The HDC launched its first housing Public Private Partnership (PPP) on 3 November 2016 at Mahogany Court, a 160-apartment complex at Eastern Main Road, Mount Hope. It is being designed, financed and built, at a cost of $145M, by NH International, led by my erstwhile friend and colleague, Emile Elias, with completion due in December 2018.
The PPP approach to public procurement is one in which the private sector assumes the risks and constructs a project with repayment of that investment taking place over a period of time, usually from the State’s recurrent expenditure. This a controversial public procurement method, with the detailed reviews of completed projects being heavily criticised for the fact that the private sector has not actually taken much risk. It seems that these contracts often contain provisions which shield the private sector from serious risks. The introduction of PPP into our public housing program therefore deserves careful scrutiny, if we are to avoid the serious losses experienced in more advanced jurisdictions.
This PPP uses no Public Money, the State’s only investment being the value of the land, which was not mentioned thus far. The approach was outlined at pg 31 of the 2017 budget as being one in which the contractor will provide short-term finance to design and construct new homes, which will then be purchased by approved applicants on the HDC’s waiting-list. Those purchases will be funded by TTMF and the purchase prices will be used to repay the contractor.
The Minister of Housing & Urban Development, Randall Mitchell, issued an 1100-word statement on Friday 4th November 2016 “...As a matter of public information and for transparency…to itemise the process”. I welcome the Minister’s effort to provide details on the process adopted for this inaugural housing PPP as this is indeed an important procurement method, given the severe budget constraints now facing the public purse.
This degree of openness ought to become the new normal, but in my view there are further details to be provided –
- How many tenders were received on 6th Sept 2016?
- Which firms bid?
- How much did they bid?
- We are unable to really tell much as this was a Design Finance Build approach which means that each proposer could have submitted a different design with a different number and mix of units.
- What was the scoring rationale and how were marks allocated to the competing firms? According to the 39th recommendation of the Uff Report “…The reviewing of tenders and the making of decisions upon the award of contracts should be undertaken in as transparent a manner as possible, including demonstrating clear compliance with procurement rules, so as to allay suspicion of improper actions or potential corrupt influences.“
There are further considerations of risk-allocation to be examined –
- Delay – Public projects have been beset by many delays, so we need to know how the financial impact of various types of delay will be borne. The purchases of the new homes cannot be completed until they are ready for occupation, so delays in completion will be detrimental to the contractor unless there are compensatory provisions. In the case of delays caused by bad weather, who will bear the cost of those delays? In the case of delays caused by other factors, who will bear those costs?
- Construction Cost increases – In the case of increases in construction cost, which of the parties will bear that expense? Are there provisions to allocate to the contractor the risks of cost inflation arising from the effects of devaluation of the TTD in the two-year project period?
- Financial risk – In the event of delays extending beyond the originally agreed period, how is the financial risk of possible penalty clauses to be allocated?
- Title defects – One of the most significant impediments to the HDC’s execution of its program to sell its completed homes, is the real difficulty of providing good title to satisfy the requirement of mortgage lenders. According to the Joint Select Committee’s 2015 Report into TTMF –
“…In 2008 we had established what we called an HDC Unit in anticipation of 3500 mortgages from HDC within three years. Three years later we had to disband that Unit because the HDC did not have the title that would afford mortgages…” (testimony of TTMF Managing Director, Ms Ingrid Lashley, at pg 126)
This is a limited insight, but it can give us some idea of the scale of the issue, if 3,500 homes did not have proper title over a period exceeding three years. A private developer cannot survive that sort of delay, so these PPPs must allocate that risk of bad title away from the State. Before buying land on which to build homes for sale, a private developer would be certain of good title, so that aspect of vetting is one in which the private sector expertise would be decisive in resolving a long-standing HDC issue.
Finally, one must consider how residential values in December 2018 will relate to the present. Given that we are now in a recession, it seems that property values will decline. What then is the appropriate allocation of the risk of property market fluctuations? Clauses which removed those risks from the private sector would be inimical to the rationale of the PPP.
The issue of how land value is accounted for, or not, together with how that influences land use will need separate coverage.