House of Commons - Regulatory Reform

Select Committee on Regulatory Reform Fifth Report

APPENDICES

CORRESPONDENCE CONCERNING THE PROPOSAL

A. Letter from the Clerk of the Committee to the Department 23

B. Reply from the Department 27

Appendix A

Letter from the Clerk of the Committee to the Department

Proposal for a draft Regulatory Reform (Housing Management Amendment) Order 2002: request for further information

1. Thank you for your appearance before the Committee on Tuesday, and for the useful briefing you and your colleagues gave the Committee on the above proposal. The Committee considered the proposal at its subsequent meeting and resolved to seek further information from the Office of the Deputy Prime Minister. The issues which concern the Committee are set out below, together with questions arising from them. The Department is requested to respond to these points as soon as possible, and in any case no later than 10 December, together with any further explanatory material which it feels may assist the Committee.

Requirement for Secretary of State's approval for sub-delegation

2. The explanatory statement says that where an arrangement includes provision for the person with whom the arrangement is made to:

a. appoint another person to exercise any of the management functions; or

b. make changes to a person so appointed; or

c. make changes to the terms of the management arrangement; or

d. make changes to subsidiary management arrangements,

the approval of the Secretary of State/National Assembly for Wales on the application of the authority will be required before any of those steps can be taken. For England the First Secretary of State will expect those tenants affected by the proposals to have been consulted before the application is made.

3. However, although the explanatory statement (including the Regulatory Impact Assessment) claims that the arrangements will be as described above, the Committee has noted that there appears to be nothing on the face of the proposed order to confirm that this will be the case. Under new subsections (6) and (7), it appears that the requirements outlined above will not be statutory requirements, but merely ones required by the Secretary of State in giving his approval to an agreement, or the variation of an agreement. If this is the case, those requirements could therefore be changed in the future without any further reference to Parliament.

Q1 It would be helpful if the Department would provide further elucidation of the proposed requirements. In particular, the Department should distinguish clearly between those aspects of its proposals which are intended to be included on the face of the order, on the one hand, and those which would be at the discretion of the Secretary of State, on the other.

Dealing with matters of urgency: moratorium provisions

4. The explanatory statement suggests that where the person appointed by the manager needs to be replaced as a matter of urgency (e.g. in the case of insolvency) a moratorium period is proposed before the Secretary of State/National Assembly for Wales' approval must be sought. This is to 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 is approached to give approval. The Committee understands that this will enable the continuous provision of services to tenants without disruption. According to the explanatory statement, authorities will need to identify the length of the proposed period and the circumstances in which they would like the Secretary of State/National Assembly for Wales to specify a moratorium period so that the Secretary of State/National Assembly for Wales can consider these prior to granting approval. The explanatory document says that the moratorium period may not last longer than six months in the first instance; but may be extended beyond that length of time "on application and if justified" (para 12.15).

5. As above, the Committee is concerned that the Department's proposals as set out in the explanatory document do not seem to be fully reflected on the face of the proposed order. Rather than requiring either an application from the parties concerned or any justification for the extension of a moratorium period, new subsection (10) would appear to leave the extension of a moratorium period entirely at the discretion of the Secretary of State.

Q2 Please indicate whether it is intended that the extension of a moratorium period will be entirely at the discretion of the Secretary of State, or whether it is intended to incorporate provisions for the extension of such a period into the order.

Q3 Please also indicate the circumstances in which the Secretary of State might withhold his approval to a sub-agreement made under an agreement in the moratorium period, and what the implications of the withholding of such approval might be for anything done under such a sub-agreement.

Appropriateness

6. The Committee notes that these proposals are intended to enable Private Finance Initiative projects in local authority housing management to go ahead. As the Department will be aware, PFI is a subject of some deal of political controversy and debate. As a result, the Committee is concerned that it may not be appropriate for implementation by delegated legislation, through the regulatory reform procedure, rather than being subject to the much greater opportunity for political discussion and debate which would be allowed if the proposal were to be brought forward by means of primary legislation.

Q4 Please justify the Minister's decision to proceed by means of an RRO to implement a proposal which is the subject of this degree of political controversy.

Re-enactment of burdens

7. Rather than simply amending the existing section 27, the proposal would replace the whole of the section with a new, amended section. In terms of the Regulatory Reform Act, the Committee considers that the proposal would therefore re-enact most of the existing burdens currently imposed by section 27. The Regulatory Reform Act provides that burdens may only be re-enacted if they are proportionate to the benefits expected to result.

8. The Committee understands that the existing burdens are chiefly concerned with ensuring that local authorities exercise their powers and responsibilities in respect of housing management properly. However, contrary to the requirements of s6(2)(c) of the RRA, in its explanatory document the Department neither acknowledges the re-enactment of burdens represented by the replacement of the old section 27 with the new section, nor addresses the resulting question of proportionality.

Q5 Please indicate whether the Department agrees that the proposal would re-enact existing burdens, and provide an assessment of whether, and for what reasons, those burdens are proportionate to the benefits expected to result from the re-enactment.

Removal or reduction of a burden and maintenance of necessary protection: replacement of the phrase "as agent"

9. Section 27 currently requires that the manager should exercise the management functions "as agent of the authority". The Committee's understanding is that an agent acts on behalf of the person who instructed him/her, so that at present the authority is, as principal, a party to all the contracts which an agent makes and consequently liable for any obligations that may arise. The Department has suggested that the intention of Parliament in amending section 27 in 1986 to insert this provision was that the authority should remain legally, politically and financially accountable for the actions of its agent.

10. The Department has explained that in PFI arrangements, the functions will be subcontracted under separate agreements between the main PFI operator or SPV and one or more management providers. The Department suggests that the requirement that a manager acts "as agent of the authority" would not fit well with such arrangements. It is proposed that the phrase 'as agent of the authority' should be replaced by provisions similar to those in the Deregulation and Contracting Out Act 1994 (i.e. new subsections (13) and (14)).

11. Paragraph 4.9 of the explanatory statement says that "the intention is that the authority remains responsible for the management functions where they are carried out by others except where the contract or agreement provides otherwise" (emphasis added). When you appeared before the Committee you said that the proposed wording "makes the contractor specifically responsible for those things identified in the contract as his responsibility".

12. New subsection (13) provides that

anything done or omitted to be done by or in relation to a manager, in, or in connection with, the exercise or the purported exercise of any management function exercisable by the manager under a management agreement shall be treated for all purposes as done or omitted to be done by or in relation to, the authority.

13. It appears that new subsection (14) is intended to reduce the consequent burden on the authority, by

— excluding the authority from responsibility for any act or omission of the manager for the purpose of so much of the contract as relates to the exercise of the management functions; and

— excluding the authority from liability in connection with criminal proceedings as a result of any act or omission by the manager or managers' employees where they exercise the management functions.

14. The Committee does not accept that subsection (14)(a) has the effect described in paragraph 4.9 of the explanatory statement. It appears to maintain the position that the authority is liable, as respects any third party, for any act or omission of a party to a management agreement or sub-agreement in or in connection with the exercise of a management function. It is only as between the parties to the agreement that subsection (13) does not apply, so that the manager will remain liable to the authority for its acts or omissions.

15. The Committee therefore remains unclear as to the precise extent to which these new provisions are intended to divide the responsibilities for the discharge of functions, and the liabilities resulting from the discharge of those functions, between the authority and the manager.

16. In addition, the explanatory document is not clear whether there is any practical difference between the effects of the use of the phrase "as agent", on the one hand, and the new proposed wording in subsection (13), on the other. The Department appears to acknowledge that there remains a certain amount of doubt on this point: in response to comments made in consultation by Anthony Collins Solicitors (at page 44 of the explanatory document), the Department states that it is considering further the question of the maintenance of necessary protection in this context.

Q6 Please explain the intended effect of the proposed wording of subsections (13) and (14), and how it has that effect.

Q7 Please explain what effect the use of this proposed wording would have as opposed to retaining the old wording, i.e. how the proposed new sections are intended, in practice, to divide responsibilities and liabilities between local authorities and managers.

Q8 In the light of this explanation and of the further consideration the Department has given to the points made by Anthony Collins Solicitors, please indicate whether, and explain why, it is still the Department's view that, in respect of local authorities which do not enter into the proposed new housing management arrangements, no necessary protection would be removed by the excision from section 27 of the specific provisions for delegation to agents.

Imposition of new burdens

17. Your explanatory statement says that new burdens imposed by the proposals "are in line with existing requirements", and "the proposed changes are not considered to impose any significant new burdens" (explanatory document, paras 7.1-2). Although the Department has apparently therefore conceded that the proposals impose new burdens, these burdens are not set out in terms for the Committee to assess whether or not they are significant. Nor does the Committee consider that the explanatory statement's somewhat cursory consideration of the proportionality, fair balance and desirability tests is sufficient to satisfy the requirements of the Regulatory Reform Act.

Q9 Please confirm whether or not the Minister considers that the proposal would impose any new burdens.

Q10 If the Minister does believe that it would do so, please state how any such burdens are proportionate to the benefits which are expected to result from their creation. Please also explain why the Minister is of the opinion:

(a) that the provisions of the order, taken as a whole, strike a fair balance between the public interest and the interests of the persons affected by the burden being created, and

(b) that the extent to which the order removes or reduces one or more burdens, or has other beneficial effects for persons affected by the burdens imposed by the existing law, makes it desirable for the order to be made.

Whether the proposal has taken proper account of consultation responses

Length of consultation

18. The Committee notes that the Department set 27 September 2002 as the closing date for responses to its consultation, representing a period of only eight weeks (compared to the Cabinet Office recommended minimum of 12 weeks). The Committee also notes the Department's statement, "Although we would have liked to have allowed a full twelve weeks for consultation, the section 27/housing management issue only came to light fairly recently and, as some housing PFI projects were nearing contract signature, it was felt important to have the change in place as soon as possible", but that the Department has indicated that it has nevertheless taken account of all available responses, including those that were received after the closing date.

Q11 Please list the consultees whose responses were received after the closing date.

Scope of consultation

19. The Department has indicated that the paper was distributed to all local authorities, those building contractors, finance houses, Registered Social Landlords, advisors, consultants and other groups currently involved in housing PFI projects; and tenants' and leaseholder groups. In addition, copies were sent to trade unions and others who might have an interest. However, during the presentation it emerged that the consultation paper had not been distributed to tenants' groups who had previously opposed the establishment of arms' length management organizations (ALMOs).

Q12 Please indicate why it was thought appropriate to confine the thrust of the consultation exercise to those bodies and organizations engaged in housing PFI projects, and not the whole of the local authority housing sector.

20. It appears that the present consultation was not designed with the aim of taking into account workforce issues (e.g. in respect of staff who are transferred from local authority employment to employment by a PFI contractor): Unison has pointed out that a number of other unions representing staff likely to be affected by the proposals have not been consulted. The Department's explanatory statement acknowledges that Unison "raise a number of pertinent points in relation to staff who transfer to a PFI contractor", but does not appear to make any attempt to respond to those points.

Q13 Please explain why it was apparently not felt necessary to seek full consultation with representatives of all staff likely to be affected by the proposals.

Q14 Please indicate what effects the Department believes the proposals will have on local authority staff who may be transferred to employment with PFI contractors.

Q15 Please supply to the Committee the Department's views on the "pertinent points" made by Unison in its response to consultation.

Tenant consultation

21. The Committee recognizes that the Department is keen throughout the consultation document to stress that tenant's rights to consultation will be preserved under these proposals. However, it understands that those rights are not specifically stated on the face of the proposed order, and derive instead from a combination of tenant's rights under section 105 of the Act, and the requirements the Secretary of State will impose before giving his approval to any agreement or sub-agreement. The Committee is therefore unclear about what exactly the consultation requirements will be, and the precise effect they will have. For example, will they, as some respondents to consultation on the proposals suggested, result in tenants being over-burdened with constant consultations about changes to the management of their homes?

22. The Committee notes that para 4.5 of the explanatory document states that "as at present under section 105 of the Housing Act 1985, tenants will be consulted about the proposed arrangements before approval is sought, and the First Secretary of State for England will take account of this when deciding whether or not to give approval". However, in response to a point made in consultation, the Department has suggested that "consultation requirements under section 105 may not coincide with the Secretary of State/National Assembly for Wales' requirements for consultation under these arrangements" (page 35). On the face of it, these assessments appear to be contradictory.

Q16 Please indicate how the Department envisages the operation in practice of the requirement for tenant consultation.

Q17 Please clarify the relationship between the statutory requirement for consultation under section 105 of the 1985 Act and the envisaged discretionary requirements for consultation to be made by the Secretary of State/National Assembly for Wales under the proposal.

Cost-benefit analysis: attitude to risk

23. The Department states in its Regulatory Impact Assessment that "no risks are associated with the changes being made" (Explanatory document, Annex A, para 3). Yet during the course of the presentation to the Committee, the Department indicated that the PFI projects which are to be enabled by the proposal bear significant risks.

Q18 Please explain the grounds for the Department's assessment that no risks are associated with the changes arising from the proposal.

Broader implications of the changes

24. The consultation document and the explanatory document accompanying the proposal focus on the application of the proposed changes to section 27 in the context of proposed PFI agreements. However, the proposed changes may have implications across the whole of the local authority housing sector which is governed by the application of section 27. The Committee cannot determine from the information supplied from the Department whether it has considered the wider implications of the changes, and if so, what its assessment of those implications are.

Q19 Please indicate whether the Department believes that the proposed changes have wider applications, and if so, what they might be.

Q20 Please supply the Department's assessment of the implications of the proposals for Arm's Length Management Organisations (ALMOs), Tenant Management Organisations (TMOs), Registered Tenants Associations (RTAs) and local authority housing co-operatives.

Q21 Please indicate whether the Department is satisfied that all necessary protections will be maintained across the entirety of the housing sector presently governed by section 27 of the 1985 Act if the changes are made.

I hope these requests are clear. Please contact me if you have any queries.

Clerk of the Committee

27 November 2002

Appendix B

Reply from the Department

Proposal for a draft Regulatory Reform (Housing Management Amendment) Order 2002: request for further information

Thank you for your letter of 27 November 2002 conveying the concerns of the Committee. We have considered all the points raised by the Committee and our response to them is attached. My apologies that we have just missed the deadline you gave us. As I explained on the 'phone our legal advisor was taken ill over the last few days which complicated things.

We would like to reiterate to the Committee that ODPM does not consider this Regulatory Reform Order proposal is politically controversial. The proposal centres on enabling local authorities to sub-delegate their housing management functions. This is being done in the context of enabling housing PFI schemes to proceed, but will more generally increase local authorities' flexibility and ability to achieve the Decent Home target. Section 27 as it currently stands is imposing a burden on housing management as it is preventing local authorities from taking full advantage of modern procurements practice.

I hope the Committee will find the responses to their questions satisfactory. Please contact me if they require any further explanations or if there is anything further they need. I understand the Committee may wish to take evidence from our Minister, Jeff Rooker, in the New Year. I would appreciate it if you could let me know as soon as the Committee has made a decision on this.

David Green

11 December 2002

Proposal for a draft Regulatory Reform (Housing Management Amendment) Order 2002: request for further information

A1 To comment specifically on paragraphs 2 and 3 of the Clerk of the Committee's letter dated 27 November 2002, paragraph 4.6 of the Explanatory Document identified those instances where the Secretary of State's approval would be required under the new arrangements. The following is how the points apply in practice.

a. Subsection (6)(a) of the proposed draft order requires the Secretary of State's approval to any management agreement, which subsection (2)(a) defines as also meaning a sub-agreement.

b. Where it is necessary to appoint a new manager in place of the current one, the Department considers a new management agreement will be required similarly subject to the approval requirement of subsection (6)(a). Such a change is too fundamental to be considered a variation.

c. Changes to the terms of a management agreement will constitute a variation of a provision. Under subsection (6)(b) the Secretary of State is able to identify those instances where he will want to give approval to any variations to management agreements. 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.

d. As above, subsection (2)(a) defines a management agreement as including sub-agreements. Subsection (6)(b) therefore covers variations to both management and sub-agreements and the instances are likewise subject to the discretion of the Secretary of State.

The purpose of the Secretary of State's approval is to enable him, in the public interest, to control or influence local authorities' decisions in entering into management agreements. He is concerned to ensure that tenants are adequately consulted on any proposals that may affect them. The current requirements for tenant consultation are twofold. It is subject to existing legislation and also subject to the Secretary of State's policy on these matters. Existing legislation on tenant consultation is contained in section 105 of the Housing Act 1985 which makes it a legal requirement for tenants to be consulted about matters to do with housing management. The existing section 27BA of the 1985 Act also contains powers to enable the Secretary of State to make regulations requiring an authority to consult with tenants in respect to the exercise of management functions. No regulations have so far been made under this power since the Secretary of State has so far been content that authorities follow his guidance (see below) on consultation. However, its existence reflects the importance the Secretary of State places on these matters.

The Secretary of State's policy on these matters is that tenants should be involved and consulted in the letting of housing management contracts. He has issued guidance to local authorities on tenant involvement in these matters in the past. A copy of the latest guidance with which he requires authorities to comply is at Annex F of the Explanatory Document. In giving an approval under section 27 he wishes to be assured that tenants have been involved in the process as set out in the guidance. Authorities will therefore have to provide him with evidence that tenants have been consulted and their views taken into account.

On a more general note and to assist the Committee further Annex A contains a list of all of the proposals under section 27 together with details of the Secretary of State's discretionary requirements.

A2 An extension to a moratorium period will be at the discretion of the Secretary of State. There is no intention to limit the circumstances in which a moratorium period may apply in the order. 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, the justifications for it and the further time likely to be required. We have proposed that the Secretary of State should have discretion in specifying the period of the extension. In the light of what the authority says in its application for an extension, the Secretary of State will need to take a view about progress and what would be a suitable period. The circumstances where an extension might be required may be where perhaps there has been difficulty in identifying a new manager or where the Secretary of State is not content with what is proposed. We do not propose to incorporate further provisions in the Order but will issue guidance to authorities on this and other issues.

A3 The intention is that the Secretary of State's approval will not be required during any moratorium period. It is assumed that the Committee are referring to the Secretary of State withholding his approval to a sub-agreement following a moratorium period. It is difficult to foresee all the circumstances where this might happen and we would expect that it would be a rare occurrence. Nevertheless we have considered it. One instance may be where the Secretary of State is not satisfied about the way consultation has been carried out with tenants or where the guidance on tenant involvement has not been complied with. In these circumstances he may require consultation to be undertaken again and will no doubt allow more time for this to take place. Alternatively he may have information to hand himself that leads him to think that the proposed manager would not be appropriate as a manager in the circumstances. The PFI contractor would need to seek a new housing manager and again the Secretary of State may give more time to enable this to happen.

In extreme cases if the Secretary of State were unhappy about the way the contract was being run generally he might refuse to give his approval. Except during a moratorium period, the Secretary of State's approval is required for the lawful making of a sub-agreement. If approval were to be withheld, the authority and the manager would have to take whatever steps were required to bring their arrangements within the law: this might mean the termination of an agreement and the reversion to the authority of the exercise of the housing management functions. However, in refusing to give an approval, the Secretary of State must have acted reasonably in order to avoid the possibility of a legal challenge.

Q4 Please justify the Minister's decision to proceed by means of an RRO to implement a proposal which is the subject of this degree of political controversy.

A4 The ODPM's view is that the proposal to enable the sub-delegation of housing management is not politically controversial. The proposal is about giving local authorities more flexibility in delivering their housing management function while at the same time protecting tenants rights. In this instance it will enable housing PFI schemes to go ahead but it will give them more flexibility in delivering their Decent Home targets. As was stated in the presentation to the Committee, Ministers announced in the Housing Policy Statement in December 2000 that the Private Finance Initiative was an investment option for local authorities to bring about improvements to Council housing. This followed the April 2000 green paper. Likewise, the Deputy Prime Minister has confirmed his commitment to the Private Finance Initiative generally in recent speeches.

The decision having been made and the issue of PFI having being aired in the public domain, the mechanics of implementing housing PFI should not in themselves be controversial, even less so where the intention of the proposal is to give greater freedoms to local authorities and improve conditions for tenants. Should the changes we are proposing not go ahead, current housing PFI projects would not be able to proceed in a timely fashion and the majority of contracts would have to be revised to significantly. There is a strong possibility they may not be able to proceed as PFI projects if the balance of risk reverted back to the authority as a result. Apart from the cost implications, one impact of this would be to slow down the delivery of the Government's Decent Home target, an initiative where PFI is part of the accepted policy for achieving the goal of ensuring that all social housing meets a set standard of decency by 2010.

A5 As explained in Chapter 4 of the Explanatory Document, the draft order enables a management agreement made by a local housing authority to provide for the sub-delegation of the management functions which are the subject of the agreement by the person with whom an agreement has been made. Functions exercisable under sub-agreements would also be able to be further delegated under the draft order.

New provision is made largely as a consequence of this extension of the powers of local housing authorities and of "managers". The table at Annex A shows the extent to which the new section 27 substituted by the draft order, contains existing and new provision.

In considering the necessary changes, it became apparent that the extent of amendments required to give effect to the whole of the proposal meant that very little of section 27 would remain unaffected in its current form. It was considered that it would be easier to understand what was going on if the whole section was substituted rather than being subject to a series of amendments. The aim was to be helpful to users of the section.

The powers in the 2002 Act are novel and we are still at an early stage of their use. In drafting the order the view was taken that the object of the whole order was the removal of limits on the statutory powers of housing authorities and "managers" and accordingly the removal of burdens within the meaning of section 1(1)(a) of the Regulatory Reform Act 2002 together with new consequential provision. Restating a subsection of the current section 27, with modifications to take account of the extension of the powers to sub-delegate, seemed to us provision made with a view to removing burdens, not with a view to re-enacting provision imposing burdens, and so the test in section 1(1)(b) of the 2002 Act was not applied. If extensive amendment to existing provisions would not attract that test, it might be thought odd that the same changes made by way of a new provision drawing on existing drafting should do so.

It is possible to test this view by assuming for a moment that section 1(1) of the Regulatory Reform Act 2001 did not include a power to make provision with a view to the re-enactment of existing provision. In our view it would still be possible to substitute section 27 in the terms of the draft, because the substitution would be with a view to removing burdens, and incidental and consequential provision following on the changes required to remove the burdens. The fact that the drafting technique used would be substitution rather than piecemeal amendment would not make a difference.

The issue is whether the inclusion in section 1(1) of the 2001 Act of the power to make provision with a view to re-enacting provision necessarily reduces what would otherwise be the scope of the power to remove burdens. If so the power to remove burdens is only a power to make piecemeal amendments, and any restatement of existing drafting as part of the removal of burdens requires the minister to exercise of the power to re-enact provision. It is clear that the test of proportionality will not be attracted unless the minister is required to rely on the power to re-enact, rather than the power to remove burdens. If it were possible to rely on either power in a particular case there would be no need to rely on power to re-enact.

We think it is arguable that section 1(1)(b) is concerned with re-enactment of provision imposing burdens where substantial restatement of existing provisions is undertaken as part of the consolidation of existing legislation, where the power to make incidental and consequential provision would not be sufficient to cover the re-enactment in question. We accept that this view does produce a grey area, and that there is force in the contrary argument. Because the 2001 Act includes a power to re-enact provision the power to remove burdens does not include the power to restate any provision which imposes new burdens as part of the exercise of removing burdens. The power is confined to removing burdens by piecemeal amendment. For the purposes of this order we are prepared to proceed on this basis.

We therefore accept that the following existing provisions imposing burdens in section 27 are being re-enacted.

The aim of current section 27(3) seems to us to be to enable the terms of a management agreement to be regulated by the Secretary of State. Although no regulations have ever been made, the requirement to include any prescribed provisions in an agreement could arguably be considered a burden within the meaning of section 2(1) of the 2002 Act. On that basis, new subsections (3) and (4) would re-enact provision imposing the burden in respect of agreements under subsection (1).

The current requirement for the approval of the Secretary of State to the making of an agreement under subsection (1) is a burden within the meaning of section 2(1) of the 2002 Act. Subsection (6) of the new section 27 re-enacts the provision imposing that burden.

Subsection (6) of the current section 27 enables the Secretary of State to prescribe which functions are not "management functions" for the purposes of a management agreement under subsection (1). Although no regulations have ever been made, the functions which can be the subject of a management agreement are, potentially, restricted or limited and the provision may be said to impose a burden on authorities. Subsection (15) of the new section 27 re-enacts this provision and so the potential burden.

The Department considers that these burdens are proportionate to the benefit expected to result from their enactment for reasons similar to those given in the answer to Q10. The overriding reason is to enable the Secretary of State to exercise some degree of control in the public interest to any delegation of housing management functions under new section 27(1). The current burden and the benefits deriving from the proposed changes were considered quite extensively in the Explanatory Document at Chapters 3 and 6. The requirement for approvals enables the Secretary of State to ensure that, among other things, tenants rights have been maintained and that they have been consulted in line with his guidance on these matters. It also enables him to take a view on the value for money of any proposal and the appropriateness of what is being proposed. This is particularly his concern where authorities bring forward proposals for ALMOs and PFI arrangements.

The Secretary of State's powers to make regulations about the terms of an agreement under subsection (1) and what may not to be included as "management functions" are reserve powers to be exercised in the public interest if required to assist the effective and efficient operation of the powers to delegate such functions or to implement his policy on the use of those powers. No regulations have been made under the corresponding powers in the current section 27 and the Secretary of State has no plans to do so as part of the proposals in the draft order.

It is for these reasons that the burdens are considered to be proportionate to the benefits, both potential and real.

Q6 Please explain the intended effect of the proposed wording of subsections (13) and (14), and how it has that effect.

A6 The Department would like to apologise for any lack of clarity in the Explanatory Document. It agrees with the Committee's views on the effect of subsections (13) and (14) set out in paragraphs 12 to 14 of the Committee's letter. This is in line with the explanation of section 72(2) and (3) of the Deregulation and Contracting Out Act 1994 given by the responsible Minister in the House of Lords during the Committee stage of that Bill[60]. The Department considers that this will provide the same degree of protection to third parties as the words "as agent".

A7 Under the proposed subsection (13) the housing authority remains accountable and legally liable for the acts and omissions of a manager just as they are accountable and legally liable for acts and omissions of their officials.

The proposed subsection (14) only removes the liability of the authority where the delegated manager is liable for a criminal action or where, under the management agreement, in accordance with the ordinary rules of contract, the manager is to be responsible, as between itself and the authority, for any act or omission.

The management agreement will be made on the basis of the general principles of agency if the words "as agent" are used in section 27. In housing PFI it is the intention that the "Special Purpose Vehicle" ("SPV") will be liable for most of the risks arising from the exercise of the delegated functions instead of the authority bearing these. The words "as agent" in this context will not convey the meaning intended. Also in housing PFI there will often be a main agreement with further agreements made by the manager and various sub-contractors to exercise some or all of the housing management functions. The usual rule of agency is that the contracts should be undertaken on the principal's behalf. This would be difficult to apply where there are various different sub-agreements. By virtue of subsection (14), the SPV and any sub-contractors may make provision in a management agreement for their responsibilities as between themselves and, if the housing authority joins in such an agreement, as respects the authority

The interests of third parties will not be affected by the removal of the words "as agent" as an equivalent protection is provided by subsection (13).

A8 Section 27 of the 1985 Act derives from an early, and rare, power enabling local authorities to delegate (or contract out) statutory functions to external providers. The original section 27 (consolidated from Schedule 20 to the Housing Act 1980) permitted agreements only with housing co-operatives. It made no reference to a co-operative acting "as agent" of an authority. The current section 27 was substituted by section 10 of the Housing Act 1986 and the inclusion of the words "as agent" was intended to have the effect summarised in paragraph 9 of the Committee's letter.

Through Part 2 of the Deregulation and Contracting Out Act 1994, Parliament conferred on Ministers the power, by order, to authorise authorities to contract out (or delegate) other functions. Section 72 of that Act provided for the general effect of a contracting out by virtue of an order under section 70 of that Act.

The Department took the view, supported by many of the consultees, that the creation of a statutory agency was not always suitable for some of the arrangements currently proposed to be made under section 27 or which might be proposed in the future. As there is no difference in substance between a contracting out under section 27 and one authorised by an order under section 70 of the 1994 Act, it was thought appropriate to remove the statutory agency and align the earlier provision with the later, more modern formulation by including new subsections (13) and (14) in section 27.

Subsection (13) expressly preserves an authority's accountability to third parties for the exercise of management functions by a manager which was one of the more important reasons for the creation in 1986 of a statutory agency. Subsection (14)(a) expressly allows the agreement between the parties to deal with rights and duties as between themselves. If they so wished, the parties to a more traditional housing management agreement could agree to the creation of a contractual agency. Whatever they decide to do, in the case of more traditional agreements, there is no difference in substance as respects an authority's accountability to third parties between the statutory agency and subsection (13). On that basis, the Department considers that no necessary protection is removed by these changes.

Q9 Please confirm whether or not the Minister considers that the proposal would impose any new burdens.

A9 As stated in the answer to Q5, the Department originally considered that the primary aim of the draft order was the removal of a burden rather than the creation of new ones. The new provision in the order for conditions or requirements associated with the new power to sub-delegate were thought to form an integral part of an overall removal or reduction of the existing restriction on sub-delegation. The Department moved towards an acknowledgement that the changes did impose some new burdens but these were not thought significant. The Department accepts that the Explanatory Document should have included material on "new burdens" setting out the proportionality of any benefit expected to result from their creation and the Minister's opinion as required by section 3(2) of the 2002 Act; and that the draft order should have included recitals reflecting those opinions. It apologises to the Committee for its failure to do so.

It is considered that the following provisions of the draft order have the effect of imposing new burdens on either local housing authorities or managers:

— Subsection (5)(a): the requirement that the local housing authority should consent to a sub-delegation under this paragraph

— Subsections (7) to (10): although the overall effect of these provisions is intended to relieve authorities and managers from the requirement to seek approval to a sub-agreement or variation immediately in accordance with subsection (6), they are each part of the restriction or condition on the power to make sub-agreements or variations. By virtue, in particular, of the requirement that an initial moratorium period should not exceed 6 months, authorities and managers are required to pay very careful heed to the existence and duration of a moratorium period and to an implied requirement to apply for an extension of a period if they are not in a position to submit a sub-agreement or variation for approval before the end of a current period.

— Subsection (13): arguably this statement of a local housing authority's statutory accountability for things done or omitted in the exercise of functions is a "burden" in the widest sense

The requirement in subsection (3) to set out, in a sub-agreement, the terms on which functions are exercisable by a manager could, arguably, be considered a new burden but seems to us merely to state the requirements of the general law of contract. The terms of a sub-agreement are not subject to regulation under subsection (4). On balance, we consider that a new burden is not created but will consider carefully anything the Committee may say about this and any other matters in its Report.

(a) that the provisions of the order, taken as a whole, strike a fair balance between the public interest and the interests of the persons affected by the burden being created, and

A10 Considering the burdens identified in the answer to Q9, we consider the following benefits will apply as a result of the changes being proposed.

— Subsection (5)(a): the requirement that the local housing authority should consent to a sub-delegation under this paragraph. The benefit in respect of this requirement is that it ensures that there are adequate controls over who is appointed as a sub-delegated housing manager. This is something that we regard as essential to protect the propriety and suitability of such arrangements. In our view the burden is proportionate to the benefits expected to result from it of protecting the value for money and probity of any proposals.

— Subsection (6): the requirement for the Secretary of State's approval to the making of a sub-agreement and to the variation of provision in a head or sub-agreement in the specified circumstance. As with the above, we see the Secretary of State's approval as being an essential control in respect of ensuring such things as that tenants rights are protected, that they are consulted on any changes, that a proposal is in respect of Best Value, that it reflects the authority's housing strategy, is sustainable etc. Again, the burden is considered proportionate to the expected benefits in ensuring these principles are maintained.

— Subsections (7) to (10): the limitations on the moratorium period. As explained in the answer to Q9, these subsections have the effect of requiring authorities and managers to pay careful attention to the existence and duration of a moratorium period. There is also an implied requirement to apply for an extension of a period if they are not in a position to submit a sub-agreement or variation for approval before the end of a current period. The burdens again provide the Secretary of State with some degree of control enabling him to have some influence on periods where his approval has not been given. The benefits from this are that while enabling managers greater flexibility in making alternative arrangements there are still pressures on them to limit the amount of time they take in appointing a new sub-delegated manager and to ensure tenants' rights to consultation are complied with. We believe that there should be some constraints in these circumstances and therefore that the burden is proportionate to the expected benefits.

— Subsection (13): arguably this statement of a local housing authority's statutory accountability for things done or omitted in the exercise of functions is a "burden" in the widest sense. The benefit of the burden is that the local housing authority's responsibilities are defined and are clear to all those involved. Defining the liabilities in this way ensures that third party rights, especially those of tenants, are protected. We likewise consider that any burden is proportionate to these expected benefits.

(a) In considering the 'fair balance' of the proposals, the public interest is in the improvements to local authority services that will be possible if the draft order is approved and made. Any such improvements would reduce the burden on local taxpayers and Central Government funding and/or better quality service provision. One of the major benefits would be to local housing authorities in that the changes would enable them to have greater flexibility in the kind of agreements they can enter into and in the kind of potential managers. If the draft order is approved and made, they would have the opportunity of considering proposals which include sub-contracting and which may offer better value for money than the limited types of arrangements they can consider at present. In particular they would be able to consider proposals which provide investment opportunities in respect of the housing stock as well as improved housing management services. Tenants would also benefit in respect of more effective service delivery, better value for money for the rent they pay and better quality services. There are likely to be wider benefits where a contractor is providing additional services. These may include schemes for refurbished and better maintained properties, improved estate environment, reductions in crime, work and training schemes for residents etc.

The burdens would affect local authorities and housing managers in having to apply for consents and approvals etc. In this respect we have tried to reduce the potential burdens by taking into account responses to the consultation paper and making amendments accordingly such as enabling the Secretary of State to identify the circumstances in which he wishes to see further requests for approvals about changes to agreements, rather than making every change subject to further approval (see Chapter 12 paragraphs 12.13 to 12.15 of the Explanatory Document). In addition, throughout devising the proposals we have sought to apply the principles of the existing section 27 rather than impose arbitrary or unnecessary constraints. Consequently those involved in the housing management sector and who would be affected by the changes and are familiar with the current requirements of section 27 would not be unduly surprised at the burdens being proposed. Taking all of the above into account, we therefore consider that the provisions of the order, taken as a whole, would strike a fair balance between the public interest and the interests of those affected by the burdens being created.

(b) In respect of 'desirability', the proposal seeks to remove the burden on local housing authorities and managers deriving from the limitations on the power to sub-delegate housing management functions. As things stand under current arrangements they are limited as to who they can appoint since they can only have an agreement with a person who is going to undertake the work directly. They are precluded from entering into agreements which may offer better value for money through sub-contracting arrangements. This is particularly true in situations where the housing management function may be a part of a larger proposal encompassing things additional to housing management such estate regeneration or property refurbishment. The immediate benefits to local housing authorities would be to those authorities proposing to enter into PFI contracts where they will be enabled to meet their Decent Home and Best Value targets. Considering the extent to which the order would remove that burden and the beneficial effects identified here for authorities and managers that would be possible from the proposed changes it is considered desirable for the order, if approved as a draft, to be made.

Q11 Please list the consultees whose responses were received after the closing date.

A11 See Annex C.

A12 As will be seen by the list of consultees, we were at pains to widen the consultation rather than limiting it to just those involved in PFI. As a consequence we consulted all those in the local authority housing sector as far as we were able. We additionally used the Department's mailing lists for housing issues and as a result we in fact consulted more widely than is apparent from those identified in the consultation paper.

We consulted all local authorities and their representative bodies, the Local Government Association and Welsh Local Government Association. We consulted the National Housing Federation and the Welsh Federation of Housing Associations who represent all Registered Social Landlords (RSLs) and housing associations as well as the 200 largest RSLs in the country, not just those involved in PFI. We consulted tenants representative organisations, the Tenants and Residents Organisation of England, the Tenant Management Organisation Federation, the Association of Tenant Involvement and Control as well as tenant advisors groups and leaseholder groups regardless of whether they were currently involved in PFI or not. We also included three leading tenant federations, Plymouth Federation of Tenants and Residents' Associations, Bradford Tenants' Associations and Bristol Tenants' Federation - none of whom are involved in PFI - as well as Shelter and the Housing Centre Trust. We also discussed the consultation with the Tenant Participation Advisory Service who agreed to send out copies of the consultation paper to their Consultative Forum and who also advertised it on their website.

We are unaware of tenants' groups who have specifically opposed the establishment of Arms' Length Management Organisations and consequently did not target them specifically[61]. However, as identified above, we consulted tenant representative organisations who represent any such groups. As will be seen from Annex G of the Explanatory Document, the Minister Tony McNulty MP responded to an article in the Big Issue on the Housing Management consultation paper and invited responses to it across the board including from Mark Weeks of Defend Council Housing.

We also included those organisations who were currently involved in housing PFI projects as we felt that they may be in a position to offer informed advice or suggestions for improvement on what we were proposing.

Q13 Please explain why it was apparently not felt necessary to seek full consultation with representatives of all staff likely to be affected by the proposals.

A13 We included the Trades Union Congress in our initial mailing. Upon further consideration and advice from the TUC we then specifically consulted UNISON, the GMB, the Transport and General Workers Union, Amicus and UCATT.

Q14 Please indicate what effects the Department believes the proposals will have on local authority staff who may be transferred to employment with PFI contractors.

A14 The position of local authority staff transferred to employment with PFI contractors is protected by the Transfer of Undertakings (Protection of Employment) Regulations 1981 ("TUPE"). Previous guidance on these issues was issued by Cabinet Office under the title "Better Quality Services - A Handbook on creating public/private partnerships through market testing contracting-out" in 1998. Government has issued more recent guidance on staff transferring in these circumstances in the publication 'Statement of Practice on Staff Transfers in the Public Sector' issued by the Cabinet Office on 7 January 2000. Staff transfer matters will also be covered in the Department's Local Government Bill which was introduced to Parliament on 25 November this year and will cover such things as staff pensions.

Q15 Please supply to the Committee the Department's views on the "pertinent points" made by Unison in its response to consultation.

A15 The "pertinent points" in respect of the UNISON response were the general reference to workforce issues. In the current housing PFI projects we have concentrated very much on ensuring that they have tenants' support, that tenants are involved throughout the process as much as they want to be in the drawing up of the contract requirements and specifications, in evaluating bids etc. and that they will continue to be involved once the contract is let. The response served to remind us of the wider workforce issues.

Q16 Please indicate how the Department envisages the operation in practice of the requirement for tenant consultation.

A16 Annex F to the Explanatory Document makes clear how the Department expects tenants to be involved in and consulted on these types of contract. As was stated at the presentation to the Committee, we see consultation as part of a continuum where there is a constant exchange between tenants and the authority or the contractor (if this function has been delegated). As the guidance suggests, consultation can be in a number of forms and it is really up to those involved to find the format that works best for them. Where there is a proposal to change a housing manager we would expect the tenants to be informed at an early stage. Where consultation was a delegated function the SPV would have to consult tenants about to appointment of the new manager and take their views into consideration. The SPV would then have to forward its proposal together with details of the consultation with tenants (how the tenants had been consulted, the information given, questions asked etc., details of any comments from tenants) to the authority, which would then have to apply for approval from the Secretary of State. If the Secretary of State was content he would give the approval and the authority would give its consent in writing to the SPV (a contractual requirement).

A17 Section 105 of the Housing Act 1985 contains the statutory requirement to consult tenants on matters of housing management. Housing management is defined in the section as relating to the management, maintenance, improvement or demolition of properties, or the provision of services and amenities in connection with the properties but excluding rent and other charges. It further defines housing management as being those things which in the landlord's opinion represent new maintenance, improvement or demolition programmes or changes in practice or policy of the authority likely to affect tenants. The section requires the landlord to publish details of the arrangements it makes and make them available for inspection.

It is likely that the making of any new management agreement will come under section 105. However, 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.

Q18 Please explain the grounds for the Department's assessment that no risks are associated with the changes arising from the proposal.

A18 The guidance 'Good Policy Making: A Guide to Regulatory Impact Assessment' says that 'risk assessment involves identifying the hazard or situation which ¼¼ leads to harm or detriment¼' It is not apparent to us that there are any hazards or situations leading to harm or detriment arising out of the proposals for changes to section 27. There are of course risks in housing PFI projects not being successful, but there are suitable contract clauses in place which will offset this risk where for instance the contractor terminates the contract or which will invoke financial penalties for poor performance etc.

Where PFI and other investment arrangements are concerned risk is an important factor because of the emphasis placed on the accounting treatment of the project. In accordance with Treasury guidelines, risks must be clearly identified and allocated to the party best able to manage them. There are risks which the private sector will take on and some risks which the authority will retain but the emphasis is on managing them. However, our concern was with considering the risks associated with the delegation of housing management and not an assessment of the risks of PFI.

Q19 Please indicate whether the Department believes that the proposed changes have wider applications, and if so, what they might be.

A19 As we stated in the Explanatory Document and the consultation paper, we believe that the proposed changes may have a wider application in that they may enable authorities to enter into new types of contract for management and other services where sub-contracting is envisaged, where these may provide better value for money for tenants and where they may enable the authority to achieve its Best Value and other targets. Consequently the proposals focus primarily on enabling the sub-delegation of the housing management function. This will allow PFI schemes to proceed but may also enable other types of contract for this work although we do not have any specific arrangements in mind. In our view it would be unfair to restrict authorities by making the proposals increasing flexibility and lifting burdens etc.) apply only to PFI arrangements and indeed there seems to be no reason to limit them.

A20 Our assessment of the implications of the proposals for Arms Length Management Organisations (ALMOs) are that the changes will be the same as for any other housing manager in that they will also have more flexibility in sub-delegating their housing management functions should they wish to and should the authority consent to, and the Secretary of State approve, the arrangement. However, at this point in time we do not envisage circumstances in which an ALMO will wish, or be permitted by its parent authority, to delegate further its responsibilities for delivering the authority's housing management functions.

Our assessment of the implications of the proposals for Tenant Management Organisations (TMOs) is that they will not have an adverse impact on the development of new TMOs. In line with the Secretary of State's commitment to ensure that tenants rights are not affected in a PFI or similar arrangement, Council tenants will continue to be able to exercise the right to manage their homes whether their local authority landlord enters into a PFI arrangement or not. This right is statutory and derives from regulations made by the Secretary of State under section 27AB of the Housing Act 1985[62]. All "non TMO" management agreements under section 27 of that Act are required to contain sufficient flexibility to enable the establishment of new TMOs and PFI management agreements will be no exception to this. A copy of the guidance on these matters is at Annex B.

The proposals will have benefits for TMOs in that they will allow them to consider the benefits of sub-delegating housing management functions themselves. However, we consider that it is unlikely that many TMOs will choose to do so.

TMOs will be able to agree the nature of their relationship with their Council landlord and the extent of their respective liabilities as between themselves and set these out in a management agreement. Some may wish to continue to act as "managing agents" under the agreement, even if the provision in section 27(1) creating a statutory agency is omitted.

Our assessment of the position of existing TMOs is that they also will not be adversely affected by these proposals. Given that existing TMOs may be operating in areas covered by PFI proposals (one of our current local authority housing projects - Rochdale - includes such an arrangement) we consider that they have a special need for consultation at an early stage. In these circumstances, in evaluating requests to proceed with such projects the Department sees it as essential that the authority demonstrates the TMO support for the scheme at that time. The Department's guidance 'Tenant Involvement in Housing Management: Supplementary Guidance for Local Authorities entering into long term partnering arrangements' (Annex F to the Explanatory Document) will be revised to include a specific reference to the consultation needs of established TMOs.

As regards to Registered Tenants Associations (RTAs) we are not clear who the Committee mean by these. If the Committee is referring to tenants associations generally then these groups do not undertake delegated housing management functions and the RRO will not have a direct impact on their operation or an impact on the establishment of new tenant associations. Tenant associations will, however, have a role in terms of the consultation and monitoring arrangements set up for PFI schemes.

It is also unclear exactly who the Committee means by "Local Authority Housing Co-operatives". If they are referring to home ownership co-operatives where tenants have taken on the ownership of their homes as well as the housing management functions relating to their homes, then the RRO will not be relevant because it relates purely to situations where the housing management functions are being delegated. If they are referring to tenants' groups that have set themselves up as "management co-operatives" then they will be in the same position as Tenant Management Organisations above.

A21 The Department works very closely with authorities who propose to enter into new types of agreements with the private sector. In respect of PFI proposals, the Department has worked closely with those authorities undertaking these projects and have required them to submit their proposals, contract documents, intentions as regards tenants etc. for scrutiny at various stages in the procurement process. Likewise the Department has worked closely with those authorities proposing to set up ALMO arrangements. The Department also looks closely (and will continue to do so) at any requests for the Secretary of State's approval to ensure that all the necessary protections are maintained. In addition, District Auditors are familiar with the requirements for the Secretary of State to give approval for any housing management delegations and will look to ensure that the regulations have been complied with when they audit an authority's accounts. The Department is therefore satisfied that the necessary protections will be maintained.

Annex A

SECTION 27 PROPOSED REQUIREMENTS AND DISCRETIONARY REQUIREMENTS

The proposals under the Order are identified in the following table showing those which are existing and those which are new elements:

Proposal
Existing
New

An authority may agree that another person may exercise the authority's housing management functions through a management agreement.
Yes

The person or 'manager' may agree to a further person undertaking the housing management functions through a sub-agreement, subject to the authority's consent.

Yes

The housing management functions may be delegated within the management body to a committee, officer or employee etc.
Yes

The Secretary of State's approval will be required before any agreement or sub-agreement is signed.
Yes
Yes, in respect of sub-agreements

His approval will also be required for any proposed variations to an agreement or sub-agreement which the Secretary of State identifies when giving his initial approval to an agreement.

Yes

In addition, he may also indicate circumstances where his approval to a sub-agreement is not required.

Yes

The Secretary of State may identify a moratorium period of not more than six months during which time his approval will not be required for an agreement.

Yes

After the moratorium period has elapsed his approval must be given for any agreement to be valid or he may extend the moratorium period.

Yes

The Secretary of State may give approval to an agreement or variation to an agreement either as a general blanket approval to all authorities, approval to a particular authority or approval to types of local authority.
Yes

His approval may be in terms of a particular case or description of a case and may be with or without conditions.
Yes

Anything done by the appointed manager may be treated as having been done by or not done by or in respect of the authority except where the actions are in respect of the management functions in the agreement and in cases of criminal proceedings brought against the manager.

Yes

The Secretary of State may make regulations to identify those functions which he considers are not housing management functions, otherwise they may include those functions which are the authority's statutory duty to provide.
Yes

Any regulations made in this respect will be through statutory instruments and may be different for different cases or types of cases and for different geographical areas and may contain provisions which are incidental, supplementary or transitional.
Yes

The discretionary elements will be those deriving directly from the order and also those things that the Secretary of State takes into account when considering applications for approval and relate to the implementation of section 27. As a result of the proposal he will have discretion in:

i. the giving of an approval;

ii. instances where he will wish to give approval to variations to agreements;

iii. circumstances where his approval to a sub-agreement is not required;

iv. circumstances where a moratorium period will apply.

In considering an application, the Secretary of State will use his discretion about what he wishes to be informed about in order to reach a decision on giving approval. Since these are discretionary they may be subject to change but nevertheless the Secretary of State intends to issue guidance about what he wishes to be informed about in these circumstances in respect of PFI and any similar arrangements. These things are likely to be as follows:

v. the identity of the person with whom the management agreement is to be made;

vi. the identity of the person or persons who will undertake the management functions if the intention is to have sub-agreements;

vii. where sub-agreements are proposed, the interaction of these with the management agreement (details of which should be within the management agreement);

viii. details of the consultation undertaken with tenants on the appointment of a housing manager and the management agreements and the results of the consultation;

ix. the implications of any proposed variations to a management agreement or sub-agreement as identified in the Secretary of State's approval;

x. details of the consultation undertaken with tenants on any proposed variations to a management agreement or sub-agreement as identified in the Secretary of State's approval and the results of the consultation;

xi. the procurement of the initial management agreement, compliance with EC procurement rules where appropriate and tenant involvement in the process;

xii. compliance with any Departmental or Government guidance in respect of these arrangements.

Annex B

EXTRACT FROM 'STANDARDISATION GUIDANCE FOR LOCAL AUTHORITY HOUSING PROJECTS'

11.3 Right to Manage

11.3.1 Background Legislation

(a) The tenants of an Authority have the right conferred upon them[63] to require that the Authority enter into a management agreement with a tenant management organisation ("TMO"). The notice exercising the right to manage may only be served by a TMO which is a representative and accountable organisation serving a defined geographical area with a membership of at least 20 percent of both secure tenants and other tenants of the Authority in its defined area[64].

(b) A right to manage notice must relate to not less than 25 dwelling houses let under secure tenancies[65]. The management agreement requested by the TMO may include one or more housing management functions of the Authority[66]. If the notice is valid and accepted by the Authority, an "initial feasibility" study followed by a "full feasibility study" is undertaken to determine whether or not a TMO will enter into a management agreement with the Authority. During this time the TMO undergoes an intense period of training and development. If the "full feasibility study" determines that it is reasonable to proceed with the management agreement then, following a positive ballot of tenants the Authority is required to enter into a management agreement[67]. The whole process can take in the region of two years to complete.

(c) Regulation 8 of the 1994 Regulations requires the inclusion of a break clause in all housing management agreements entered into by an Authority to enable tenants to exercise the right to manage. The definition of management agreement[68] is sufficiently broad to cover a PFI contract and such a break clause should be inserted in the Contract. The effect of the break clause will be to allow the TMO to take on the range of functions identified in the management agreement with the Authority.

Where an existing TMO(s) provides services to accommodation which is intended to be the subject of the Contract, the Authority should give careful consideration to the relationship between the management agreement and the Contract before determining the boundaries of the accommodation to be included within the Contract.

11.3.2 Change Mechanism

(a) It is conceivable that the right to manage may be exercised in relation to the whole or part of the units of accommodation which are the subject of the Contract at any time during the Contract period.

(b) However, the Contract should contain a change mechanism to deal with adjustments to the Unitary Charge following the exercise of the right to manage. As mentioned previously, the right to manage can be exercised in relation to 25 or more dwellings and in relation to which of the Authority's functions as the notice exercising the right shall specify. As a consequence therefore, theoretically the right can be exercised in relation to as few or as many functions and units of accommodation as the TMO specifies and the Authority (following the feasibility studies) accepts.

(c) The consequences of the grant of a management agreement by the Authority to a TMO should be to exclude the units of accommodation from the Contract in relation to those parts of the service covered by the management agreement.

(d) It is recommended that the General Guidance[69] relating to Authority Changes should be applied in relation to the right to manage. It is unlikely, although possible, for the right to manage to be exercised before or during the construction or development phase. In which case the recommendations in relation to Authority Changes and Compensation Events as they apply to the right to buy should equally apply to the right to manage.

(e) Where the right to manage is exercised during the Service Period the recommendations in relation to Authority Changes or the same as those applied to the right to buy[70].

(f) When the management agreement with the TMO expires, the Authority may wish to include the services formerly provided by the TMO with the Contract. The consequences of this will again be an Authority Change.

(g) As with right to buy sales, the Authority will continue to be in receipt of PFI credits notwithstanding the occurrence of the exercise of the right to manage. However, the Authority will, unlike with the right to buy, continue to receive rental income to fund the housing revenue account and in turn any part of the Unitary Charge not funded from PFI credits. On the other hand, the Authority will also pay allowances to the TMO to cover its management activities. Furthermore, as there will be no disposal there will be no capital receipt for the Authority.

(h) The exclusion of the dwellings from the Contract in relation to those parts of the Service covered by the management agreement is the only feasible course of action open to the Authority and the Contractor. The Contractor should not be expected to take the risk of the performance of the TMO by way of the acceptance of the TMO as an Operating Sub-Contractor. There will also be an issue on the interface between the TMO and the Contractor in relation to the respective parts of the Service provided by each. In the circumstances, it is quite reasonable for the Authority to accept the risk of interruption to the Service and/or loss of damage caused by the TMO. These would be by way of a Compensation Event during the construction and refurbishment phase and provisions of similar effect during the Service Period. The risk and cost of damage to the Assets should also fall to the Authority by way of indemnity[71] and responsibility for insurance excesses and deductibles and increased premia[72]. The Contractor would also need to be exonerated from deductions for inadequate performance.

11.3.3 Termination Threshold

As in the case of the voluntary withdrawal of units of accommodation and the loss of units through right to buy sales, the reduction of the number of units in the Contract, through the exercise of the right to manage, may reduce the number of units of accommodation to a threshold beyond which the Contract is not sustainable either in financial or management terms. As a consequence, the same solution will prevail[73], namely voluntary termination with compensation payable accordingly.

Annex C

Details of late respondents

4Ps

Addleshaw Booth and Co

Anthony Collins Solicitors

Brighton & Hove Council Leaseholders Independent Forum

Camden Leaseholders Forum

Greenwich Council

LB Camden

LB Islington, Housing PFI Project Team

Local Government Association

London Borough of Lewisham