Stock Options

The Government was keen to introduce a new financial framework for local authority housing.  This will place councils' housing accounts on amore business-like footing, encouraging more efficient investment in stock maintenance. The Best Value regime for housing, underpinned by the Housing Inspectorate and a rigorous assessment process as part of authorities' housing investment programmes, will also ensure better performance and more efficient investment in the stock. The introduction of tenant participation gives tenants a clear role in improving housing services.

The recommendations and targets of the Construction Task Force apply as much to refurbishment, maintenance and repair as to new build. There is substantial scope for improving the performance, quality and value for money of work on the existing stock, and for reducing whole life costs.

The Government is committed to ensuring better housing management, and that adequate resources are made available to continue to tackle the backlog of council housing renovation work, to modernise older stock to the standards of decency that tenants have aright to expect, and to provide an adequate supply of new affordable housing in areas where it is needed.

With the Government setting the 2010 deadline for all social housing to meet the Decent Homes Standard, local authorities have been placed under increasing pressure to deliver. Since the target was set local authorities have been asked to update their stock condition surveys and report annual figures that state the amount of disrepair to their stock. This information is critical in determining the amount of resources needed to bring their stock up to the required standard.

Limited by the inability to generate private capital, many local authorities are operating under conditions of financial stringency and with their extensive repair backlog they have found it difficult to acquire the necessary finances to fund their maintenance obligations. As such, other approaches must be pursued if the target is to be met. The three main approaches are:

• Arms-length management organizations

• Private Finance Initiative

• Stock transfer

No matter what option is pursued, the tenants have to be at the heart of the strategy. They need to be fully engaged in the decisions about the future of their homes. Having had the opportunity to appraise the options and seek independent advice, the tenants vote to determine the outcome.

Arms Length Management Organisation (ALMO)

Local authorities are already encouraged to separate their strategic role from day-to-day management of stock. One way to achieve this would be to set up a company, controlled or influenced by the authority itself, to manage their housing. However, under present arrangements, unless the ownership of the housing is transferred to the local housing company (effectively creating a new registered social Landlord), then the company is subject to the controls on capital expenditure that apply to local authorities.

In addition to raising the level of public investment for housing, this ensures that local authorities invest their housing resources more efficiently and strategically and that their housing services meet demanding targets for improvement. This results in more money for local authorities in return for modernisation. A key initiative is Best Value and the new financial framework ensures a more business-like approach to management and accounting for local authority stock.

ALMOs are usually companies limited by guarantee with council nominees, tenants and independent members on the Board. The ALMO operates under the terms of a management agreement with between the local authority and the ALMO. In order to delegate their housing management functions to an ALMO, local authorities must apply to the Secretary of State for consent under section 27 of the Housing Act 1985. Before awarding consent, Ministers need to be satisfied that tenants have been consulted and show a balance of support for the proposal to create an ALMO.

Local authorities who create high performing ALMOs are eligible for additional funding from the Government to help them meet the Decent Homes target. Before a local authority can access ALMO funds, their ALMO must achieve at least a 2* good or 3* excellent inspection rating from the Housing Inspectorate.

Key features of the ALMO option are:

• Ownership of the housing stock remains with the local authority

• The local authority remains the legal Landlord

• Tenants remain secure tenants of the authority and there is no change in their rights, such as the right to buy, right to repair and right to manage

• An ALMO may manage all or part of an authority’s stock

• An ALMO has a significant degree of independence from its parent local authority
   

Private Finance Initiative

The Private Finance Initiative (PFI) was announced by the then Chancellor, Norman Lamont in the 1992 Autumn Statement and came into being in 1992. The aim of the PFI was to increase the “involvement of the private sector in public sector services”. Through PFI the private sector is able to bring a wide range of managerial, commercial and creative skills to the provision of public services, offering potentially huge benefits to the Government.

Local Authority’s need to complete a business plan, demonstrating that Housing PFI offers the most cost-effective solution for their respective projects. Funding is dependent on authorities producing a detailed Outline Business case, which will require approval by the inter-departmental Project Review Group. Projects endorsed by the PRG become eligible for revenue support as long as current proposals are translated into contracts. The schemes differ as RSLs will be contracted to acquire or build additional social housing, the properties will not be council owned.

Housing Private Finance Initiative provides an alternative to stock transfer, through which private finance can be used to improve the condition and management of local authority homes. Authorities enter into long-term service contracts with private sector providers under the PFI. Provided an authority can demonstrate an appropriate transfer of risk to the private sector, the investment made is not subject to public expenditure controls.

PFI contracts encompass early refurbishment works as well as continuing management, maintenance and repairs services. The authority defines the standards it requires in the form of outcomes rather than inputs, and potential private sector providers compete for the contract and raise the funds to do the work. Payment by the authority is on a performance basis and in the form of annual service fee payments rather than initial capital expenditure.

Tenants remain tenants of the local authority and play their part in defining and monitoring the performance standards of the PFI contractor. The PFI approach is being piloted in eight housing pathfinder schemes. The purpose of the pathfinder exercise is to find out where PFI works best and to develop good practice and common procurement approaches on which other authorities might build. We expect PFI to establish itself as an option that many authorities will want to consider as part of their investment strategy, and we will be considering future levels of support for it during the current Spending Review.

The decision to choose the PFI for HRA investment route must be based on a thorough appraisal of the various investment options. The experience from the pathfinders shows that the decision to choose the PFI route was made when one or more of the following conditions applied:

• When the alternative methods of getting investment are not viable economically. In at least 5 cases the LSVT alternative was calculated not to be viable given the condition of the stock. These schemes aimed to secure through PFI the funding needed to address poor stock conditions that other alternative sources of investment could not provide

• When the alternative methods of getting investment are not acceptable to tenants: In almost every case the alternative of Large Scale Voluntary Transfer had been considered and was deemed to be unacceptable to tenants

• To lock in investment and access funding over a long period: A distinctive feature of HRA PFI is the 30- year contract defining output standards for the housing stock. This means that HRA PFI is the only investment mechanism that locks in investment to maintain housing over such a long period, and some Pathfinders see this as adding value.
   

PFI allows local authorities to bring in private sector expertise. Risk is apportioned to the party, either the local authority or the PFI Operator, best able to understand and deal with it. It also encourages innovation in service delivery and tenant involvement. Housing PFI can be linked to sustainable regeneration, estate remodeling, crime reduction, training and work opportunities. It can also include more unquantifiable benefits such as improved quality of life for tenants and residents, and the knowledge that homes and services will be provided to agreed standards for thirty years.

Stock Transfer (including Large Scale Voluntary Transfer)

Housing transfer is where a council transfers some or all of its stock to a housing association. It makes a major contribution towards achieving the target of making all social housing decent by 2010. Since 1988 there have been 188 Large Scale Voluntary Transfers (LSVTs) involving over 800,000 dwellings in England.

A local authority proposing a transfer of more than 499 dwellings must first obtain a place on an annual disposals programme approved by the Secretary of State. Councils must then develop scheme proposals and carry out informal and formal consultation with their tenants. The Secretary of State will not give his consent if the majority of tenants are opposed to transfer. This is usually established through a formal ballot of secure tenants. Transfer is a tried and tested model which has grown to play a key role in Decent Homes delivery.

Transfer has the potential to bring about a wide range of benefits - housing renewal, improved service delivery and greater tenant involvement which puts tenants at the heart of the process and will provide them with improved and more responsive services in line with their aspirations. It provides the mechanism for enhanced community facilities and environmental improvements to an area, not just the physical fabric, but also providing opportunities for skills and training to enable people to make the most of their potential.

Stock transfer can:

• Improve the quality of housing by bringing in private investment;

• Create a wider range of bodies with high levels of tenant
  involvement to run housing, improve services and match them more closely to tenants' needs and preferences; and

• Enable local authorities to concentrate on their strategic responsibilities for housing.

Transfer involves the sale of Local Authority dwellings to Registered Social Landlords, in order to utilise private finance for repairs. These repairs are funded through rent increases which are detailed to tenants prior to a tenants’ ballot. The ballot has to show a majority in favour of the transfer proposals before a transfer can take place.
The main advantages of transferring stock to RSL’s are:

• Local authorities can free themselves from the constraints of housing management and development

• Housing development is subject to fewer restrictions

• Repairs to housing stock are financed by private loans

• Reduction in local authorities debt

• More local authority finance available for other projects

• RSLs are more able to fund repair, maintenance and improvement work 
  

Retain Ownership and Management

In some instances the ownership and management of the housing stock can remain with the Local Authority. This may be the result of:

• The stock transfer being defeated by tenants (1 in 4 of the votes taken place)

• The condition of housing stock is so poor that it is difficult to sell to an RSL

• The council able and willing to meet the target themselves
  
  

In areas where housing transfers are largely supported by tenants, such as Tower Hamlets in east London, councils can still face difficulties meeting the pledge, because the condition of the stock is so bad.

John Prescott recently wrote: “There is not and will not be a ‘fourth option’ for providing direct additional funds to local authorities to meet the decent homes standard.” The letter referred to a vote at the Labour party conference, where the government failed in its attempts to persuade delegates not to support a motion calling for tenants not to be “financially disadvantaged” if they chose to retain their local authority as their Landlord.

In the negotiations that led up to this vote, Prescott offered to undertake a review of council funding. This would explore the possibility of ensuring a level-playing field between councils retaining ownership of their stock or transferring it to an ALMO or housing association. The condition was the withdrawal of the proposed motion. Negotiations over this review broke down when the unions and their negotiators were unhappy with the lengthy timescale over which the ODPM planned to conduct the review. Labour was defeated by eight votes to one.

A local authority has the option of continuing to own and manage their own housing stock. This might not necessarily be through choice as the tenants may vote against any of the aforementioned three alternatives. In this case, local authorities are limited in their ability to raise the finance required to meet the Decent Homes Standard and with the 2010 deadline looming, the Government is coming under more pressure to either extend the deadline or to offer a further option.

A recent trend has seen the emergence of Local Authorities whom have declared themselves financially able to meet the Decent Homes Standard by 2010. After the tenants turned down the opportunity to transfer the housing stock to an RSL, Leicester Council are able to make the £99m investment required to take their 22, 500 housing stock up to the standard over the next 5 years. They have even budgeted to invest a further £55m to improve their stock over and above the Decent Homes Standard. A further example is of Blackpool Council whom urged their tenants to vote against a proposed transfer owing to the fact that they too believe they have access to the £9.4m needed to upgrade their 5,200 housing stock.