Examination of Witnesses (Questions 360-379)
13 JANUARY 2004
MR JOHN
CRAGGS, MR
ANDREW TAYLOR
AND DR
DAVID SMITH
Q360 Christine Russell: Is that breaking
promises to your tenants?
Mr Taylor: No. That is just something
that if we are able to perform the business plan and generate
better value from the business plan, we expect to bring our rents
within a new rent regime that was less than we originally predicted
and planned for in the long term. Generally, as regards rent restructuring,
our principle costs are building and maintenance costs and the
building and maintenance tends to exceed RPI considerably according
to the trade cycle and staff costs. Staff costs also appear to
be repeatedly exceeding RPI. To limit our rents to RPI will, over
the medium to longer term, bring a differential against us.
Q361 Christine Russell: The scale of
the problem that you have in Sunderland seems immense. You tell
us that nearly two thirds of properties that were transferred
were in need of upgrading and modernisation to meet standards.
Yet, in your submission, you paint really quite a rosy picture
of your finances.
Mr Craggs: If I can give you a
practical example of that. Yes, it was 70%, down to 66% non decent,
and will be about 45-46% by the end of this financial year. The
funny thing is that we could hit the Decent Homes Standard a lot
quicker than we were going to. Our original plan was to do all
the elemental parts in a house to meet the standard and tenants
have said, "We don't want you to do that. We only want you
in our house once. We want you to do everything once and then
get lost and leave us to live our lives. Don't keep coming back
and doing the fencing and such like later." When Andrew talks
about our performance of the business plan, because we only have
what we have . . . If you look at construction as an example,
our partnering deals with our contractors—we do 50% of that
in house and 50% is with external contractors—in this day
and age, with building prices going up the way they are, we have
had three years without an increase in building prices from our
construction partners and it goes back to what I mentioned about
the material supplies. It is about guarantee, about certainty
and about programming. We are doing an extra few hundred modernisations
this year than we originally expected and, in my parlance, that
is called an "overspend", but we now call it an "acceleration."
It is good news. Mr Betts spoke earlier about the extra cost of
delivering stock transfers, vis-a"-vis staying with
what you have, but there is so much value that you can squeeze
out of the system because of the certainty that is involved from
a wide range of suppliers.
Q362 Chairman: Are you knocking some
properties down, is that how you get it?
Mr Craggs: Absolutely.
Q363 Chairman: How many are you knocking
down in Sunderland?
Mr Craggs: 6,000 and quite a lot
of them are occupied. You can imagine the press we are getting
at the moment! It is a massive issue for us because although we
have got the money, we have only got it once and so we cannot
afford to waste it. We have used the neighbourhood assessment
matrix tool to look at issues of sustainability. It looks at the
private sector, it looks at crime, it looks at education, it looks
at all of those peripheral issues which are so important. Our
144 estates have been ranked from top to bottom and we look at
demand and Right to Buy levels and we have concluded that to pore
money into certain estates ain't going to work. There are legacies
of local authorities all over the country who have done that.
Q364 Christine Russell: Did the residents
know that at the point they voted to transfer?
Mr Craggs: No. Some of them are
in properties that are just not fit for repair. That is only part
of the story. The other part of the story is that we are going
to build 4,000 brand new homes in place of the 6,000 that we are
taking down and Andrew has secured quite a unique funding deal
of an additional—
Mr Taylor: —£300 million.
Q365 Chairman: I think we will have to
have a note about your funding deal.
Dr Smith: Low demand and difficult
to let properties are not the prerogative of the north because
in the south we have a lot of issues of low demand and very difficult
to let properties. One of the things that LSVT does is it renovates
very quickly a lot of its properties and we start to build new
ones. We build about 200 properties a year. What happens is the
gap between the worst and the best widens and there are properties
we transferred in 1996 that were perceived, with our municipal
hats on, talking to our tenants, as perfectly adequate flats and
they are now being demolished because they are not perceived by
the tenants to be perfectly adequate. Aspirations change. We drive
them up by what we do. What happens is what is deemed to be perfectly
adequate at the time of transfer seven years on is not and particularly
new building exposes that, renovations expose that. The difficult
to let properties and low demand ones are a really serious issue
in large areas of the south. On rent restructuring, you can imagine
our rents are nothing like the original rents that were promised.
We had locally negotiated rents where the tenants negotiated and
which had the components which they thought were important. There
is a presumption against refurbishment. If in the end, after spending
£35,000, the rent goes up by nothing or a very small amount
then the presumption will always be on redevelopment. It drives
some really good asset management strategies.
Q366 Mr Betts: The National Audit Office
has said that stock transfers were very much more expensive than
remaining with the local authority and it did not go on to say
that is because everyone is getting a lot more benefit as tenants
because of the improvements, it simply said they were considerably
more expensive.
Mr Taylor: The report looked at
one or two specific areas and I accept there is a hypothetical
assumption that they would cost more. One of the areas it looks
at is the cost of funding and it is comparing the cost of local
authorities borrowing money at PDRB rates, which is not a competitive
market place, to the private sector funding that is available
for stock transfers, but I think a more relevant comparison would
be the cost of private sector funds to the social housing market
compared to private sector funds elsewhere and that is a very
competitive market. The private sector is prepared to fund social
housing at the very best margins.
Q367 Mr Betts: You might say, if we put
the political consideration on one side, we would be better letting
the authorities get on and borrow the money because they can do
it more cheaply.
Dr Smith: My view is that because
we are freed from the internal management of local authorities
we become single focused. As a director of housing I had many
other worries other than just housing because of the corporate
nature of it. Our own focus is to deliver the goods for our tenants.
That allows us to whack on in a much more focused way.
Q368 Chairman: You have just told us
you are concerned about the schools in the area, you are concerned
about the level of crime, in other words you are still concerned
about all the issues that the local authority has going on there.
Dr Smith: Indeed. There are fantastic
partnerships. It is a two-tiered system of local government in
Hampshire. We were a district council, we were not a county council
and so we always had complex relationships with social services.
I think a single focus brings a lot of non-quantifiable benefits.
Q369 Mr Betts: The Government clearly
is of the view that we should be splitting the strategic and the
management functions of housing. Surely that leads to a situation
where you still have the director of housing sat there now doing
the strategic role and no management, but he is being paid the
same salary as before. One of the extra costs is the fact that
the people who then move with the stock transfer initiatives find
themselves with a lot bigger salaries. I bet your salaries have
gone up substantially compared to what they were when you worked
for the local authority.
Mr Craggs: Are you pointing at
me?
Q370 Mr Betts: All of you. That is the
reality. All of the senior management find that they get a big
boost in their salaries.
Dr Smith: I did not get a pay
rise for two years because my view was that we would not even
think about pay rises until we delivered the goods.
Q371 Mr Betts: Yes, but that is not the
norm.
Dr Smith: I could not say. You
are referring there to the split between the local authority's
enabling role and ours. Where those local authorities manage the
enabling role properly and invest in it properly it brings a completely
different focus to the whole housing delivery picture.
Q372 Mr Betts: You are the exception.
Everybody else has had a big pay increase.
Mr Craggs: I am not aware of any
large stock transfers where the local authority had continued
with the director, I do not think that happens. What does happen,
and it happened in Sunderland, is that the local authority takes
the opportunity to reorganise. In Sunderland they created a Director
of Regeneration and put the remaining strategic housing function
into that.
Q373 Mr Betts: The people who were previously
managing the properties in the local authority suddenly found
they had a much bigger salary than they had before, is that right?
Do your senior managers have much more in their pockets than they
had before?
Mr Craggs: Some will and some
will not. That is not the case with us.
Chairman: I think we must move on from
that.
Q374 Chris Mole: In your experience so
far, do the local authorities that have commissioned options appraisals
seek to engage the involvement of stakeholders such as housing
associations like yourselves?
Mr Craggs: We are getting significantly
more involved in that now as an RSL. Not many people go through
stock transfer twice. It is quite torturous. You do not see your
families for quite a while. Perhaps it is like being an MP, I
do not know. We have been through that and normally the local
authority then seeks the services of an external consultant at
whatever fee to bring in that advice. Clearly the guidance now
is to look seriously and much more closely at bringing in existing
RSLs to see whether they can assist in that process, and we are
certainly in that position now. There is one other facet about
LSVTs. Across the country housing associations are getting bigger,
there is a drive for there to be fewer of them in number but they
are larger because of the economies of scale, but all LSVTs are
getting smaller because they are selling off properties through
the Right to Buy scheme and a lot are demolishing properties.
There is a need to try and share that expertise because it is
valuable, it is quite unique in the marketplace and if we can
bring some expertise to the table and assist local authorities
in their option appraisals, where a lot of particularly district
councils simply do not have the capacity to continue delivering
their service whilst looking at the strategic options for their
service, usually because they have a very small number of staff
who would be expected to do both—
Dr Smith: Some do and some do
not. Some local authorities are only getting going on to their
options appraisals now.
Q375 Chris Mole: In Sunderland you have
developed quite a few contacts with local authorities. Looking
at those that perhaps have not progressed very far with their
options appraisals, they are going to have quite a "steep
challenge" in complying with the Decent Homes standard by
2010. Is that a fair view of your local authorities?
Mr Craggs: Yes.
Mr Taylor: I think you should
ask them directly. To be in a position where you have no stars
and strategy, you are heading towards 2004-05, leaves a very short
amount of time in order to deliver the strategy and to deliver
Decent Homes, yes.
Dr Smith: I think the position
in the south of England is that a fair number of authorities may
well be able to just about meet the Decent Homes Standard with
a bit left over. They will not be meeting the standards that we
talked about at the beginning.
Q376 Chris Mole: Dr Smith, you have referred
to the importance of a sophisticated approach to demand, supply
and asset management. What do you really mean by that?
Dr Smith: You have really got
to get stuck into the demographics.
Q377 Chris Mole: That is about older
people mostly, is it not?
Dr Smith: It is more complicated
than that. You are looking at tenure, you are looking at the demographics,
you are looking at changes in local employment, you are looking
at the changes in employability wage rates, changes in health
and you are looking at supply and demand and you are trying to
make some sensible decisions about what the thing will look like
in five years time.
Q378 Chris Mole: Does that criticism
apply equally to local authorities and RSLs?
Dr Smith: It should do.
Q379 Chairman: You have the problem that
you have borrowed money and yet you are not clear whether the
market is still going to be there in five years time for properties.
Dr Smith: I am very confident
about what the market will look like in five years time but I
am less confident how it will look in ten years time or twenty
years time.
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