Examination of Witnesses (Questions 460-478)
28 JANUARY 2004
MR JIM
COULTER, MR
DANNY FRIEDMAN
AND MR
NIGEL MINTO
Q460 Christine Russell: Can I move on
and ask you about how easy it will be for different types of Housing
Associations to reach the Standard. Will the longest standing
Housing Associations have more or less difficulty in reaching
the Standard for their properties?
Mr Coulter: There is a mixed picture.
The biggest proportion of the problem is by definition the stock
transfer sector. By and large that is progressing as part of the
transfer process business planning to meet the DHS and beyond.
Q461 Christine Russell: Why is that,
because the properties are in a worse condition?
Mr Coulter: It is a balance of
what the resource is within the business plan. There are two potential
problems for stock transfer organisations. There is that group
of stock transferred up to 1995 where we think the Standard as
it presently is defined may not be met in some cases. So there
needs to be some exploration of whether their business plans—because
many will be approaching or past their peak debt—can accommodate
more borrowing. More importantly, there is a rather perverse set
of issues being debated between Customs & Excise, Inland Revenue,
the Treasury, the ODPM and ourselves about an obscure thing called
"VAT shelters".
Q462 Chairman: You had better just explain
what a VAT shelter is to me.
Mr Coulter: We can let you have
a note about this because it is interesting and extraordinary.
The Disposals Levy Deduction England determination 2002—
Q463 Chairman: Wait a minute. Let us
suppose I want to ask the Minister in a few minutes what a VAT
shelter is.
Mr Coulter: I am sure he would
tell you because he has been involved in the correspondence. What
has happened is that a VAT arrangement was agreed with Customs
& Excise which meant that revenue-based repairs from stock
transfers from 2002 did not meet VAT. Previously they had also
been relieved, as all other landlords are, of Corporation Tax
on revenue funded repairs. The Revenue has now ruled on an interim
basis that Corporation Tax will be charged. The Corporation Tax
levy is actually greater than the resource created by the VAT
shelter. So the business plans of a number of organisations transferred
since 2002, since this determination went through Parliament,
are actually now adversely affected so there is bound to be an
impact.
Q464 Chairman: Is it big sums of money?
Mr Coulter: Yes. We could let
you have a note on that if you wish.
Q465 Chairman: Yes, please.
Mr Coulter: That is dealing with
the stock transfer side. On the so-called traditional side I think
there are two broad problems. One is the uncertainty about the
housing market in areas until their business plans are completed
and therefore associations can plan. I know you have had evidence
from some Housing Associations critically affected there who believe
that on their own resources they will not be able to meet the
DHS. That is one of the arguments that we have about helping the
public expenditure line for this. The second area is that a number
of particularly 19th century organisations with flatted stock,
the Peabodies of this world, have been the subject of your scrutiny.
The level of their need for investment goes well beyond the DHS
because it means the remodelling of stock. So in their case, for
example, they are looking in very great detail at remodelling
asset management and disposal which of course raises the question
of loss of stock in areas of very high demand. Thirdly, they are
looking at whether the rentals restructuring system in which Housing
Associations operate has enough headroom to pay for that reinvestment
out of own resources through borrowing rather than recourse through
a public sector grant.
Q466 Christine Russell: Are there geographical
differences between the north and south? Just explain a bit more
how it makes a difference to be in an area of high demand.
Mr Coulter: The historic position
is that if you leave out stock transfer the bulk of traditional
Housing Association stock is in the urban areas. So the Victorian
stock which is disproportionately represented in our sector as
traditional stock creates particular problems of renewal. If you
take the London situation where there is a significant amount
of flatted stock from the old trusts particularly in Central London,
the 19th Century trusts, the Peabodies, Guinesses, William Suttons
and so on of this world, you have got housing which may have been
adequate in 1890 but it certainly is not adequate in 2004 let
alone 2010 and 2020. So investment to remodel is important. If
those organisations do not have enough money to remodel in their
own balance sheets and extra borrowing capacity and they have
to sell those assets then you lose stock in areas where there
is huge demand, as the Government itself acknowledges.
Q467 Christine Russell: I want to ask
you whether or not size matters because I think there is something
in your submission that seemed to indicate that you have concerns
on the part of smaller authorities who are going to struggle to
meet the Standard.
Mr Coulter: We have some data
which shows that on average that may not be exceptional, but we
do have some concerns about whether in individual cases that would
be so. Until this year it has not been mandatory for the smallest
associations to produce a regulatory return on their DHS position.
There are about 28,000 or so homes covered in a large number of
Housing Associations, but the average position we believe is that
about 15% of those currently fail to meet the Standard. When that
information is available, probably in the late summer, both the
housing corporation as the regulatory body and ourselves as their
trade body will be in a position to step up advice, but it is
an area where there must be uncertainty, there is less understanding
of the detail.
Q468 Christine Russell: Is there going
to be pressure for mergers between the smaller associations?
Mr Coulter: It could add to that
pressure in the business environment which associations face.
It has to be said, if you look at the data about the balance sheets
of Housing Associations, the smallest associations on average
which have the strongest balance sheets because they have not
been growing are less geared than the largest associations. So
there is quite a detailed set of investigations that would have
to happen on a case by case basis about whether they could borrow
and meet the DHS of modernisation requirements or whether they
would be faced with other choices.
Q469 Mr Cummings: You tell the Committee
in your evidence that most Housing Associations can pay the costs
involved in meeting the Decent Homes target. What are the problems
for those associations who face difficulties, and how many associations
will be in the position where they cannot meet the costs?
Mr Friedman: I think we have already
indicated that there is a relatively small amount of stock that
we think will have difficulty in actually meeting those standards.
Some of that can be solved by the corporation enhancing the current
repairs fund that it has. We have not got an absolutely definitive
sum yet, but currently there is around (40 million a year in that
budget. We would say that probably to be safe and also to pick
up some of the issues that Jim has touched on in the housing market
renewal areas and some of the more traditional stock, we would
want to see something between £50 and £60 million a
year made available, but we are doing more detailed work on that
and that will be part of our submission to the 2004 Spending Review.
Q470 Mr Cummings: How many Housing Associations
will be in that position?
Mr Friedman: It is difficult to
say association by association. We look more at the amount of
stock that is available. I know you have had information previously
from other parties that numbered associations. We think it is
more complex than that. We do not have a definitive list of associations
and we would not want to hazard a guess about association by association.
I think it is more important to look at the type of stock that
different associations hold and which are the particular types
of stock which is liable to need extra resources putting into
it.
Mr Coulter: It is probably about
40,000 or so on present trends which may not meet the Standard
by 2010.
Q471 Mr Cummings: Bethnal Green and Victoria
Park Housing Association have expressed concern that the "rent
restructuring" in conjunction with the Decent Homes Standard
may generate problems for Housing Associations in the future similar
to those experienced by local housing authorities. Do you agree?
Mr Friedman: Yes. We do have concerns
about how the rent restructuring regime impacts on associations
where they are meeting the Decent Homes Standard. I would say
that in most instances there is not a problem, that the two regimes
can run hand in hand and associations can factor the Decent Homes
Standard in, but there are some problems. I think the first one
is a general problem which is about inflation and building costs
which are running at a far greater rate, between 6 and 8% is usually
quoted and the rate at which our members are able to increase
their rents. More specifically, we have picked up information
that some associations, although they will meet the Decent Homes
Standard with reduced rent incomes, have slowed down their maintenance
programmes and made them cover a number of years and to our minds
that is storing up longer-term maintenance problems for the future.
So they might get the baseline right now but in the longer term
they might be storing up trouble because of revenue flow. Secondly,
other associations are starting to adopt what has been described
as a just-in-time approach, ie doing repairs and maintenance work
when it comes up rather than having planned maintenance programmes
which in the short term may be cheaper but in the longer term
could be detrimental to the overall standard of the stock. Thirdly,
there are associations that operate in less popular areas whose
rents are scheduled to remain completely static or go down in
real terms and in those areas they do not have the option to dispose
of redundant stock to fund repairs because of market failure,
so again rent restructuring does impact on them. Finally, there
are associations perhaps in more high demand areas who have had
to make the trade off between different Government priorities
because associations are under great pressure in high demand areas
to develop more stock, to solve homelessness problems and to work
with key worker problems, but they need revenue flow to do it.
Rent restructuring constrains the revenue for this. So they may
not be able to do as much development as perhaps the Government
would like because they have to use resources correctly to meet
the Decent Homes Standard. That was a rather long answer to a
short question, but there are a range of problems associated with
rent restructuring in relation to the Decent Homes Standard.
Q472 Mr Cummings: Given the National
Audit Office findings with regard to the financial costs of stock
transfer relative to Council retention of stock, is it justified
for the Office of the Deputy Prime Minister to continue championing
and supporting transfers?
Mr Coulter: I think we are getting
into an area that is a very lively area with a very short time
to go. The briefest observation we would make is that Government
policy is for Government to determine.
Mr Cummings: You are entitled to an opinion.
Q473 Chairman: We will settle for a thumbs
up or a thumbs down!
Mr Coulter: We are quite happy
to give stock transfer a thumbs up because the financial data
in the NAO Report was based upon hypothetical examples which,
if you roll them back, are about 80p per week on the rents of
the houses affected. The other data in the Report shows significant
gains for residents and the NAO Report did not cover the opportunity
costs of no investment under the present arrangements which look
very unlikely to change under any government.
Q474 Mr Clelland: Mr Friedman talked
earlier about the wider issues and he seemed to suggest there
is some tension between the Decent Homes target and wider community
and environmental issues. Do you think it is feasible or even
desirable to fully integrate the Decent Homes target with the
Sustainable Communities plan?
Mr Coulter: I think there is a
policy and a resources conflict. The Sustainable Communities plan
has been admired by many and that includes us. It is comprehensive,
it has a long-term vision, but it has a number of lead points
in it, most obviously the growth areas which some consider to
be biased and therefore unbalancing other priorities for housing
needs in other parts of the country. We certainly want to see
the regional inequity in the present process addressed and that
comes back to the position faced in the Spending Review. The Barker
Review makes clear that there is a shortage of affordable housing
supply. It is our view that regeneration-led housing investment
also needs more resource. So the Chancellor and the Government
generally is going to have to address that particular question
in the not too distant future. There is an underlying conflict
of shortage of resource. Our view is that Housing Associations
need to take their responsibilities to use their assets creatively
to meet their obligations, but Government needs to do its part
too and that includes more capital investment in the major repairs
area.
Q475 Mr Clelland: Do you think the local
authorities have sought adequate involvement from stakeholder
Housing Associations when they have been commissioning option
appraisals following the ODPM's guidance of June 2003?
Mr Coulter: At this stage I think
there is probably not a sufficient level of engagement. On the
whole stock transfer has been to standalone organisations and
we establish a very early relationship with those standalone organisations.
It is less frequent than local authorities talking to the existing
Housing Association stakeholder community about what the broader
options would be. That is something the Department wants to change,
but that has not happened yet.
Q476 Chairman: You have referred a couple
of times to the fact that you are putting together figures to
make a bid to make sure that the Government takes into account
in the spending round the needs of housing. How soon are those
figures going to be available?
Mr Coulter: Our target is to complete
our full assessment of submission, which we are doing jointly
with the Chartered Institute of Housing, by the end of February,
but in the short term we could let the Committee have working
notes so you could see our submissions.
Q477 Chairman: Can you give us a global
figure yet?
Mr Coulter: We can do that within
a few days. As Danny observed earlier, we think that the £40
million repair line in the housing corporation's approved development
programme needs to be £10 to £20 million higher over
the three-year spending period that we are debating now. It is
more difficult to estimate the cost and the resource impact of
the VAT shelter point which I made, that is still under exploration,
it still sits with the Treasury for policy determination, but
we can give you more detailed information about that.
Q478 Chairman: Those figures would be
very helpful. Can I thank you very much for your evidence.
Mr Coulter: Thank you, Chairman.
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