Spending watchdog expresses concern over value for money of housing PFI

The use of PFI by local authorities to improve housing has had “a measure of success” but nearly all of the projects have been hit by lengthy delays and substantial cost increases, the National Audit Office has said.

The spending watchdog also criticised the Department for Communities and Local Government for failing to evaluate properly whether the programme delivers value for money.

In a report PFI in Housing, the NAO found that PFI has been a flexible and useful funding route that has delivered housing improvement. It has typically been used to regenerate areas with a high social housing need but where stock maintenance has been poor, with projects then benefitting from the long-term maintenance that PFI delivers.

However, the NAO added that most projects have suffered significant cost increases and delays. This was particularly the case in early projects, which were unrealistic in terms of expected costs and timetables.

The report said: “Twenty-one of the 25 projects which have been signed to date have experienced cost increases above estimates in the business case, 12 of which were over 100%. All signed projects, for which we have data, were delayed and signed later than was expected when the business case was agreed.”

The delays ranged between five months, and five years and one month, with an average delay of two years and six months. One project cost the DCLG three times more than expected in its business case.

“The Department took steps to check funding increases were valid, but we consider that across the programme these problems and delays put achievement of value for money at risk,” the NAO said.

The report acknowledged that part of the problems was that PFI was new to the housing sector. Another factor was that the DCLG had to develop its understanding of stock condition issues.

The watchdog said the DCLG could not demonstrate that the programme achieved value for money. “While performance and costs vary between projects there was broad agreement from local authorities, providers and advisers, that PFI can be excessively costly, and generally takes too long relative to other routes,” it added.

Other key findings included:

• Local authorities reported that their initial choice of PFI was influenced by the funding structures of the DCLG and policy constraints, rather than a pure focus on value for money
• The DCLG has undertaken only limited evaluation of whether housing PFI delivers value for money when compared to alternative investment routes. The Department’s evaluation has not taken account of the full costs.
• The DCLG’s programme management for early projects was “weak and under-resourced”, with some local authorities and private sector organisations expressing concerns over the capacity of the Department and the Homes and Communities Agency (which took over responsibility for the programme in December 2008) and the level of expertise of some staff. “While there have subsequently been steps to address these issues, they have posed a risk to effective delivery of projects,” the watchdog added.

The report concluded that the PFI model “is not inherently poor value for money”, with success depending on the circumstances in which it is used and how it is applied.

Amyas Morse, head of the National Audit Office, said: “The Department for Communities and Local Government has pursued the PFI funding route for improving housing stock with only limited evaluation of the value for money of the programme. It should now carry out such evaluation.

“The Department should assess, as a matter of priority, whether its current and planned PFI projects are delivering value for money. It should at the same time, assess all its past projects. This assessment should be based on hard numbers as well as qualitative factors.”

Research by law firm Nabarro earlier this year found growing support amongst local authorities for the use of Local Housing Companies, ahead of alternatives such as PFI or joint ventures with RSLs and housing associations.