Select Committee on Transport, Local Government and the Regions Memoranda

Memorandum by Chartered Institute of Housing (LGB 03)


  The Chartered Institute of Housing (CIH) welcomes the opportunity to submit written evidence on the Draft Local Government Bill. We will deal solely with the implications of the Bill for the financing of council housing. After general comments on the provisions, we will concentrate on the issues of whether the Bill gives local authorities any greater financial freedom in running their housing stock, and in particular whether it could provide new investment options. We will do this by making comparisons with housing associations, in particular those taking over local authority housing stock. For brevity we will not describe the Bill's provisions in any detail.


  The Bill's main purpose is to codify the new financial framework for LA housing which began in April 2001 but can only be fully implemented once legislation is in place. It completes the transition to a resource accounting basis for housing revenue accounts (HRAs). It separates out the payment of housing benefit (rent rebates) for council tenants, and it simplifies the capital control regime. As we shall make clear, the more flexible financial arrangements which it introduces are in practice severely limited in their application. The basic features of the present system, whereby income is largely determined by central government formulae, are retained. In particular, the arrangements by which resources (both capital and revenue) are pooled nationally remain and are strengthened (see Annex for a diagram describing how an HRA works).

  The effect of the Bill on local housing authorities as a whole is financially neutral. Thus, for example, although the existing requirements to set aside part of capital receipts against debt, and to cross-subsidise housing benefit payments from other tenants' rents, will be removed, "pooling" arrangements will ensure that any resources that would have been released form part of a national pot to be distributed by centrally-determined formulae.


  Much has been made of the "prudential borrowing" regime introduced by the Bill. Whilst welcome, this will have much more direct application in non-housing LA business activities such as municipal markets, the remaining municipal bus companies, leisure centres and other facilities with locally-decided incomes. Because income to the HRA is largely decided by central government, the new regime will not lead to more council housing investment unless there are substantial increases in subsidy.

  This means that the existing financial attractions of stock transfer to a housing association will remain. High debt authorities, which benefit from the national pooling arrangements, will achieve more financial freedom through transfer because their old debt will be paid off. Low debt authorities will also get more financial freedom through transfer because they "escape" the pooling arrangements whereby they pay into the national pot.


  The impression is often given that the key aim of local authorities in considering stock transfer is "borrowing freedom", and that this enables them to achieve the required investment in their stock. If the issue were this simple, the Bill would indeed provide the means by which councils could be put on a "level playing field" with housing associations.

  But housing associations have a range of "business freedoms" which are not enjoyed by councils, and which are gained through stock transfer. They include:

  1.  The ability to borrow "prudentially";

  2.  Ability to borrow outside public sector controls;

  3.  Borrowing directly against the value of (and income stream from) the stock;

  4.  Ability to use their revenue stream more flexibly, notably to allow them to borrow against future rents to enable them to finance investment now;

  5.  In the case of stock transfers, freedom from the liability of past debts;

  6.  Command of all the revenues relating to the stock (rents, HB payments, etc) with no dependence on government revenue subsidy (except indirectly through HB);

  7.  Project-specific grants for new house building (ie social housing grant);

  8.  Much greater control of their own assets—in particular, the ability to replace stock which is in demand and which is sold to sitting tenants.

  HAs previously had more freedom to set rents and therefore to determine their future revenue streams, but this difference has largely been nullified by the Government's rent restructuring policy. Even so, they have greater freedom at the margin than LAs, and may well have greater freedom still once rent restructuring is complete (if controls are then relaxed).


  The answer is "no". The Bill will allow the Government to deliver the first of the eight freedoms listed above, but none of the others. In relation to item two, borrowing will remain within the main measure of government borrowing (Public Sector Net Borrowing—the replacement for the PSBR) even though councils will have more freedom. The Treasury will make estimates of the level of borrowing, as it does now, and as it will for (say) the proposed "foundation" hospitals within the NHS. No doubt it will act if local government greatly exceeds its estimates of new borrowing.

  The draft Bill specifically rules out items three and four. It says nothing on the remaining items.


  The answer to this is also "no" except in certain circumstances. Some councils may find that, at the margin, they can borrow more than previously because they have sufficient "spare capacity" in their HRAs to sustain more debt, although such capacity is likely to be "squeezed out" by the progressive effects of rent restructuring (which will increase, not relax, central government control of HRAs).

  More importantly, councils which create Arms Length Management Organisations (ALMOs), and meet ODPM requirements, will be allowed to retain more of their rental income and will therefore be able to pay for the extra borrowing required to meet the Decent Homes Standard (DHS). So far 21 councils have set up or are setting up eligible ALMOs for part or the whole of their stock.


  Unless they achieve ALMO status (see below), councils such as Birmingham and Sheffield which were planning stock transfer will be in broadly the same position after the Bill becomes law as they are now, in relation to housing investment. Apart from day-to-day running costs, councils have three main calls on their HRA resources in relation to investment in their stock:

    —  Costs of paying old debt;

    —  Costs of achieving the DHS and dealing with their repairs backlog;

    —  Providing for future repairs (to avoid future repairs backlogs).

  These costs have to be met from rents, HB payments and from HRA subsidy. The amounts available are decided by government through the subsidy system and rents policy. In practice, whilst the costs of old debt and future repairs are largely reflected in the level of HRA subsidy, the cost of the middle item (the backlog) is not: subsidy is limited to the level of credit approvals available—usually much less than an urban authority needs to deal with its backlog within the ten-year target set by ODPM.

  Stock transfer HAs avoid these limitations for two main reasons. First, they do not inherit the (often substantial) costs of old debt. Second, although they do not get revenue subsidy, they have full control over their income from rents and HB and are able to borrow against future rental income, both to deal with the repairs backlog and plan for future repairs. A stock transfer HA starts with a clean sheet: the business plan encompasses all the new investment required as well as the costs of running a modern housing service, and is designed to be affordable from the rents charged. The balancing factor is the transfer price (the higher the investment required, the lower the price and hence the capital receipt to the LA).

  To put councils in a comparable position to transfer HAs, the Treasury would have to provide the extra subsidy needed to deal with the £19bn repairs backlog. Local authorities would also need several more of the financial freedoms mentioned at the beginning of this submission.

  It might be argued that the Treasury does take over debt costs on transfer, to the extent that they are not met from the receipt, and that this could become a substantial commitment with urban transfers such as Birmingham. The Treasury would probably say that it meets debt costs through subsidy anyway, and transfer means the end of any future commitment to subsidy for running costs, improvements or repairs.

The potential for ALMOs

  As already indicated, unlike other councils, those with ALMOs will be able to exercise their new borrowing freedom because they will receive extra subsidy. Could ALMOs be the route to greater autonomy for council housing, if they were to become more like HAs? CIH believes that the Government should promote ALMOs by providing extra resources and setting a somewhat less stringent test for access to them. However, ALMOs at present do not address the real issue that separates council housing from housing associations, which is the dependence on revenue subsidy, the pooling of costs and resources with other authorities, and hence the tight control of the Treasury's "purse strings".

  If ALMOs are to be a real alternative to transfer, they need more of the eight financial freedoms set out above. This cannot be achieved quickly, but there could be a phased programme of reform which includes steps such as allowing ALMOs to keep part of the benefit of rent increases, and provision to pay off part of their historic debt once their stock achieves the DHS. The Government could aim to give ALMOs financial autonomy within a defined period, for example by 2010 (the target date for achieving DHS). This would provide a strong incentive for councils who wish to retain their stock to follow the ALMO route, as well as providing an effective answer to those arguing that councils should simply be given the extra resources to improve their housing stock with "no questions asked".

  CIH believes that developing the ALMO model in this way is the best response to authorities who wish to retain their council housing and deal properly with their repairs backlog. It could provide a programme of reform, including performance measures, which could convince the Treasury that council housing should have greater financial autonomy and most of the business freedoms of housing associations, without stock transfer. It could be argued that, by providing these freedoms whilst retaining public ownership, there is greater control over the future quality of the service and the use of the assets than is the case if housing stock is moved out of the public sector.

Chartered Institute of Housing

June 2002

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