SPVs, Joint Ventures and PFI….Where’s the Assurance?

Posted: 28th February 2021

Mark Davies-resizeThe housing sector can be proud of its drive towards innovation – as grant has dried up registered providers (RPs) have found new ways to deliver more housing, in some cases through special purpose vehicles (SPVs) and joint ventures (JVs) with developers or others. Providers have also responded to government initiatives such as private finance initiatives (PFIs) which, while much (and often rightly) maligned, did at least contribute new housing and extra care facilities, and enabled the regeneration of areas such as Salford, Manchester, Leeds and parts of London.

These innovative delivery vehicles present a series of challenges for RP boards in terms of their risk and control frameworks, and in particular with regards to where they might look for assurance that their participation in such ventures is consistent with the requirements of the regulatory standards.

Stress-testing of PFI ventures or other SPVs often shows that relatively small downturns in performance can have a disproportionate financial impact on a provider; in part, this is down to the requirement of lenders to pass down risk from the SPV, and it’s also a function of the performance-based nature of payments – poor performance is reflected in the amount paid to a provider.

Risk planning often shows that a provider can walk away from a poorly performing venture – ‘limited recourse financing’ offers some degree of financial ring-fencing. In practice, though, is a board actually prepared to take the nuclear option, and walk away from a long-term contract? Recent experiences in the sector suggest not.

Counter-party risk can also be difficult to manage – JV partners’ corporate behaviour, performance and financial stability can vary substantially over the period of a long term contract, and where this has an impact on the performance or reputation of a provider then the board of that organisation needs to look for effective assurance with regard to its JV partners.

Risk and scenario planning for providers which have participated in joint ventures, PFI or other long terms contracts should therefore aim to identify a series of trigger points – performance or financially based – which lead the board to consider clearly identified risk mitigants: when do we exercise step-in rights, when do we replace a partner, when do we stem the losses and walk away?

Effective planning and scenario-gaming allows the board to subsequently take a rational decision, should circumstances demand it, and protect their housing assets and reputation.

This level of effective assurance with regard to the provider’s risk and performance – along with that of its partners – also means that the board remains fully informed and in control of its participation in any JV, and can demonstrate this degree of control through an in depth assessment or other engagement with the regulator.

Written by Mark Davis, consultant for DBAS, who work with Altair on specialist risk reviews.

DBAS is a consultancy providing assurance advisory support to Housing Associations and Local Authorities across a range of activities, including their participation in joint ventures and other innovative delivery structures.

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