Delays caused by Whitehall and difficulties in the finance market have led to significant changes to Leeds City Council’s latest Private Finance Initiative (PFI) project – to refurbish and build homes in three areas of the city.
And some of the changes to the £180m housing project – which the council hopes is now going to be signed off at the end of this month so work can start on site in July – are about money.
Using PFI credits, the council is going to build 388 new homes and refurbish over 1,200 in Little London, Beeston Hill and Holbeck.
An update on the project status is to be discussed at a meeting of the Council’s executive board tomorrow (Wednesday 7th March). And it says that costs are up: inflation means building work is going to cost more; new funding arrangements have had to be put in place and they’re going to be more expensive; and the costs of the consortium that’s going to deliver the project (Sustainable Communities for Leeds, Sc4L) have ended up higher than anticipated.
We don’t know whether the costs have now risen beyond the extra half a million pounds a month that the council’s housing and regeneration chief Peter Gruen was speaking of at the end of January. The net result of all the cost changes to the project are detailed in an appendix to the update. And that appendix is not available to the public – for reasons of “commercial confidentiality”.
Costs of loans increased
What the update does reveal is that we now have a new set of banks financing the project – the Nationwide Building Society, Norddeutsche Landesbank Girozentrale (Nord) Bank and the Cooperative Bank – and they’re charging more for our borrowing.
“The continuing finance market difficulties experienced towards the latter part of 2011 led to changes in the ability and willingness of funders to lend money on the long term basis necessary to support PFI Projects,” the report says. “As a result the club of banks funding the Project changed and their funding terms have changed…”
“The new funding arrangements are considered to be reflective of the current financial market, and are therefore different to those anticipated during the preparation of the PPB FBC (Pre Preferred Bidder Business Case) or those known at final tender stage.
“Generally the cost of loans, in terms of fees and charges has increased. However this is balanced to an extent by the fact that the general market borrowing rates, SWAP rates, have reduced, mitigating some of the increase in loan terms.”
“Very high” risk
The report does say that despite the changes the project is still within the affordability limits previously set by the executive board. A limited financial buffer has been built in to the final figure against the risk of the project becoming unaffordable due to market interest rates going up before the deal finally gets signed off at the end of this month.
That risk is currently assessed as “very high”.
“The principal risk to the Project relates to the risk that market funding interest rates may increase resulting in the Project becoming unaffordable,” the report says. “This risk is currently set at ‘very high’ status, with the market being volatile at the current time.”
It’s bad luck on the Council that it finds itself in this situation. This particular PFI baby has been six years in gestation, the recession intervened half way through and the government then took an age to review it in terms of value for money.
Quarry Hill syndrome
One other aspect of the update worth mentioning: construction firm Frank Haslam Milan will now oversee all the operational services involved in the project as well as undertaking the works and lifecycle programme; and the contract operations, covering repairs and maintenance, grounds maintenance, caretaking and cleaning will be carried out by Milnerbuild Ltd.
Both firms are part of the Keepmoat Group, one of the members of the consortium that won the bid to deliver the project. Keepmoat are regeneration sector specialists whose growth strategy is based on working with local authorities.
It’s a strategy that appears to be working. Bucking the trend in the construction sector, the Group saw turnover increase last year from £70.1m to £126.0. Between them, Keepmoat Homes, Frank Haslam Milan and Milnerbuild earned £9.7m last year from business with Leeds City Council and its arms length housing organisations.
And one final point: part of the PFI project involves the demolition of council houses built as recently as the 1980s, but now considered surplus to requirements. It would be interesting to know whether this is a continuation of the Quarry Hill syndrome, in which council housing is demolished before we’ve finished paying back the loans we took out to build it.