Select Committee on Office of the Deputy Prime Minister: Housing, Planning, Local Government and the Regions Fifth Report

4 Social housing

120. All homes in the social housing sector, in other words homes owned either by Local Authorities or Registered Social Landlords (RSLs), have to comply with the Decent Homes standard by 2010. Many of the key issues and concerns brought to our attention during our inquiry relate to the policies directed at achieving the target in this sector. The concerns of stakeholders relate not only to levels and inequity of funding available under different scenarios, but also in some cases to the underlying policy agenda being pursued through the Decent Homes funding mechanisms.

Local Authority housing

121. In 2001, Local Authorities in England owned and managed some 2.8 million homes, and approximately 43% of these failed the Decent Homes standard. In other words, although marginally better than the privately rented sector (49%), local authority homes were much more likely to fail the standard than homes owned by RSLs (28%).

The separation of stock management from strategic housing management

122. The Government has consistently favoured the separation of strategic housing management from the day-to-day management of stock in local authorities. In the 2000 Green Paper, the ODPM stated that,

"…we strongly favour the separation of authorities' strategic and landlord responsibilities for housing. This will strengthen both roles."[113]

123. In practical policy terms, this has led the Government to embrace the principle of stock transfer whereby local authority housing stock is transferred to the ownership and management of Registered Social Landlords (RSLs). The stock transfer policy dates back to 1988. Since 2001, it has become central to the Decent Homes policy because the Government has refused to provide specific funding for the achievement of the Decent Homes target for stock retained under the management of Local Authorities. Unless local authorities are able to fund the achievement of the Decent Homes target out of their existing funding streams, they are obliged to either transfer their stock to an RSL, or else to set up an Arm's Length Management Organisation (ALMO), or a PFI scheme.

124. The Committee regrets the change of policy which has taken place since the commitment by the then Secretary of State, Stephen Byers, in 2001 that sufficient funding would be available to bring all social housing up to the Decent Homes standard regardless of whether tenants opted for the Local Authority to retain stock management in-house.[114]

125. The Government is in effect using the Decent Homes target as an indirect means to lever local authority housing stock out of direct local authority control, or even ownership. There is no indication that the Government is wavering in its pursuit of the separation of strategic management and stock management. In its memorandum to this Committee, the ODPM reiterated the commitment to separating strategic housing management from stock management by declaring that:

"To make best use of those resources the Government makes available, it will only provide additional funding to councils that separate their landlord and strategic functions. This provides a strong incentive to better performance; ensures a sharper focus on the two distinct housing functions; and guarantees that tenants have a greater role in the future management of their homes."[115]

126. However, the Committee heard evidence to suggest that there is no clear positive correlation between a separation of the two tasks and excellence in either strategic management or stock management. The Audit Commission indicated that the issue is not as straightforward as the Government would have us believe:

"there is no indication that the 90 authorities who had sold their stock were better at strategic work than the ones who had not." […] "I do not think there is any evidence to support the fact that splitting the roles guarantees better performance."[116]

127. The Chartered Institute of Housing (CIH) came to much the same conclusion, arguing that there is no theoretical or practical reason why Local Authorities cannot handle both the strategic management of housing policy as well as managing a portfolio of social housing at ground level. The CIH said that, whilst authorities have not been good at handling both tasks in historical terms, with proper guidance there is nothing to stop them from doing both tasks well in the future.[117]

128. The Committee recommends that the Government revisit its dogmatic pursuit of the separation of stock management and strategic management of housing. A flexible policy and a level playing field is needed so that tenants and Councillors can tailor solutions to suit local circumstances. In some cases, the optimal solution, as well as the one preferred by tenants, may well be that the Local Authority retain full ownership and management responsibilities.

The funding models available to local authorities

129. The Government has made three funding models available to Local Authorities in pursuit of the Decent Homes target. The options are stock transfer, the creation of an Arm's Length Management Organisation (ALMO), and the creation of a PFI scheme (Private Finance Initiative). All Local Authorities are obliged to carry out a thorough options appraisal and have it checked and signed off by the Government Regional Office in their area no later than July 2005.[118] Some Local Authorities may also have a fourth option available to them, namely the retention of their housing stock under Council management. However, this is only a realistic option for authorities who are able to achieve the Decent Homes target without any extra funding. It will only become clear how many Authorities are able to pursue this option once all Local Authority options appraisals have been signed off by the ODPM.

Stock Transfer

130. The first option is for Councils to transfer their housing stock to a Registered Social Landlord (RSL), which may either be an existing RSL, or one set up specifically for the purpose of receiving the Council's stock. Some Councils have transferred all their stock to one RSL, for example Sunderland.[119] Alternatively, a Council may choose to split up its stock by transferring chunks to different RSLs, possibly retaining some of the stock in Council ownership, a model pursued for example by Liverpool City Council.[120] A total of 147 councils have transferred all or part of their housing stock to RSLs, covering nearly 800,000 homes.[121]

131. Stock transfers are seen as having a number of advantages. Perhaps most importantly, RSLs are able to raise capital investment funds by borrowing against future rental streams, without affecting the Public Sector Borrowing Requirement (PSBR).[122] This source of funding has ensured that the majority of Housing Associations can be relatively confident of achieving the 2010 target.[123] Such confidence is, however, subject to the restrictions imposed by rent restructuring as discussed in paragraphs 175-182 below.

132. The National Housing Federation highlighted a wide range of benefits from transfers, including the idea that Housing Associations can play a wider role in the community:

"Of the various mechanisms open to Local Authorities the stock transfer choice is [a] well-tried and effective method. Transfers have brought not only investment to achieve the Standard but improvements to homes above the Standard and other added value to communities. […] Stock transfer has been a cost effective and efficient way to achieve not only the Decent Homes standard but through its significant regeneration impact to facilitate the achievement of a range of other PSA targets such as reducing worklessness, improving health and educational standards as well as reducing the fear of crime and overall community safety."[124]

133. The NAO Report evaluating the merits of Stock Transfer as a means of achieving improvements in social housing also found that transfer has a number of advantages in terms of stock management and tenant services. However, importantly, the NAO concluded that all in all, stock transfer has turned out to be more expensive than stock retention by local councils.[125] The ODPM acknowledges the extra cost of transfers, but nonetheless believes it to be a valuable and worthwhile policy. [126]

Arm's Length Management Organisations

134. The second option available to Local Authorities since April 2001 is to create an Arm's Length Management Organisation (ALMO) and transfer the full management of the Council's housing to this organisation. Under this scheme, the Local Authority retains ownership of the stock. In recent years, ALMOs have come to be seen as the key alternative to stock transfer, but importantly, this option is only available to Councils which receive a two-star (or higher) rating in the Audit Commission's inspections of their housing management.[127] Once an ALMO is established, and has itself received a minimum of two stars on inspection by the Audit Commission, extra funding for achieving Decent Homes is potentially unlocked.[128] ALMOs have to bid for funding from a ring-fenced budget.

135. ALMOs receive significant extra investment funding as compared to Local Authorities who retain the full management of their stock. Conversely, ALMOs are unlikely to have access to the levels of funding which many RSLs can achieve, because like Local Authorities, ALMOs cannot borrow freely. In other words, there is no level playing field between different models, and this inequality is tiered over several levels.

136. One problem which arises for ALMOs is the fact that they are allowed to spend only a very limited proportion (up to 5%) of the public funding allocated to them on wider environmental investments such as, for example, communal areas.[129]

137. Westminster City Council and its ALMO, CityWest Homes, painted a very positive picture of the benefits of creating an ALMO, not least in terms of tenant participation. They lent support to the Government's argument for the separation of stock management from strategic housing management and argued that although Westminster City Council had an excellent record in terms of tenant involvement in their housing management, creating an ALMO had led to further developments by empowering "residents to have a direct involvement in decision-making."[130] CityWest Homes they told the Committee that an ALMO:

"…is the most resident friendly approach to managing housing, it allows residents to get involved right at the core of their properties in terms of looking at what we are going to deliver on their estates. We have area boards and they have made a tremendous difference to our decision making process and residents have reacted very positively to that. It has allowed us to concentrate on the Decent Homes programme rather than being bothered about tenure issues, which I can see has slowed some authorities down. We were lucky, we were able to go into round one and have benefited now, and we are £20 million worth of ALMO investment already into the programme."[131]

138. A number of Local Authorities with high performance ratings have opted for an ALMO only because they were unable to achieve adequate investment funding with their first choice - stock retention. Hammersmith and Fulham is an example of a three-star authority where both tenants and the Authority wished to retain stock management in-house,[132] but where the lack of a level playing field for funding made this option unviable. Hammersmith and Fulham are now pursuing their second preference, the ALMO route. However, the Hammersmith and Fulham Housing Commission told the Committee that:

"If the money had been made available to the council within the existing structure and the effort that had gone into the options appraisal and setting up the ALMO had instead gone into setting up the programme it [Decent Homes] could have been delivered much more quickly."[133]

139. In the Committee's view, Arm's Length Management Organisations are not without virtues, but for well-performing Local Authorities where both tenants and the Council have a preference for stock retention, ALMOs are an entirely unnecessary diversion of time and resources with the sole aim of unlocking Government funding. There is no reason why the advantages often cited in relation to ALMOs, i.e. increased tenant participation and satisfaction could not be achieved through in-house stock management. We have not heard evidence that creating an ALMO per se enhances the achievement of Decent Homes, or indeed of tenant satisfaction. The option of creating an ALMO should continue to be available to Local Authorities, but there should be no financial incentive for Councils to do so.

Private Finance Initiative - PFI

140. The third, and least utilized, funding option available to Local Authorities is the creation of PFI schemes. Under such schemes, the Local Authority retains ownership of the stock, but a long-term contract, usually of 25-30 years, is awarded to a contractor who becomes responsible for repairs and other investments as well as the management of the stock throughout the contract period. The Government contributes with extra funding in the form of PFI credits, and the contractor also raises money privately. However, PFI is generally not considered to be a 'whole stock option', but rather a solution for individual estates.[134] The CEO of CityWest Homes commented on PFI:

"…in terms of limitations revolving round having to hand over the management of stock to a third party, it is almost like a stock transfer in terms of there is a 25 to 30 year arrangement quite often. As an ALMO we would welcome the ability to go into individual [PFIs] for components of our stock, for instance lifts, communal heating systems where we can go into a 25 to 30 year arrangement but not necessarily have to hand over the management of the stock to a third party."[135]

The ODPM told the Committee that they see PFI as making a significant contribution in terms of achieving Decent Homes.[136] However, the figures would suggest that this is some way off, given that only a grand total of 18 Local Authority PFI schemes encompassing approximately 25,000 homes have so far been approved.[137]

141. In the Committee's view, PFI schemes are not well suited as a key instrument for achieving Decent Homes. The schemes are highly complex, and unsuitable as whole-stock options. Furthermore, they do not guarantee increasing levels of tenant participation and choice, one of the key aims of the Government.

Local Authority retention of housing stock

142. If a Local Authority can demonstrate that it is able to invest sufficiently to achieve the Decent Homes Standard across their stock without any extra funding, they may choose to retain and manage all their stock themselves. Few authorities have been in a position to do so, but some of those that have, such as the City of York, have pointed to the complete lack of provision by the ODPM for this route:

"There is a lack of recognition and support for Authorities which have been through the process and have opted to keep the housing stock in house. The numbers of Authorities that are in a position to do this may be small but currently there seems to be no recognition from Government that this is even an option. The Decent Homes target has given Local Authorities an urgency to access increasing levels of investment but it is this need for investment that is driving the agenda on whether Local Authorities retain their housing stocks and not the over all quality of the service delivered to tenants and the wider community."[138]

143. The ODPM's resistance to direct Local Authority management of stock would appear to be rooted primarily in the conviction that the strategic and stock management roles are best separated, and that stock management is best performed by dedicated organisations independent from Local Authorities.

144. It is fair to say that some Local Authorities have not managed their stock well in the past, and that it may be necessary to consider alternative options for Councils which consistently perform poorly in terms of stock management. On the other hand, some of our witnesses, for example Unison, argued that Local Authority retention of housing stock represents the fastest, most efficient and most cost-effective way of achieving the Decent Homes standard.[139]

145. The Audit Commission which has been inspecting Local Authority Housing Management since 2000 told the Committee that:

"Our observation about their performance, in the context of landlords to start with, has been disappointing. Their performance as landlords has been not particularly strong on repairs and maintenance but has given value for money on procurement issues, and they have not been making the right kind of strategic decisions around how to invest in their own stock."[140]

146. However, the Audit Commission also indicated to us that there are improvements in the quality of housing management by Authorities that have retained their stock, albeit the picture is not yet universally positive:

"The first results from looking at Decent Homes where authorities have not transferred stock have been quite positive. The reparations the district councils have been making, having learned from watching how other authorities have or have not done their jobs properly, have been quite encouraging. The number of authorities who are getting positive scores out of CPA for their housing work for districts is actually higher than I would have anticipated. That is a good sign. We are actually witnessing some learning across local governments about how to do things better, which is really what is important."[141]

147. Furthermore, the Audit Commission noted that an encouraging mentality shift is taking place whereby housing organisations, be they Local Authority managed or ALMOs:

"…actually now recognise their housing responsibilities and performance as really important. I think that is a significant shift."[142]

148. A great deal of evidence received by the Committee from tenants and Local Authorities alike indicated that funding mechanisms are needed which would make stock retention and direct Council management a viable and realistic option in cases where both tenants and the Council prefer this route. Such funding mechanisms could take two forms, either an extension of the ability of Local Authorities to borrow against future rental streams, and additional Government funding for investment.

149. The limited prudential borrowing regime which has just come into force as a result of the Local Government Act 2003 does not give local authorities the same freedoms to borrow as Registered Social Landlords. The ODPM described the change thus:

"The prudential system will apply to all authorities, releasing them from the need to get Government approval to borrow. It is expected to give authorities greater flexibility to manage their financial affairs to make best use of resources. It will not, on its own, allow them to borrow significantly more as it will not provide authorities with any more resources to service additional debt."[143]

150. Therefore, in practice, the ability to raise capital funding through borrowing is still severely restricted for Local Authorities. However, judging from comments made to this Committee by Mr Irwin of the Audit Commission, the Government is considering whether to grant local authorities and ALMOs some further rights to borrow. The following exchange took place during our inquiry:

Mr Betts: "Is the Audit Commission looking at whether there should be a relaxation, for local authorities and ALMOs to borrow against their rental stream?

Mr Irwin: We are looking at that. We understand that ODPM and the Treasury are looking at that and it may well be an issue that is picked up in the comprehensive spending review 2004."[144]

151. UNISON proposed that direct investment in Local Authority housing stock should be made possible by the government granting an 'investment allowance' to local authorities.[145] This idea first appeared as a 'proposal for radical change' in the ODPM's August 2002 consultation paper - A Way Forward for Housing Capital Finance, which explained that an investment allowance would be an additional revenue stream through the Housing Revenue Account (HRA). The allowance would create "'headroom' within the HRA, enabling Local Authorities to take advantage of the new prudential borrowing regime."[146] The ODPM has not made clear why this proposal was rejected in the subsequent reform of local authority housing finance.

152. The prudential borrowing rights introduced through the Local Government Act are not sufficient to create a level playing field. The Committee recommends that Local Authorities be granted wider rights to borrow prudentially against rental income streams for the purpose of improvements to their stock and to help create sustainable communities. We recommend that the Government reconsider adopting the principle of investment allowances to Local Authorities.

153. Apart from enabling Local Authorities to borrow on an equal footing with Registered Social Landlords (RSLs), it would clearly be fair for Local Authorities to receive the same levels of Government investment grants as those available to ALMOs or PFI schemes.

154. The Committee agrees with those stakeholders who argue that Local Authorities hold the potential to manage housing stock just as effectively as RSLs, ALMOs or PFI schemes. Consequently, Government financial support available for investment in Decent Homes under those schemes should be available on an equal footing to Local Authorities managing their own stock.

The tension between tenant choice and Government funding options

155. According to the PSA Plus Review, tenant involvement in decision-making is key.[147] Local Authorities are obliged to fully engage tenants in the options appraisal process, and the conclusions must be supported by tenants.[148] However, the Chartered Institute of Housing argued that there is an inherent tension in having to:

"…balance the requirement for a local authority to bring all its homes up to a decent standard with the aspiration to empower tenants to make a choice about what option they want. There are local authorities out there who have gone through very rigorous option appraisal exercises, who have had tenants, juries and symposiums and all sorts of good practice mechanisms, but the tenants have concluded at the end of the day that they want option A and that has not been deliverable for the local authority. An example would be a three star authority who cannot meet the Decent Homes Standard through its existing resources but whose tenants want to retain the stock themselves or a local authority whose tenants choose the ALMO route but who do not have enough stars to make that a realistic option. On the one hand you have asked tenants and on the other hand you have said "I'm sorry, we can't deliver the one you chose"."[149]

156. This argument is illustrated by several high-profile cases where tenant ballots have left Local Authorities in catch-22 situations where the only financially viable routes for achieving the Decent Homes Standard have been rejected by tenants. Birmingham City Council is one such example. Birmingham City Council was far from being able to fund the investment required to achieve the Decent Homes standard out of its existing funds, it did not qualify for the ALMO option due to poor performance, and PFI was unfeasible for the levels of repairs required and the quantities of stock in question. In other words, stock transfer to a Registered Social Landlord (RSL) was the only game in town. In September 2003, Housing Today summarised the situation in gloomy terms:

"In April 2002, the city's 86,000 council tenants overwhelmingly rejected the department's plans for stock transfer - a clear vote of no confidence. In December last year, a comprehensive performance assessment rated the housing service as one out of four. Earlier this month, an internal report conceded that subsequent targets on repairs, lettings and neighbourhood maintenance were unlikely to be achieved this year."[150]

157. Birmingham City Council was effectively left with no available route to achieving the Decent Homes Standard by the target date of 2010, and now two years down the line, a complete solution still remains to be found.

158. More recently, the London Borough of Camden has ended up in a similar position. The housing management of the Borough of Camden was given a three star rating by the Audit Commission,[151] so unlike Birmingham, Camden had the option of setting up an Arm's Length Management Organisation (ALMO) to manage its housing stock, as well as the PFI and stock transfer options.

159. Following their options appraisal, it was concluded that the Authority would be unable to fund the necessary investment for achieving the Decent Homes target out of existing funding streams, and it was decided that an ALMO represented the best option for the Authority. However, following a lengthy process of bidding for ALMO funding, and subsequently of balloting tenants, in January of this year, a majority of tenants rejected the ALMO option. Camden has subsequently balloted tenants on one single estate on a proposed PFI scheme, but this proposal was also rejected by a majority of voting tenants.[152] Camden summarised the situation thus in evidence to the Committee:

"None of the other options are viable for Camden and as things stand resources will not only fall way short of Decent Homes they will result in a declining investment programme."[153]

160. The Committee has been deeply concerned to learn of the catch-22 position in which some local authorities now find themselves. The Committee recommends that, as a matter of urgency, the Government provide constructive alternative options for Local Authorities in this situation.

161. Following the Camden vote, Cllr Jane Roberts wrote in the Guardian that:

"While the government believes strongly in the importance of "choice" in public services, its strategy for council housing is so prescriptive that a highly performing housing service, such as Camden's, cannot access much-needed resources for repair and improvement work without acting against the wishes of the majority of its tenants."[154]

162. The London Tenants Federation, supported by 16 borough-wide tenant and leaseholder organisations in London - representing tenants and leaseholders of more than half of London's boroughs that still have council stock - pleaded in an open letter to the Deputy Prime Minister that:

"…housing management structures should be the outcome of decisions made by tenants and their local authorities about what works best. For some this may be Arm's Length Management. However our view is that such decisions should be prompted neither by financial need nor the existence of preferential funding arrangements. Whatever structures are chosen, tenants must all be treated with equality. Funding arrangements should therefore be the same for all."[155]

163. The Committee fully supports the Government's commitment to tenant choice and involvement in determining how Local Authority housing should be owned and managed. However, the commitment to tenant choice is a charade unless Local Authorities are able to act in accordance with the wishes of their tenants. We recommend that the Government take immediate steps to ensure that where a majority of tenants wish for their homes to remain under Council management, they are not penalised when it comes to access to funding for investment in Decent Homes or any other policy initiatives.

164. Some of our witnesses argued that stock transfer (and in some cases ALMOs) provide a better framework for tenant involvement than Local Authority management. Indeed, the Atlantic Housing group maintained that stock transfer Registered Social Landlords (RSLs) represent the most successful method for achieving set standards for accommodation because of the way in which they involve tenants:

"the very strong tenant presence that there is in LSVT's [Large Scale Voluntary Transfers], on the board, within formal consultative structures and increasingly as part of more sophisticated consultation and participation arrangements means that the primary focus of the LSVT, i.e. the achievement of a significant improvement in living conditions over a short period is never lost."[156]

165. Furthermore, the Government and some other witnesses maintained that tenants in Local Authorities where stock transfers and ALMOs have been carried out tend to be more satisfied with the housing service they receive than they were before the change of management (and, in the case of transfer, ownership). The Minister for Housing, Keith Hill, told the Committee that:

"We believe that the evidence clearly suggests that the PFI transfer or ALMO routes deliver a better service to tenants, they engage tenants in a way that conventional housing management does not engage tenants. We think that there are other advantages to hard-pressed local housing authorities as well."[157]

166. However, with regard to tenant satisfaction pre- and post-transfer, it is worth bearing in mind that tenants who have gone through a transfer or ALMO process are, in a sense, a self-selected group drawn from populations of tenants where the majority voted in favour of the change of management. In other words, it is quite probable that post-transfer satisfaction is associated with pre-transfer preferences for the transfer to go ahead. Furthermore, it is also likely that the availability of extra investment funding in itself leads to increasing levels of tenant satisfaction, and hence such increases may not be related to changes in the form of management. The Committee is not convinced that ALMOs and stock transfer RSLs necessarily lead to better tenant participation and satisfaction. There is no reason to suggest that the same results and management innovations could not be achieved under Council management, given equal resources. The Hammersmith and Fulham Housing Commission is an example of Local Authority innovation and best practice development in this area.

A level playing field?

167. As suggested by the analysis so far, there are a number of ways in which the playing field is anything other than level when it comes to the management and funding mechanisms of Local Authority housing stock.

168. First and most crucial is the differential in the funding available for investment in Decent Homes under the four different ownership and management options which are, at least theoretically, available to Local Authorities. Authorities who choose to retain and manage their stock themselves will have to demonstrate their ability to comply with the Decent Homes target without any extra funding. Arm's Length Management Organisations (ALMOs) with a minimum of two stars are in a better position than Local Authorities who manage their own stock, since the creation of an ALMO triggers extra Government funding (provided sufficient stars are achieved on inspection). However, the ALMO funding position is nonetheless considerably less advantageous than that enjoyed by stock transfer companies, which are able to take out extensive loans against future rental income. Neither ALMOs nor local authorities are able to borrow in this manner. ODPM officials confirmed to the Committee that there is a general tendency for greater levels of funding being unlocked through transfer as compared to the creation of an ALMO.[158] The fourth option available to local authorities, PFI, is used relatively rarely, and it is not normally considered to be a 'whole-stock' option for local authorities.

169. The Committee believes that there should be a level playing field between local authorities with retained stock, ALMOs, and stock transfer companies in terms of the mechanisms and volumes of funding available to them. The current situation unfairly steers tenants towards the stock transfer option because the funding available is unlimited whereas the funding potentially released under the ALMO scheme is finite, and funding for Local Authority managed stock is even more restricted.

170. The second dimension of inequality arises when comparing ALMOs and stock transfer Registered Social Landlords (RSLs). RSLs are able to determine themselves what proportion of the available funding to invest in Decent Homes, and what proportion to invest in the sustainability of the general community and wider environmental aspects of the stock. ALMOs, on the other hand, are only allowed to spend a maximum of 5% of their funding allocations for 'other purposes' such as improvements to the general environment.[159]

171. We noted earlier in this report, that it is crucial to invest in the sustainability of communities, including communal areas and the general fabric of estates. We concluded that investment in Decent Homes and in the sustainability of communities needs to be integrated, and that one without the other is unlikely to provide an environment where people are happy to live.[160]

172. We recommend that a level playing field between the different ownership and management options should encompass not only funding mechanisms directly related to the Decent Homes target, but also funding for wider investment purposes. Based on local circumstances, managers and tenants should themselves be able to determine how to balance investment in Decent Homes, as currently defined, with investment in making the community sustainable and decent.

173. A third area where the playing field is uneven is in the degree and explicitness of tenant approval that is required for Councils to pursue alternative management options. Before giving the go-ahead for a stock transfer, the ODPM has to be satisfied that a majority of tenants are not opposed to a transfer - though there is no requirement for an absolute majority of tenants having to be in favour of it. There is no requirement for Local Authorities to hold a ballot, but in practice, this has become the norm as a means of assessing tenant opinion. If a Local Authority is proposing to go down the ALMO or PFI route, they are required demonstrate that they have consulted their tenants and involved them in the decision-making process. However, the requirement of tenant consent is less stringent than for the stock transfer option,[161] albeit some Local Authorities still choose to hold ballots.

174. We believe the requirement for tenant consultation and approval should be identical regardless of whether a Local Authority intends to go down a PFI, ALMO, or stock transfer route.

Registered Social Landlords

The effect of rent restructuring

175. Several Registered Social Landlords (RSLs), pointed to problems inherent in the policy of rent restructuring. According to the ODPM, the objective of rent restructuring is:

"for social rent[s] in England that are fair, affordable and less confusing for tenants. […] The changes that are being made are designed to keep rent[s] in the social sector well below those in the private sector".

176. The method used to achieve this objective is

"via a common formula for both local authority (LA) and RSL rent. Councils and RSLs are expected to move their rent as far as possible towards this 'formula rent' over 10 years from April 2002."[162]

177. The problems which our witnesses identified in relation to rent restructuring broadly come into three categories. Firstly, there are cases where early transfer companies were created on the basis of business plans with projected rent increases considerably higher than what rent-restructuring now permits. A second problem arises from the fact that the inflation of building costs far outstrips the rate at which members are able to increase their rents, and so the real-term amount available from rental income for investment purposes effectively decreases year-on-year. The third type of problem arises in areas of low demand where rent restructuring allows for no rent increase at all, and where market failure prevents RSLs from raising extra funding through disposal of superfluous stock.[163]

178. Both Riverside Housing Group and Bethnal Green and Victoria Housing Association alerted the Committee to the concern that rent restructuring could place a severe restriction on the ability of some Housing Associations to fund sufficient investment in Decent Homes. Bethnal Green and Victoria Housing Association explained:

"Rent restructuring is good policy in principle; I have no problem with it at all. It obviously makes sense that the same rent or similar rent is charged by social landlords, to give them such a generic term, for the same property in the same area. That is obviously sensible. In the capping of rent increases, that is where I am worried, because our two major expenses are salaries and maintenance and we all know how important maintenance is - that is why we are here. Allowing for future rent increases, it is important that, in setting the formula, Government recognise that the rate of increase on our two main headings of expenditure is above RPI."[164]

179. Riverside Housing Association added that:

"…we have an additional problem in that our rents start at a relatively low level, they are as affordable in Merseyside and as low as anywhere in the country. So, the target rent is low, but then the increase has been constrained for six years running and, although that does help you to achieve productivity and efficiency savings, if it is applied every year for six years, at some point, the pips squeak and real cuts in services apply and we have had to take money out of our business plan over the next five years which we would have liked to spend on the Decent Homes Plus Standard - £7 million out last year - because we do not have the income coming in to fund that spending."[165]

180. Sunderland Housing Group highlighted another problem arising for some stock transfer Housing Associations where the whole transfer process is allowed the go-ahead only on the basis of a robust business plan. In Sunderland's case, however, the parameters were suddenly changed after their transfer had been completed:

"..we have been with the last transfer under the RPI plus one regime for rents and that is incorporated in our business plan and, a year later, we are facing a future whereby we may have to re-programme our business plan to manage our rents on 0.5 per cent."[166]

181. The Committee is in favour of the general policy of rent restructuring, but acknowledges that it may be necessary to modify the way it is applied in certain circumstances. We accept evidence suggesting that in a range of cases, rent restructuring is eroding the ability of Registered Social Landlords to maintain levels of investment in stock, and therefore also hindering the achievement of the Decent Homes target, not to speak of the 'Decent Homes Plus' target which we are proposing.

182. We recommend that, whilst the Government should maintain the policy of rent restructuring, its effects should be reviewed to ensure that the levels of stock investment can be maintained across the social housing sector.

Dowry Funding

183. An issue which concerns specifically stock transfer Registered Social Landlords (RSLs) is the provision of so-called dowry funding. Previously, under the Estates Renewal Challenge Fund programme, grants were available from central government as 'dowries' to RSLs for taking on properties with a negative value. However, this scheme has been discontinued without a specific replacement.

184. The resulting situation impacts not only on transfer RSLs, but also on Local Authorities who may find it more difficult to find RSLs willing to take on very poor stock. The Chartered Institute of Housing (CIH) warned that

"…there is a real problem in that the Government has made it easier for local authorities to parcel up their stock and do partial transfers and partial ALMOs which we are supportive of, but if you do not solve the problem of how local authorities tackle their worst stock with a negative value I think there is a fear that they will be put in a position where they will have to sell the best stock, the one that they can get a receipt for and keep the worst stock, which is not necessarily a sensible outcome."[167]

185. However, whilst Dr Perry from the Housing Corporation told the Committee that he had:

"…always thought that the Estates Renewal Challenge Fund was a very good instrument. We were sorry when it was wound up. If any government were to decide to bring it back, it would be a very good idea."[168]

ODPM officials were not willing to make any specific commitment to a centrally determined and Government funded dowry scheme. [169]

186. The ODPM submission to this inquiry acknowledged that "dowry funding" will be necessary in the event of the forecast receipt from rental income over the following 30 years being less than the cost of improving and maintaining the dwellings over the same period. Potential sources, according to the ODPM, include the Local Authority, the new landlord, the Regional Housing Board or some other source such as, in certain cases, the New Deal for the Community.[170]

187. The Committee is concerned that the absence of a scheme to replace the Estates Renewal Challenge Fund programme will result in Local Authorities being unable to transfer their worst stock, having transferred the remainder to RSLs. In that scenario, Local Authorities could end up owning and managing the stock most in need of large amounts of investment, but with no resources to invest in it at all. We therefore recommend that the Government replace the Estates Renewal Challenge Fund with a similar system of dowry funding.

Demolition and sale as a means to achieve the target

188. The Committee is conscious that social homes in some instances get demolished or disposed of on the private market as part of a policy to eliminate non-decent homes.

189. As acknowledged by Sunderland Housing Group when giving evidence, many transfer RSLs (Registered Social Landlords) are now demolishing properties.[171] In many cases, this happens entirely legitimately as part of a Pathfinder programme in areas of low demand, an example of which is Liverpool:

"Liverpool is included within the Merseyside HMRI pathfinder. There are more than 76,000 properties included within the Liverpool boundary and 85% of the properties are in private or RSL ownership. The HMRI programme, over a 15 year period, is intended to restructure what is currently an unbalanced housing market. This will require clearance of approximately 15,000 dwellings during the period to tackle the low demand, obsolete and unsustainable stock. It should be recognised therefore that the decency standards should only apply to sustainable stock across all tenures."[172]

190. The Sunderland Housing Group is an example of an RSL which is proposing to demolish 6,000 homes that it has deemed to be unsustainable. The Group Strategic Executive, Mr Craggs told the Committee that:

"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 pour money into certain estates ain't going to work. There are legacies of local authorities all over the country who have done that."[173]

191. The Committee fully recognises that there are circumstances where demolition of social housing stock is the best available option. However, the Committee is concerned that some social housing providers may see the demolition, or in high-value areas such as London, the sale of properties as the easiest and most cost-effective way of achieving the Decent Homes standard. We recommend that the Government puts guidelines in place preventing the social housing stock from being unnecessarily eroded through sale or demolition.

113   ODPM: Quality and Choice: A Decent Home for All: The Housing Green Paper; April 2000; para. 3.2 Back

114   Transport, Local Government and the Regions Select Committee, 2001-02, HC373-iv: Departmental Estimates and Annual Report 2001 and Recent Policy Developments: Q672, The Rt Hon Stephen Byers, MP. Back

115   DEC01, para 7.1. Office of the Deputy Prime Minister (ODPM). Back

116   Q191 and Q192, Roy Irwin, Audit Commission. Back

117   Q38, Sarah Webb, Chartered institute of Housing. Back

118   DEC01, para 7.3. Office of the Deputy Prime Minister (ODPM). Back

119   DEC01, Annex B, Office of the Deputy Prime Minister (ODPM) ; DEC49, para 2.1. Sunderland Housing Group. Back

120   DEC01, Annex B, Office of the Deputy Prime Minister (ODPM); DEC46, para 7, Liverpool City Council. Back

121   DEC01, para 8.7. Back

122   Borrowing by Local Authorities contributes to the PSBR, whereas borrowing by Registered Social Landlords does not. Back

123   Q438, Jim Coulter, National Housing Federation. Back

124   DEC21, paras. 7.1 - 7.3, The National Housing Federation. Back

125   NAO: Improving Social Housing through Transfer; HC496. March 2003. Paras. 3.30 - 3.38. Back

126   DEC01, para. 8.12, Office of the Deputy Prime Minister (ODPM). Back

127   DEC01, para 8.17, Office of the Deputy Prime Minister (ODPM). Back

128   DEC01, Annex B, p 21. Office of the Deputy Prime Minister (ODPM). Back

129   DEC01, para 8.20. Office of the Deputy Prime Minister (ODPM). Back

130   DEC34, para. 3.2.Westminster City Council & CityWest Homes. Back

131   Q292, Nigel Brooke, CityWest Homes. Back

132   Q280, Steve Hilditch, Hammersmith & Fulham Housing Commission. Back

133   Q289, Steve Hilditch, Hammersmith & Fulham Housing Commission. Back

134   Q287, Steve Hilditch, Hammersmith & Fulham Housing Commission. Back

135   Q287, Nigel Brooke, CityWest Homes. Back

136   Q153, Neil McDonald, ODPM. Back

137   Q154, Neil McDonald, ODPM. Back

138   DEC25, p2, City Of York Council Back

139   DEC03, para. 3.4, Unison; See also evidence provided by Hammersmith & Fulham Housing Commission, and Defend Council Housing. Back

140   Q183, Roy Irwin, Audit Commission. Back

141   Q183, Roy Irwin, Audit Commission. Back

142   Q183, Roy Irwin, Audit Commission. Back

143   DEC01(c), Office of the Deputy Prime Minister (ODPM). Back

144   Q206, Roy Irwin, Audit Commission. Back

145   DEC03, section 3.3, Unison. Back

146   ODPM A way forward for housing capital finance, paragraph 32 (ii) Back

147   ODPM: Review of the Decent Homes Target for Social Housing (PSA Plus Review); March 2003; p23. Back

148   DEC01, para 7.3. Office of the Deputy Prime Minister (ODPM). Back

149   Q33, Sarah Webb, Chartered Institute of Housing. Back

150   Housing Today, 26 September 2003 : 'Birmingham on the Brink' Back

151   DEC65(a), p1, Camden Council. Back

152   Public Finance, 19-25 March 2004, p13. Back

153   DEC65, para 12, Camden Council. Back

154   The Guardian, January 19th 2004 Back

155   DEC52, p3. Back

156   DEC53, p3-4. Back

157   Q525, The Rt Hon Keith Hill MP, Minister of State for Housing. Back

158   Q159, Neil Mc Donald, ODPM. Back

159   Q159, Neil Mc Donald, ODPM. Back

160   See paragraphs 79 to 91 above. Back

161   Q33, Sarah Webb, Chartered Institute of Housing. Back

162   ODPM: A Guide to Social Rent reforms in the Local Authority Sector: Chapter 2: Introduction.  Back

163   Q471, Danny Friedman, National Housing Federation Back

164   Q320 - see also DEC42, para 4. Back

165   Q321, Deborah Shackleton, Riverside Housing Group. Back

166   Q359, Andrew Taylor, Sunderland Housing Group. Back

167   Q44, Sarah Webb, Chartered Institute of Housing. Back

168   Q198, Dr Norman Perry, Housing Corporation. Back

169   See questions 146-148, Neil McDonald, ODPM. Back

170   DEC01, para 8.16, Office of the Deputy Prime Minister (ODPM). Back

171   Q374, John Craggs, Sunderland Housing Group. Back

172   DEC46, para 21. Liverpool City Council. Back

173   Q363, John Craggs, Sunderland Housing Group. Back

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