, participants were proud to close the first PFI council housing deal in the UK and possibly the world.

Chronology:

• May 1999 -   Application submitted by Islington Council to the ODPM
• June 2001 -  ITN issued by Islington Council
• 31 October 2002 -  Partners for Improvement named preferred bidder
• 31 March 2003-  Contract signed between parties
• 12 May 2003-   The scheme officially begins

The ProjectIslington is located in North London and the properties involved in the contract are pre-1919 residential street properties owned by the London Borough of Islington. In total the deal includes 2390 dwellings with a number of properties that have a tenure mix (as displayed in figure one below). The tenure mix will change over the duration of contract with the number of council dwellings decreasing and the number of leasehold dwellings increasing. The increase in the number of leasehold dwellings may also result in a reduction of the number of properties in the PFI scheme.

The purpose of the contract is to refurbish, improve and maintain council properties and dwellings. It is also to deliver a step change in tenancy and leasehold services delivered under the contract delivering value for money and modern partnership working practices.

The income flow to the consortium is derived by periodic payments from Islington Council. 

Legal Framework

There is a huge raft of UK legislation that affects council housing and these general housing provisions had to be adhered to by Partners for Improvement. On top of the housing legislation all the usual PFI provisions also had to be conformed to including the Government’s requirement of risk transfer and the guidance under Advice Five.

The use of the PFI to deliver improvements in the condition of existing, local authority owned social housing has been possible since March 1998, when changes to the Local Authorities (Capital Finance) Regulations came into force. These projects have generally become known as ‘housing revenue account’ or ‘HRA’ PFI projects, reflecting the fact that the financial impact of entering into them falls on a local authority’s HRA, and that the stock remains in the ownership of the local authority.

Prior to this, the Regulations only permitted the use of PFI to develop new or additional social housing, provided the unitary charge payable to the Operator was charged to the General Fund, and not the HRA. The model for this type of project also involves the new housing being owned by a registered social landlord (RSL) and not the local authority. These projects are generally known, as ‘non HRA housing’ PFI projects.

There have been attempts to standardise British PFI housing as with all other sectors of PFI. The 4Ps  provide housing standardisation guidance updates, example briefs for the commissioning stock condition surveys, surveyors letter of appointment, inter consortia deed, novation if appointment, surveyors deed of warranty, and even a checklist of information for bidders.

The legal advisers for the consortium were Norton Rose and Pinsent Curtis Biddle advised Islington Council.

Risks

Risks involved in refurbishment are generally harder to allocate than new builds. When dealing with new builds companies are effectively building the risks so therefore have greater knowledge of the risks and therefore can price and allocate them more easily.

The use of subcontractors by the project company is a standard feature of PFI projects, as with conventional direct procurement programmes, and was important in the Islington Housing project. The development of the sub-contractor partner relationship within PFI allows the burden of project risk to be allocated from the project company to the sub-contractor.

The most important and unique risks relating to Islington housing PFI 1 are listed below:

• Penalties for poor performance

The Council has prepared a long list of output specifications relating to contractor performance under the agreement. Each property has to meet an availability standard meaning the consortium will not receive payments for each period standards are not achieved. There are initial, interim and full availability standards for council and leasehold dwellings.

• Insurance

The insurance for the project was secured by Partners for Improvement through FARR plc, specialists in risk and insurance management for social landlords, in conjunction with consultants Gibbs Laidle. The insurance structure for Islington Housing PFI 1 differed from regular PFIs because if the 'project insurance' model had been used to provide cover for the housing project it would have been extremely expensive. FARR took on the challenge of convincing the legal advisers and funders that conventional insurance with modifications to suit the PFI housing structure offered the most cost effective outcome. While project insurance covers all parties' liabilities, the protection developed for Islington means that the Contractors' liability remains with them directly whilst Partners for Improvement's property and housing management risk is ring fenced and insured separately.

• Tenants

Under the PFI scheme there will be no transfer or changes in the status of council housing and council tenants. There was no legal requirement for a ballot on the proposals from the tenants. The contractor signs up the tenants, however they do not get any choice on who the tenants will be. The consortium has to take on the tenants that Islington Council allocates to them.

• Financing

The total allocation to the project is £74 million that comes from a mix of PFI credits and private investment. The £54.4 million of this total was funded with private investment and £19.6 million was provided by the government through PFI credits. The total figure will meet a significant proportion of the total capital and financing costs.

At this stage the consortium cannot release any details as to the terms of the finance agreement because Stage 2 is still in process which involved the procurement of a further 5000 dwellings.

Hyde Housing told IJ that this process should take about 8-10 months and at that stage they will release the financial arrangements. The financial advisers to the consortium were KPMG, and PWC advised the government. ConclusionIslington’s first PFI scheme demonstrates how PFIs can improve the quality of the UK’s social housing stock. There is a need for investment in this area because of a significant repair backlog. Questions do remain about the fundamental suitability of PFI for social housing. While the price of the contract is fixed there may be additional risks over the 30-year life of the contract the will need to be allocated. The PFI housing procurement process is still expensive and time consuming, lasting an average two to two and a half years.

The UK 2003 Communities Plan announced that £685 million new PFI credits are to be made available for the improvement of local authority housing. The next PFI housing schemes to close will be the Camden and Newham pathfinder schemes in late 2003 or early 2004, and Lewisham’s second round scheme early next financial year.IJ