There are debates about where the State should and should not get involved in the housing market – but no argument that one area where it needs to step in is the provision of social housing for those who do not have the resources to rent or buy in the private market. Like many areas of the housing market, there are shortages here, as shown via long local authority housing lists and homelessness figures.
So when a key Government scheme to provide more social housing is in danger of falling apart, it is noteworthy and the circumstances need to be examined. It is also clear that the decision of the Government to pull out of a public-private partnership (PPP) agreement to provide almost 500 social houses puts the whole process of using these kinds of deals to build social houses for local authorities in doubt.
With future deals in the pipeline due to deliver another 1,000 social homes, this poses questions for the Government and Minister for Housing James Browne.
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Late last week, as reported in The Journal, Government officials decided to pull the plug on a public private partnership programme where a private investment consortium was to deliver almost 500 social homes in Dublin, Kildare, Sligo and Wicklow.
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The reason, according to the Department of Housing, was on cost grounds, with the decision made “on a value for money basis.”
Nobody is saying much about the exact circumstances of this, but we can safely assume that the Department of Public Expenditure and Reform was heavily involved. A key unanswered question is why it took the Government so long to decide to pull the plug on a deal where a preferred bidder had been chosen six months ago, at which time the cost details were all known.
These public/private partnerships had become an important route for delivery of social homes. Close to 1,000 homes were delivered under the first two partnership programmes, or “ bundles” as they are called.
The one which has now been cancelled was to be the so-called Bundle three. Four more bundles are in the pipeline involving around 3,000 further homes and the Department says these are now being reviewed. Given the cost issues with Bundle three, there must now be serious doubt about whether these will go ahead. So a key plank of Government social housing delivery now hangs in the balance.
PPPs involve a range of players. The houses are financed and constructed by a consortium – involving financiers, builders and housing managers – who then provide maintenance and tenancy management services for a 25-year period. The homes remain in the ownership of the local authorities and are handed back to them after the end of the 25-year period. The preferred bidders for Bundle three – who had also built out the second bundle – was a consortium called Torc, led by international financiers Equitix and the Kajima Partnerships. The consortium also involves construction companies JJ Rhatigan and the Spanish firm, Obrascon Huarte Lain SA (OHLA). Tenancy management services are provided by Tuath Housing and facilities management by Derwent for a 25-year service period.
Minister Browne has said that the department and the relevant local authorities remain fully committed to delivering the social housing in PPP Bundle three through “an alternative procurement and delivery strategy.”
Planning permission has been granted in all cases and while the department will not comment on what happens next, one possible course of action would be for the local authorities to seek tenders to get the houses built, operating on a more traditional basis which does not involve a PPP contract to manage and maintain the properties afterward. Another option would be to re-enter talks with the consortium to see if the deal could be saved, or even if it might move forward on a different basis. Sources close to the consortium say it is keen to look at all the options.
Sinn Féin housing spokesman Eoin Ó Broin has called on the Government to provide funding to the local authorities to ensure that the houses are delivered as soon as possible. Ó’Broin has been critical of the PPP model in the past arguing that it does not deliver best value for the State. The build costs under previous two social housing PPPs have appeared broadly in line with the market, he said, but significant additional costs are built into the contract for financing, maintenance and management over the subsequent 25 years, raising questions about value for money. Dealing with problems which emerge can also be complicated for tenants, he says, given the complexity of the arrangements.
The Dáil Public Accounts Committee also questioned the value-for-money achieved through expenditure of €639 million on the first two bundles of PPPs which delivered almost 1,000 social housing units in Dublin, Cork, Galway, Waterford, Clare, Kildare, and Roscommon. The total construction and life cycle costs were approximately €640,000 per unit, it pointed out.
A breakdown of this figure was not provided to the committee beyond it being told that actual construction costs per unit were €222,000 and €277,000 respectively for the first two bundles. The PAC said it was “concerned that it cannot evaluate whether the units delivered through this PPP programme represent good value-for-money, as commercial sensitivity means the total cost, minus construction costs, in the tenderers’ models will remain confidential ‘until a specified period of time has elapsed’.”
Now, it appears, this value for money issue has come to a head. Sources say that the per unit cost – including construction but also all the other expenditure over the 25-year period – has risen sharply beyond the €640,000 per unit referenced in the PAC report, due – presumably – to rising build costs and general inflation. Some sources say that the increase could have been 20 -25 per cent or more per unit, though the figure could not be confirmed.
The costs appear to have sounded alarm bells in the Department of Public Expenditure and Reform (Dper). What is odd is that this seemed to take so long to happen – the preferred consortium had been chosen last October, there had been extensive contacts since then, contracts were about to be signed and builders were close to going on site. Crucially, sources close to the consortium say that there had been no increase in the costs involved in the project since last October, when it had been chosen as the preferred bidder. So why did it take so long for the plug to be pulled?
The agreement would have been assessed by Dper under what is called a public sector benchmark, to ensure value for money as compared to other possible forms of delivery. But this would presumably have been done before the preferred bidden decision.
The Minister for Housing says that it is determined to get the projects moving in some form. But the questions now are what delivery mechanism will be used, what will it cost and, crucially, what the delay will now be in delivery. Public procurement rules will be an issue here in finding a way forward.
Sources believe that with bundle three now in trouble, the subsequent four – which are at varying stages in the process and which were set on up exactly the same basis – are also now in doubt. The Department says that these will be reviewed “to ensure the most appropriate procurement strategies for the delivery of these homes is selected and advanced.” This would appear to indicate uncertainty about the whole PPP approach.
In turn this means problems for one area of social housing delivery on which the Government and the local authorities would have been relying to help to meet targets. It also sends out some decidedly mixed messages to international investors at a time when the Government is trying to attract more of them to build here under its rental reform programme.
Had the plug been pulled late last year, when the costs were clear and before a preferred bidder was appointed, then there would have been more time to reassess the best way forward. Now, however, there is a messy situation with the bidding consortium and most other players – including the National Development Finance Agency (NDFA) who helps advise on these bundles – all apparently taken unawares.
The consortium has also spent significant amounts of money, including hiring staff, with a reasonable expectation that the deal would go ahead. While sources close to the consortium say they wish to find a way forward, legal action – potentially- delaying matters further must surely be a possibility if some compromise is not found. This one still has a way to run and it is difficult to see how the delivery of the planned social housing will not now be subject to serious delay.
