Is PFI The Way Forward In Social Housing? Ashley Blows Head of Project Finance Tel: 020 7470 7333

1. Is PFI The Way Forward In Social Housing? Ashley Blows Head of Project Finance Tel: 020 7470 7333 8 April 2003

2. Agenda • The role of the funder in PFI social housing projects. • What makes a project bankable? • What makes social housing different from other sectors? • What are the implications for RSLs? • The future of PFI in social housing.

3. Why Use PFI in the Social Housing Sector? • Another procurement option. • Lever for additional investment & different “players”. • Enables local authorities to renew stock without transferring ownership or raising capital finance themselves. • Permits authorities to retain their “tenant-facing” role, but sub-contract all property-related matters. • Greater attraction to many tenants in some areas that prefer to retain their local authority as landlord. • Further development of mixed tenure.

4. Dexia’s Involvement in the Sector • Started out with very keen appetite for PFI social housing projects as a result of our: • Focus on the public sector and infrastructure; • Leading role in providing finance to UK RSLs; & • Focus on the PFI / PPP in UK & overseas. • Formed joint venture to bid for the first 8 social housing PFI pathfinders in late 1999. • Preferred bidder at NE Derbyshire & still involved in a further three of the pathfinders.

5. The Role of the Funder • Senior Lender: • Demonstration of deliverability; • Optimise bid financial structure; & • Extensive due diligence for the benefit of all involved. • Provider of hedging instruments to manage long-term inflation and interest rate risks. • Equity: • Closer support through the procurement process; & • Fewer parties to the negotiations.

6. Local Authority Direct Agreement Project Agreement Shareholders Equity Senior Debt SPV Funder Sub-contracts Design and Construction Housing management and day-to-day repairs Lifecycle repairs Typical PFI Contractual Structure

7. Typical Features of Financial Structure • SPV set-up to enter into contracts and raise finance. • Competitive long-term financing. • High gearing (ca 90:10 debt:equity ratio) with small equity cushion. • Long term debt with limited tail until concession end. • Repayment solely from project cash flows. • Security solely over SPV’s assets and step-in rights. • No “bricks & mortar” security.

8. What Makes a Project Bankable? (1) • Affordability • Experience and commitment of all consortium members • Design & build; • Maintenance / Day-to-day repairs; but also… • Housing Management…New in PFI. • Registered Social Landlords • Long-term commitment through fixed price contracts. • Must appreciate & be able to withstand risk transfer. • RSLs and PFI are compatible.

9. What Makes a Project Bankable? (2) • Clear risk allocation with realistic transfer of risks and liabilities • OGC guidelines need to acknowledge sector-specifics. • Address sector specific issues, e.g. - 100% stock condition survey - Latent defects - Interface with tenants / access - Payment mechanism - Right to buy & right to manage - Refurbishment versus new-build & impact on life cycle • Robust financial structure. • Satisfactory due diligence.

10. What Makes PFI in Social Housing Different? • Nature, number & occupancy of the assets. • Refurbishment. • Heavily regulated environment / legal rights of tenants. • Unusual financial dynamics. • Nature of parties involved: RSLs & (indirectly) tenants. • Extent of affordability problems experienced. • Lower visibility of housing within Government than, say, health or education.

11. What Are The Implications For RSLs? • No ownership interest in stock but also no need to pledge security. • Residents remain tenants of the local authority. • New role(s) as shareholder of a project-financed SPV and/or sub-contractors to such an entity. • Long-term sub-contract on an indexed, fixed price basis including pass-through of payment deductions & liabilities from Project Agreement. • Need for sensitivity analysis of potential deductions and negotiate caps on liability.

12. Is PFI The Future For Social Housing? • PFI in social housing has a future provided the lessons from the “pathfinders” are taken on board. • The legal difficulties should now be behind us. • Particular relevance where: • Transfer is not an option (due to value or negative vote). • A local authority wishes to retain ownership of stock. • An authority wishes to procure new council-owned stock. • New-build should allow increased value for money and quality for tenants.

13. But … • The market is currently very thin with few bidders for projects. • To attract more RSLs projects need unequivocally to include housing management functions. • The “pathfinders” need to be closed (and fast) to restore confidence in the market. • The stock condition survey process needs to be improved significantly with 100% pre-ITN & validation pre-close. • Difficult to fit a PFI project into a broader regeneration scheme due to the number of parties & sources of finance.

14. Conclusion • Social housing PFI has had an incredibly prolonged gestation period and is in the middle of a difficult birth. • The market needs to be developed and bidders encouraged to come forward through a disciplined procurement process. • The underlying need for the works and services has not gone away! • Finance is available for appropriately structured projects. • PFI in social housing should succeed, but this should not be taken for granted.