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sustainable placemaking forum 79 Parkway London NW1 7PP tel. 020 7485 8555 fax 020 7485 1232 |
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seminar proceedings |
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A seminar series organised by HTA Architects Ltd Report of seminar held on finance on 14 June 2000 in Harrogate Main conclusions Aspects of the government's green paper do not support its aim of greater community regeneration. Rent restrictions may require debt restructuring for many RSLs, particularly stock transfer associations. Regeneration projects must be robust with managers who have the requisite skills: lenders are likely to apply far more stringent sensitivity analysis. PFI requires very close team working, rather than the traditional client/provide approach - thus it has many of the attributes of partnering. PFI is taking far too long to implement: procedures require simplification. Risk Both housing associations and local authorities are concerned to ensure that the interests of tenants are not put at risk. Local authorities do not want PFI to impact on other capital spending programmes. Housing associations do not yet see the advantages of taking on PFI schemes where they do not have the comfort of asset values: there are other funding streams which offer this security. The seminar was opened by guest speaker Gabrielle Berring, a member of the Public Private Finance Team at BNP Paribas. BNP Paribas has been involved in UK public infrastructure funding since the early 1980s, arranging off balance sheet structures for projects such as roads, council housing and parking meters. It became involved in the first large scale voluntary transfer, and mixed funding for housing associations following the 1988 Housing Act. More recently, funding has involved PFI projects such as schools, hospitals, a police headquarters and a water treatment plant. We face a situation of reduced public investment in housing and changes in the nature of projects we are asked to fund. At the same time, we also face the impact of the Green Paper and the realisation that much of the social housing stock is in the wrong place and of the wrong type. There is a need for creative solutions: placemaking and sustainability is at the core of our future since it is essential to ensure financial viability. Development of LSVT More than 90 local authorities have transferred their stock in response to the lack of funding. Most of these have taken place in the shire districts of the south. Funding has been extremely competitive because they have been relatively riskless - there have been difficulties over right to buy but these were solved and, in general, a standard approach adopted. Most business plans have been out-performed. Demand in these transfers has generally been high and works have involved new bathrooms and kitchens rather than fundamental restructuring. Now we are beginning to see urban transfer, as local authorities realise that New Labour is not going to increase public funding for a deteriorating stock which requires major restructuring in terms of repair, type and location. From a funding perspective, this is regarded in risk terms as the same as previous LSVTs except more concentrated with the added risk of demand. These factors are reflected in low or negative valuations requiring dowries. Economic and social regeneration have come to the fore and the issue of sustainability affects decisions about investment. Other factors in the equation now are rent restructuring and choice for tenants through dismantling the monopolistic municipal landlords. Green paper Government wants to divorce strategy and implementation and is continuing to advocate wholesale transfer from councils - though not to single RSLs, rather sensible sized landlords. Although the paper calls for greater community regeneration there is little in it which supports the aim. There is no more money, alongside potentially greater restrictions on income through rent restructuring and RPI+0. Best value also places significant burdens on housing organisations over a long period. These restrictions mean that it is hard to see how the problems will be rectified without imagination and team work. Risk The most obvious risk is demand, particularly as many of these projects have suffered years of under-investment and local economic decline to the point where people move out if they have the opportunity. Funders need to see how the stock performs in terms of void levels and turnover and will look at potential economic 'kickers' such as new transport infrastructure, hospitals or universities. Very rarely are we presented with any detail of demand surveys and are forced to research it ourselves. Cost overruns come a close second. Delays in implementation have resulted in higher than budgeted build costs. Cutting specifications risks failure to meet tenant expectations: some expect funders to extend maturity of loans to enable projects to remain on track. Using design and build is one approach but this can take longer to achieve and in our experience may well lead to greater costs. Local market conditions are also important. The hot housing and construction market in London, has led to significant build cost inflation - this is supply and demand in action. It is also extremely important that project managers have the skills to manage regeneration projects. Sensitive issues include detailed and effective resident consultation, phasing of works and decant programmes. I do not think that the average RSL can necessarily demonstrate the requisite project management skills without the input of those involved in the practical sense previously - that is those such as the contractors and masterplanners. There is a real benefit to be gained if these projects are approached on a consortium basis, through a group of organisations working together, sooner rather than later, rather than as client/provider. That is the basis of PFI and I believe it makes good sense. I would suggest it is also equates to partnering. Funders need to be comfortable that projects will be viable which in turn equates to sustainability. It means they get back their money earning the anticipated return, when they are supposed to. This is particularly relevant in relation to the impact of the Green Paper proposals: funders are already looking at the impact of rent restrictions on some LSVTs given that many transfers were set up on the basis of increase above the RPI+1% that was subsequently imposed. Many require debt rescheduling to avoid breaching covenants or failure to repay in line with contractual obligations. While partnering would not solve this issue, it does illustrate the importance of robust projects and where possible to protect them from political risk: funders will run far more stringent sensitivity analysis when considering any project. Conclusion I believe that the challenge of people trying to sort out the problems of social housing is shared. The risks are there for all - local authorities, contractors, RSLs and funders - to fall by. Partnering makes sense, providing a cohesive response and enabling partners to apply the lessons in subsequent projects. It has already been adopted on the client/contractor side but for regeneration to work best, the partnering ethos should spread across all organisations. A team-based approach must surely provide the greatest chance of success. Discussion From the subsequent discussion among the 30 representatives of housing associations, local authorities, developers and contractors who attended, it was clear that there is considerable degree of scepticism about whether PFI will provide an appropriate response to tackling regeneration: existing methods are seen as having more relevance at present. The concerns raised ranged from the long time scale in setting up projects, the lack of asset backing, how risk is allocated, to whether it is right to start in the worst areas first. Perhaps the most pessimistic are the housing associations, who fear that existing assets and therefore tenants could become vulnerable: almost all of those present believe that other approaches than PFI are safer and fewer risks. Suggestions were made that the rules need clarification. Perhaps above all, pathfinder projects need to show successes to help through the uncertainty. Housing associations: "Private finance has proved a huge success for housing associations and the money has poured in. "PFI has proceeded more slowly because of risk. With conventional finance and stock transfer you have an asset. With PFI what have you got? Very often it amounts to a contract which is far less value than other assets you are prepared to invest in over a long period. "The way PFI is currently packaged is problematic and RSLs are not going to be as comfortable as with stock transfer." "We need to get in our head what each of the partners in PFI bring to the table and what risks we are prepared to take. At the moment there is still misunderstanding. "There are also risks to our tenants - we need to protect them. The rewards for taking those risks have to be there or it will not work." "The risk for us is that we get involved in a project, which is going to be supported by our existing assets with no commercial return. In a PFI deal we should take a commercial view." "PFI schemes are risky. The rent restrictions cap income and thus affect a contingency. Frankly, from an RSL perspective, there are still enough asset backed schemes out there: why should we take the risk with PFI?" "Schemes may work in London but the benefit peters out across the country. Without values, the ability to get into the home ownership market is reduced." "PFI is one solution but why go down this down this complex, long procedure when you can do it much easier than that?" "My concerns are the length of time and the cost. When you actually start looking to see who makes the money, it's the lawyers. It is not necessarily in their interests to expedite matters. "When you start adding up the total costs you have to reassess whether going down the straight local authority-housing association partnership route is actually a lot easier and simpler, and tried and tested. "There needs to be very clear evidence that PFI schemes are working satisfactorily. I know they we are at a very early stage, but nobody is saying PFI schemes are the best thing since sliced bread. "It is wrong to see funding institutions who are totally risk averse as saviours. It is vital to get a strategy together and then see whether PFI is the appropriate approach." "30 years in social housing is a long time. What worries us is that if we don't own the stock, we have no security." Developers/contractors: "We are looking at PFI not just as a way of winning a building contract - we are also looking for an equity stake. This means we are very interested in the long term, in sustainability. "I understand the local authority aim of improving the housing stock and PFI can bring in investment which would not be there otherwise. But I believe it works much better where there is complementary funding such as SRB cash in Manchester and Sandwell. "I see PFI as just one part of the jigsaw. I think that there are situations where you have to look at the broader picture than the immediate neighbourhood. This is where joint venture company can deliver wider regeneration benefits." "I worked previously for a contractor. The whole ethos of PFI was about transferring risk to the private sector. I think the government of the day totally overestimated the private sector appetite to take on that risk because the rewards were not just there. It was in a regime when the contracting was in decline. "The situation has changed. PFI is pretty low down the agenda and there is a lot of other work contractors can get." Local authorities: Councillor "We regard PFI as a highly problematical activity. Although the outline business case and funding implications look to be exceedingly favourable - we are just about to go to tender - there will be all kinds of considerations which will decide whether we proceed, such as: what kind of financial deal can funders offer - if it does not stack up we will not go ahead. it must not produce additional risk to our general housing financial circumstances. We are not prepared to risk the housing revenue account or our other capital programmes for the sake of a single scheme. "So as a hapless politician, I will judge this by these criteria. If we cannot find a lender who will offer appropriate conditions we will not go ahead." Councillor: "I do not understand why PFI is going so slowly and why it is so difficult. I thought that the government would be much further down the track than it is (and it is not housing primarily that is the issue). In London some schemes have been on the stocks for years. They cannot show any evidence that it is producing "It is difficult to see PFI making a contribution to regeneration that it is expected to unless a method can be found to simplify and speed it up. "At the root of it is our absurd PSBR rules, and there are areas where introducing private finance it is not appropriate." Officer: "I think we are trying get out of PFI what it is not meant to deliver. I want it to provide 30 year funding to refurbish assets and provides revenue to do the wider regeneration. "It doesn't turn everyone into entrepreneurs and risk-takers - it is about risk allocation and it is not surprising that banks are risk averse. "It does make us think about a 30 year life. Trying to run it into an all-singing-all dancing regeneration vehicle is not sensible. It should be about risk management and seeing what people are good at." Officer: "I am not so sure it is so slow. If we can resolve the future of an estate for the next 30 years, then it is three years well spent. I like the idea of being able to stand back and ask challenging questions about what this place will look like in 30 years time." Officer: "You can achieve value in the stock but it can result in a significant loss of accommodation at affordable rents. That may not be possible given the statutory responsibilities of councils." Responses During the discussion Gabrielle Berring responded to some of the comments made. She was asked whether "imaginative funders" could consider small scale loans such as those that have proved very successful for enterprises in India and Asia where they had made a huge difference. She replied that loans of £100,000 or £100m take the same amount of time to set up - it is a crude issue of economics and banks are commercial organisations. They take risks - at a price. Other organisations such as RSLs have different objectives. On the issue of diversity, she said there is a need to ensure that such things as market renting should avoid putting existing projects at risk. This has not yet been sorted out with PFI. She was concerned that some existing borrowers might not be aware of what they are taking on - will PFI schemes put existing loans at risk? She also pointed out that PFI is not about property value. The banks talk with the local authority about the payment they make. It is a balancing act - what makes sense councils is to get money into the stock. The funders don't have to take into account value but cash flow. And she felt that PFI has parallels with stock transfer. RSLs need not be in any worse position given the right package. Gabrielle Berring also commented that too often funders were brought into schemes too late. They should be involved as early as a possible. This seminar series operates on a 'Chatham House rules' basis. However, many of the participants have already expressed their willingness to have their contributions credited to them. In the other cases, speakers have not yet given clearance - no inference should be drawn from this. Anyone wishing to quote the speakers should speak to them direct for their permission. For further information, contact Chris Bazlinton, Editor on 01279 771468. HTA Architects Limited 79 Parkway London NW1 7PP telephone 020 7485 8555 fax 020 7485 1232 email hta@hta-arch.co.uk ISDN 0207267 0061
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