Supplementary memorandum by Westminster
City Council and City West Homes (DEC 34(e))
1. INTRODUCTION
1.1 City West Homes has been invited by
the Chairman of the Decent Homes Inquiry to provide additional
information on the mechanisms that might be considered as part
of the financial freedoms for three * ALMOs in order to secure
its long term funding requirements.
1.2 This paper provides a brief analysis
of some of the additional financial freedoms currently under discussion.
These are as follows:
— Accounting changes to the Major Repairs
Allowance.
— Repayment of Housing Revenue Account
loan debt.
— Adjustment to rent restructuring
capping mechanism.
— Recycling capital receipts locally.
— Bidding for Social Housing Grant
(SHG).
2. ACCOUNTING
CHANGES TO
THE MAJOR
REPAIRS ALLOWANCE
2.1 The current financial rules for local
authority housing require the Council to ring fence part of its
Housing Revenue Account (HRA) income for major repairs. This is
known as the Major Repairs Allowance (MRA). In Westminster's case
this will equate to around £11.7 million in 2004-05.
2.2 Under current arrangements the authority
is expected to charge an equivalent sum to the HRA as "depreciation"
on its current assets. This effectively prevents the authority
from using the MRA to support additional borrowing.
2.3 This practice differs from that used
in the housing association sector where associations are given
more discretion over how much they can charge to the revenue account
for depreciation.
2.4 Altering this arrangement would enable
the Council/ALMO to maximise the opportunities available under
the prudential borrowing regime by investing more up front and
supporting the additional borrowing costs from the MRA.
3. REPAYMENT
OF HOUSING
REVENUE ACCOUNT
LOAN DEBT
3.1 In 2004-05 the authority expects to
receive around £14.1 million in HRA Subsidy less around £3.0
million being contributed towards rent rebates (see item 4 below).
However as a result of recent changes in subsidy allowances this
is expected to reduce rapidly, such by 2007-08 the Operating Account
would be in deficit. Our current business plan projections indicate
that by 2009-10 the Council will be making a contribution back
to the "national pot".
3.2 Part of the subsidy we receive is effectively
being used to support our existing HRA loan debt of around £134
million along with the additional debt taken on to support the
extra spending on decent homes. As an alternative the Council/ALMO
would be prepared to explore an arrangement whereby the existing
debt is repaid by the Exchequer. A capital grant would then be
provided to meet the balance on any other approved funding. The
arrangements for repaying the debt would be broadly in line with
the overhanging debt arrangements used on some stock transfers.
3.3 This approach would enable the Council/ALMO
to remove itself from the current subsidy regime, which was one
of the original proposals behind the three * freedoms. Whilst
this approach would seem attractive in principle it would mean
the Council/ALMO taking on more risk, for example in connection
with interest rate management. The Council/ALMO would therefore
need to satisfy themselves first that the overall funding arrangements
were manageable over the longer term.
4. ADJUSTMENT
TO RENT
RESTRUCTURING CAPPING
MECHANISM
4.1 The Council's average rent for 2004-05
is expected to be around £84.03 per week (subject to its
final budget decisions). This is £5.31 more than the "limit
rent" of £78.72 (set for rent rebate subsidy limitation
purposes) and £2.98 more than the local authority target
rent of £81.05.
4.2 In practice this means that the Council
will have to pay around £2.0 million towards rent rebates
in 2004-05 (along with an estimated £1.0 million towards
overpayments). This amount is expected to reduce over the coming
years as the authority's actual rent comes in line with the limit
rent and target rent.
4.3 However the Council's average rent compares
with a target rent of around £85.93 that would apply had
the same stock been in the housing association sector. Housing
associations are not subject to subsidy withdrawal and are able
to charge up to the target rent, subject to limitations on individual
increases and individual caps.
4.4 Housing associations are also given
the flexibility to charge up to 5% over the target rent on general
needs properties and 10% on special/sheltered dwellings, without
subsidy withdrawal.
4.5 One option which we feel could be explored
further is therefore to give the Council/ALMO the scope to charge
up to 5% above the target rent (or limit rent), if it wanted to,
without subsidy loss. In the long run this would enable it generate
up to £1.6 million additional income each year towards stock
investment and service improvements.
5. RECYCLING
CAPITAL RECEIPTS
LOCALLY
5.1 Under the new arrangements introduced
for 2004-05 Westminster City Council, along with other local authority
landlords, will be paying a proportion of their capital receipts
from Right to Buy sales back into a national pot. Our understanding
is that this is then redistributed in line with national and regional
housing priorities, including a sum towards new social housing
(see item 6 below).
5.2 In Westminster's case it will be paying
around 75% of its sales receipts back to the national pot. Based
on our current sales assumptions this would equate to around £12.3
million in 2004-05.
5.3 However we are also forecasting that
this will reduce in the coming years as a consequence of the current
high open market values and the reduction in the maximum discount
in London to £16,000.
5.4 One additional freedom which would be
worth exploring is the scope for the Council/ALMO to retain most
or all of its capital receipts in order to reinvest this locally.
This would again be more consistent with the practice with housing
associations where sales receipts can be reinvested locally.
5.5 Because of the expected downturn in
sales levels in Westminster this might only provide some marginal
short term benefit to the authority, although sales could pick
up again later. However we understand that in other parts of the
country Right to Buy sales are increasing dramatically and causing
problems with the management cost base in some ALMOs. Whilst not
wishing to prejudge the situation elsewhere, we would imagine
that a change in these rules would be welcomed by other three
* ALMOs.
6. BIDDING FOR
SOCIAL HOUSING
GRANT
6.1 The other key area which we think would
be worth exploring is the extension of Social Housing Grant (SHG)
to three * ALMOs/local authorities.
6.2 Until recently SHG, paid by the Housing
Corporation, has only been available to housing associations.
Under the new arrangements for 2004/05, this is being extended
to developers.
6.3 We consider a further extension would
be to allow local authorities and three * ALMOs to access
SHG to develop and acquire new social housing. This would be logical
given that much of the grant money has been generated from local
authority Right to Buy sales.
6.4 At present the Council works in partnership
with local housing associations to deliver new social housing
and regenerate some existing schemes and sites. If it were able
to access SHG itself, it would broaden the Council's overall options.
6.5 Further thought would need to be given
with regard to whether the Council or the ALMO became the landlord
for any new social housing. If the ALMO were, itself to become
a social landlord, it would need to become registered with the
Housing Corporation under current rules.
7. CONCLUSIONS
7.1 This paper has sought to identify some
key options on how to develop the financial freedoms for three
* ALMOs. The ideas are not mutually exclusive and could be developed
together or separately as appropriate. Some ideas will be more
relevant to Westminster than other authorities/ALMOs.
7.2 In each case the Council/ALMO would
be pleased to prepare a more detailed paper showing how the financial
arrangements would work in practice and could be developed further.
7.3 In the meantime we would be pleased
to answer any further queries from the Inquiry on the issues raised.
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