Select Committee on Regulatory Reform Fifth Report


Part I: The proposal

Background

THE POLICY CONTEXT

  6. The explanatory memorandum notes that a significant proportion of social housing stock in local authority possession is in need of repair and refurbishment. Government policy in recent years has been aimed at assisting local authorities to address these needs. The Housing Green Paper Quality and Choice: a decent home for all, published in April 2000, noted that £19 billion was needed to bring the worst council housing in England up to a decent standard. The Welsh Assembly Government's paper Better Homes for People in Wales similarly suggested that the cost of investing in improvements and the modernisation of neighbourhoods where council homes are located could exceed £1 billion. The Government highlighted four options for raising the necessary funds, one of which was the use of the Private Finance Initiative (PFI).

7. There are currently eight 'pathfinder' authorities in England pioneering the use of PFI applied to housing projects, with a further ten projects in England in a second phase. The intention is that the PFI contractor or 'operator' will bring all of the properties in the scheme up to a required standard through refurbishment within the first few years of the contract. The operator will also provide management and maintenance services for the thirty years of the contract, ensuring that the properties remain at the required standard throughout the term of the contract. Failure to provide the services or maintain the properties to the specified standards will mean that the operator will incur financial penalties.

8. The pathfinder authorities are now well advanced in the procurement process, having identified contractors to bid for the work and drafted their contract conditions. However, during this process it became apparent that authorities did not have the power to enter into PFI­type housing management agreements under section 27 of the Housing Act 1985.

THE CURRENT LEGISLATION

  9. Section 27 of the Housing Act 1985 enables local authorities to delegate their housing management functions. Section 27 originally enabled local housing authorities to delegate those functions by entering into contractual agreements with providers. The agreement would have to specify the houses involved, any other land included and the management functions being delegated. Section 27 has been subject to various amendments over the years and, in particular, was amended to enable compulsory competitive tendering of housing management services.

10. The Secretary of State's approval is required for any proposed delegations. Currently, this is one of the mechanisms for ensuring that among other things, tenants' rights to consultation have been complied with.

11. Section 27 enables the Secretary of State to

12. The Secretary of State issued a general approval in November 1994 which applies to all authorities in situations where the proposals conform to specified criteria. It covers agreements of up to five years' duration where there has been competitive tendering and the requirements of section 27A of the Housing Act 1985 (now repealed) and EC procurement regulations have been complied with.

Purpose of the proposal

  13. The Minister proposes to amend section 27 to facilitate the delegation by local housing authorities of their housing management functions. There are two main aspects to the proposal:

    (b)  altering the wording of the section which governs the division of liabilities between the authority and the contractor (which currently refers to the contractor acting "as agent" of the authority).

These are discussed in greater detail below.

Aspect (a): ability to sub-delegate

  14. Under PFI, contracts will be let between the authority and a PFI operator. In most cases the operator will be a company uniquely formed for the purpose of financing the contract known as a 'special purpose vehicle' (SPV) or 'special purpose company' (SPC). The SPV (or SPC) will be a shell organisation, set up in these instances to bring together a consortium. For a housing contract, such a consortium might consist of a Registered Social Landlord (RSL), a building contractor and an investor. A management agreement will be made between the local housing authority and the SPV. However, in most instances the SPV will not carry out the management functions itself, because its main purpose is to provide the necessary investment structure for the project. Instead, as in PFI contracts in other industry sectors, the functions will be subcontracted under separate agreements between the SPV and one or more management providers.[3]

15. The Government proposes to amend section 27 in a way that would enable a management agreement between an authority and their preferred contracting partner—a PFI operator or SPV—to include an agreement that other persons may exercise some or all of the management functions. The approval of the Secretary of State (or, in Wales, the National Assembly[4]) would have to be sought for that original management agreement. The Secretary of State/National Assembly's agreement would normally also have to be sought for any sub-agreement made under that agreement, making specific provision for housing management functions to be sub-delegated (subject to para 16 below).[5]

16. When giving approval to an original management agreement, the Secretary of State/National Assembly would specify the circumstances in which a variation to that agreement would require further approval.[6] The Secretary of State/National Assembly may also specify circumstances in which approval to the making of a sub-agreement would not be required.[7]

REQUIREMENT FOR SECRETARY OF STATE'S APPROVAL

  17. In order to be able to enter into a management arrangement, a local housing authority would have to provide details of the agreement and of any subsidiary management agreements to the Secretary of State or the National Assembly. For English authorities, the Secretary of State's conditions of approval would require that the authority include, amongst other things, the identity of the person with whom the agreement is to be made. Where that person is not to exercise any management functions themselves, the authority would need to identify the person or persons who will do so.

18. If it were intended that further arrangements—that is, a sub-agreement—should be made for the sub-delegation of these management functions, then the management arrangement with the authority would have to set out what is intended. The proposed order itself would require the manager to obtain the consent of the authority, as well as approval of the Secretary of State/National Assembly for Wales, before entering into the sub-agreement.[8]

Approval not required for changes not affecting tenants

  19. In certain circumstances, the Secretary of State/National Assembly's approval will also be required for the variation of a management agreement. As noted above, those circumstances will be specified by the Secretary of State/National Assembly when approval is given to the original agreement. The Secretary of State/National Assembly may also specify circumstances in which approval for the making of a sub-agreement would not be required. The Department notes that the Secretary of State intends to exercise his discretion so that there is no requirement to obtain approval where the change will not affect matters concerning tenants.[9] Guidance will be issued to local authorities about the situations where approval should be sought and, in respect of England, the considerations the Secretary of State will take into account when dealing with applications.

Summary of requirements for Secretary of State's approval

  20. In summary, the position is as follows. The Secretary of State/National Assembly's approval would be required to the original management agreement. It would also normally be required if the parties to the original management agreement wish to

    (b)  make changes to a person so appointed,

    (c)  make changes to the terms of the management arrangement, or

    (d)  make changes to subsidiary management arrangements,

but only if those changes do not affect tenants.

TENANT CONSULTATION

  21. Section 105 of the Housing Act 1985 contains a statutory requirement that tenants should be consulted on matters of housing management. The Department considers it likely that section 105 would apply to the making of any new management agreement.[10] Tenants would therefore have a statutory right to be consulted on any of the arrangements envisaged under this proposed order. Nevertheless, the Department is keen to stress that tenant consultation will be central to any such arrangements and will be an important factor taken into account by the Secretary of State when he or she decides whether to grant approval to a management agreement, or a variation to an agreement.

22. As regards the relationship between the section 105 requirements and the requirements which will be imposed by the Secretary of State, the Department notes:

... guidance issued in respect of section 27, both in the past and currently, seeks to involve tenants much more than as defined in section 105, and also at a much earlier stage. It also provides more detail about how this should be done. A copy of the current guidance is at Annex F to the Explanatory Document. It makes clear that tenants should be involved throughout any procurement process, not just about making details available for inspection as section 105 requires. The section 27 guidance is much more specific and detailed about involving tenants and is not confined to consultation.[11]

DEALING WITH MATTERS OF URGENCY: MORATORIUM PROVISIONS

  23. The proposed order would provide that the Secretary of State/National Assembly may, in giving approval to the making of an original management agreement, specify a moratorium period and the circumstances in which it is to apply. During a moratorium period, the Secretary of State/National Assembly for Wales' approval would not be required for the making of a sub-agreement.[12] However, any such sub-agreement would not be valid unless it was approved by the Secretary of State/National Assembly immediately after the end of the moratorium period.[13]

24. This provision is intended for cases where the person to whom housing management functions have been sub-delegated needs to be replaced as a matter of urgency—for example, in the case of insolvency. It would enable a temporary manager to be installed and tenant consultation to take place on a new, permanent manager before the Secretary of State/National Assembly for Wales was approached to give approval. This would enable the continuous provision of services to tenants without disruption.

25. When submitting a management agreement for approval, authorities would need to identify the length of the proposed moratorium period and the circumstances in which they would like the Secretary of State/National Assembly for Wales to specify such a period so that the matter could be considered prior to the granting of approval. Under the proposed order, the moratorium period may not last longer than six months in the first instance,[14] but may be extended by the Secretary of State.[15]

26. An extension to a moratorium period will be at the discretion of the Secretary of State. Where a manager has to be replaced, the circumstances where a moratorium period will apply would have been identified in the Secretary of State's approval to the management agreement. In practice the authority will then have to notify the Secretary of State if they are likely to need an extension to the moratorium period, giving the justifications for the extension and the further time likely to be required. The Secretary of State will have discretion in specifying the period of the extension, and will decide on a suitable period in the light of what the authority says in its application for an extension. Circumstances where an extension might be required might include those where there has been difficulty in identifying a new manager, or where the Secretary of State is not content with the proposed new arrangements. The Department will issue guidance to authorities on this and other issues.[16]


3   A simplified diagram of the likely composition of a consortium bidding for a PFI scheme may be found on page 11 of the explanatory statement which accompanied the proposal. Back

4   Explanatory statement, para 4.3. Back

5   New subsection (6)(a). Under new subsection (2)(a), "management agreement" in subsection (6)(a) includes a sub-agreement. Back

6   New subsection (6)(b) Back

7   New subsection (7)(b) Back

8   New subsection (5)(a) Back

9   Appendix B, section A1. Back

10   Appendix B, section A17. Back

11   Appendix B, section A17. See also Qq 51-59. Back

12   New subsection (8)(a) Back

13   New subsection (8)(b) Back

14   New subsection (9) Back

15   New subsection (10) Back

16   Appendix B, section A2. Back


 
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Prepared 24 January 2003