Leaked documents reveal soaring costs of Little London PFI

Save Little London has been leaked confidential financial documents [1] warning of huge potential cost rises to the PFI housing regeneration scheme that could threaten further homes and public assets in our community.

The documents were part of a recent report by housing officers to Leeds City Council's Executive Board on 15 November 2006 explaining why the PFI scheme was again delayed and the cost implications. The information in the confidential documents is explosive. It shows how much the PFI scheme is actually costing and the extraordinary way in which it will be financed.

The True Cost of the Little London PFI

We can reveal that the PFI will not cost £85m as we were told during February's consultation, nor £95m as the council is now telling is, but an enormous £215m over a 20 year contract period. The public figure of £95m is the amount of 'PFI credits' the government will give to the council to part fund the scheme. PFI credits are the estimated 'capital investment' needed in Little London - new buildings, refurbishments, physical improvements etc.

However, because the council must pay the private sector to run the investment scheme and then manage the estate for 20 years, the true cost of the PFI is another £120m. This figure does not represent any investment in the area - just the amount it costs to pay the private sector to carry out this investment and improvements over 20 years.

How the Little London PFI will be financed

The documents reveal who pays for PFI. The Government will put in £7,922m a year or £165.385m over 20 years; Leeds City Council will put in £1.521m a year or £41.445m over 20 years, and have to find an additional £8.930m in interest payments.

So how will the council find £1.5m a year?

Just under £1m will come from the council's existing housing budget - that's the account into which we pay our council rents and the government pays subsidies. But the extra £0.5m will have to come from what the documents call "other resources".

In other words, the government has deliberately under-funded the PFI scheme so that the council has to find money from other budgets. Given that councils are already cash-strapped and in debt due to government under-funding, this inevitably means either cutting services elsewhere or selling off land and other public assets to raise the cash.

So now we realise the real reason why the council’s regeneration scheme involves selling off three Lovell multi-story tower blocks to a private developer, and demolishing 152 other council properties in order to create a major development site for new home building. These sell offs and demolitions are about raising 'capital receipts' - the money raised by selling of council assets such as land and buildings - to part-fund its financial contribution to the PFI scheme.

Delays, rising costs and more bad news

Incredibly, the leaked council documents reveal that because the government has taken so long to decide on whether to approve the PFI scheme, Leeds City Council has had to find an extra £149k per year for the 20 year duration of the PFI contract, or £2.98m. This is because any delay in a PFI scheme will massively raise the overall costs.

Why does this happen? PFI involves a long contract – in this case a 20 year contract – in which future costs must be predicted now. Each delay changes the future cost, usually by increasing it because of predicted inflation rates and so on.

The government’s incompetence has meant that the PFI regeneration will not start before January 2009. This means that the expected increase in capital costs by the new estimated start date of service will have risen from 15% to 17%.

If this was just a one-off increase caused by an unexpected, one-off delay, the medicine might not be so hard to swallow. But this is PFI where escalating and unforeseen costs are the rule, not the exception. It’s no surprise then that the leaked documents alert the Authority’s Executive members to a number of future scenarios under the “sensitivity analysis” that could place the affordability of the PFI scheme in doubt.

For example, an increase of the inflation rate by just 0.5%, combined with a rise in building costs of 0.5%, and a further 6 month delay due to difficult contract negotiations, would increase the Council’s contribution by some £364,000 a year for 20 years – that’s an extra £7.28m. In the worst case scenario set out in the leaked documents, a moderately changing economic environment could add an extra £600,000 a year of Council contributions over 20 years – that’s an additional £12m on top of the present £30m figure. [2]

In an alarming development, officers have convinced the Council to "agree that, should any affordability gap arise beyond this level, to make a commitment to supporting this project through other mechanisms including capital receipts from the area or through reviewing the project scope without impacting on value for money".[3]

This means that the Council could be forced to sell off – or give away as is often the reality – more land to the PFI contractor and chosen developer, or change the specification of the PFI scheme to reduce costs and/or increase capital receipts for the project. Or what is also called writing ‘a blank cheque’ from the public purse to the private sector.

Nightmare scenarios

Save Little London cannot see how the Council can raise any more capital receipts from Little London or change the project scope without radically changing the regeneration scheme we were originally promised.

Scenario 1: the council drops its affordable housing promise

The council promised to place up to 75% to 80% of the new and refurbished private housing on the estate in so-called ‘affordable’ schemes. By breaking this promise, more profits could be generated from the regeneration for the private sector, off-setting rising costs.

Leeds City Council has a history of allowing private developers to get around their statutory requirement to provide 25% affordable housing in city-centre schemes of 25 units and over by accepting one-off commuted sum payments. The Council’s record of then translating those sums into affordable housing has been poor.

Scenario 2: the council reduces promised refurbishment standards to council homes

The council promised that some 910 council homes would be refurbished to a standard above the government’s own Decency level. Councils are obliged to bring all their properties up to the Decency standard by 2010. By committing to do more than it legally has to, Leeds City Council could easily turn round to tenants and say that ‘due to unforeseen financial circumstances, we are only able to meet the Decency standard’.

Look at any PFI scheme and you will find allegations and evidence of contractors cutting costs and increasing profits by using inferior materials, cheap and unskilled labour, and changing the design of a hospital or home to reduce the amount of money spent on it. Go to the Swarcliffe estate in Leeds where a PFI scheme is currently going on and you will see how this works – the standard of refurbishment is so bad that the council is refusing to sign off a single home until things are improved and has fined to contractor.

Scenario 3: the council reduces the number of homes to be refurbished

Similar to above, the council might suddenly decided to reduce the PFI area in order to cut out a number of houses and make the scheme less expensive. In 2002, the council changed the PFI area to exclude Woodhouse from the scheme when a number of streets voted no in the controversial ballot. So it can happen.

Scenario 4: the council demolishes more council housing to sell land to developers

The Council may suddenly discover asbestos or severe structural damage in properties previously given a clean bill of health, prompting their demolition to clear more land for developers. In the confidential report, Council officers point out to the Council’s Executive that the Council could reduce its annual revenue contribution to the project by around £70,000 a year for every £1m additional capital receipt allocated to the scheme. This is a not-so-subtle way of telling the council to sell more land to the private sector.

Corporate profiteering

Private developers will not be the only corporations to benefit from the outsourcing of public services under the Little London PFI scheme. Since December 2000, when the Council first decided to initiate the PFI bid to Central Government, the following companies have been contracted to provide various services to Leeds City Council in preparation of the Little London regeneration programme:

· Gleeds – the Council’s technical advisors, they have jointly developed with LCC Output Specification for the works covered by the Project Agreement;
· PricewaterhouseCoopers – financial advisors to the project
· KPMG, – the City Council’s external auditor: has assessed the overall project
· Kings Sturge – has carried out stock condition and valuations
· Banks of the Wear – consultancy employed as the Independent Tenants’ Advisor in 2005-06
· CHS – consultants employed as Independent Tenants’ Advisor in 2001-02
· DLA Piper – the Council’s external legal and commercial advisors

In addition to the £ms already spent through staff time, consultation events and consultancy costs, Leeds City Council estimates that it will need to spend £3m during the procurement period and has already allocated £1.3m from the Housing Revenue Account for 2006/7.

Running down the estate to force people out

As public money is wasted on consultancy and legal fees, as well as the continual delays to the PFI scheme, tenants and residents accuse the Council of deliberately running down the estate further to ‘persuade’ those it wants out to leave. Leeds North West Homes, the Arms Length Management Organisation (ALMO) running housing in the area, has apparently stopped all new lettings in any of the properties scheduled for sale or demolition. Each time a tenancy turns over the property is closed up and secured from the outside.

We argue that this is “constructive eviction” – the council is deliberately creating lifeless ghettos that will be attractive to squatters, drug addicts and mice infestations and convince those remaining to get out as soon as they can. The ALMO has even been denied funds from central government to carry out improvements or basic repairs to council stock before the PFI regeneration. Broken windows that need new frames are simply being nailed shut and empty properties that need anything more than minor repair work are not being re-let.

Enough is enough

The leaked documents contain a glimpse of the future horror in Little London under PFI – we have to stop this crazy scheme from happening.

Notes

[1] Leeds City Council (2006), Report of the Director of Neighbourhoods and Housing to Executive Board. 15 November 2006. Subject: Little London Housing Private Finance Initiative – Outline Business Case update. Appendix 1 (not for publication, Exempt/Confidential – Access to Information Procedural Rules 10.4 (3)
[2] The Council report outlines the following four key variables that could affect the affordability of the PFI: (i) Inflation: the affordability of the project is assumed on a 2.5% inflation rate.; if inflation was to rise to 3%, Leeds City Council would have to find an extra £58,000 a year on top of the £561,000.; (ii) Subsidy Rate: if the subsidy rate was cut from 6% to 5.9%, this would reduce the Council's subsidy rate by £54,000 a year; (iii) Increased Build Costs: if building costs increased by 1.5% above the current forecast, this would cost the Council an additional £209,000 a year. This is considered unlikely by the Council’s advisors, Gleeds, but an increase of 0.5% – scored as a ‘medium chance’ – would add £66,000 a year to the cost; (iv) Procurment Delay: a year long delay - which could realistically happen as part of a judicial review - would cost an additional £266,000 a year.
[3] P. 100, Leeds City Council (2006)