Communities and Local Government CommitteeWritten evidence from the Aster Group (HCA 06)
Background to the Aster Group
The Aster Group offers housing, care, support and other services to over 70,000 people from Cornwall to Hampshire. Our Registered Providers, Aster Communities and Synergy Housing, own more than 27,000 homes. The combined Group has assets exceeding £1 billion, a turnover of £150 million and employs 1,500 people.
Our ambitions are to:
grow our business;
be brave and bold where we can make a positive difference;
deliver value and choice; and
be financially strong.
In considering our response, we have been very mindful of the views of our tenants and other customers. They recognise and support the need to diversify in order to continue to develop affordable housing in their communities.
Background to our Response
We welcome the opportunity to debate important matters as part of a sector-wide discussion and in addition to this response, have submitted our response to the Regulator on its latest discussion paper which affects the HCA’s economic and consumer regulation.
Following the adjustment to the Regulatory Code covering economic and consumer regulation in 2010, independent housing associations were able to achieve their social objectives and outcomes in whatever way they saw fit, subject to compliance with the general outcomes required by the new Regulatory Standards and their ability to operate in an environment of low (and diminishing) public subsidy.
We have already adjusted our business to fit this environment and have devoted significant resources to a pipeline of schemes which incorporate cross subsidy, either from development for sale or, market rent; all of which have risks we believe we are well capable of managing as the Sector’s competence and capability has increased over a period of time to reflect this. We would also maintain that these interventions, particularly in relation to market rented schemes, have been pursued with the active knowledge and encouragement of Government. With housing need/demand massively exceeding supply now is not the time to place unnecessary obstacles in the path of innovation in housing production.
The reality is of course, over and above the Regulatory Standard, there is an array of other controls to which housing associations are subject which work to effectively “ring-fence” or control what they do:
Restrictions in loan agreements. Lenders are typically unwilling to accept greater risk without re-pricing their loan margins; any significant change to loan pricing is something they would only accept for a fundamental reason.
The requirements of investors, who we believe will differentiate between individual housing associations as the bond market matures and reliance on it increases.
Charity Law.
Tax Law and its implementation
Responses
1. What has the RC has been doing since it was set up in 2012, how well has it done, are there other things it should have been doing, and what impact has it had on the social housing sector since its establishment?
The RC has not been in existence long enough to have had a direct impact on the Aster Group thus far, but, if it is to continue to safeguard the good name of the Social Housing sector (as its predecessor at the Housing Corporation—the Registration Committee—did), its role will be vital in ensuring the sector has a future as far as public investment is concerned.
2. What are the major risks facing housing associations and the social housing sector? Are the standards set by the RC on governance and financial viability adequate to mitigate those risks? Are the established arrangements providing self-regulation of the sector being adequately supervised and tested? What effect are EU procurement rules having on the financial stability of the sector?
Aster sees the main risks facing housing associations and the social housing sector as welfare reform, and how the ending of direct payment of Housing Benefit to landlords in most circumstances will affect organisations. In addition, the restriction on benefits for social housing tenants under-occupying properties, and the turbulence in the global financial markets.
Aster considers its current highest risk activity is delivering new affordable housing, with lower or zero capital grant and higher income streams to support borrowing. This however would be affected should the proposals in the latest HCA paper on restrictions to diversify be implemented. We see cross-subsidy as an essential element of our business strategy to deliver new affordable housing. This involves new and different risks; but ones we believe we are capable of managing and we see it as our business to manage risk in whatever way our Boards believe is appropriate; subject to demonstrating to the Regulator that it is being done appropriately. In our judgment the current Standards give the Regulator the necessary tools to do this.
Housing associations have branched out significantly since the new regulatory regime came into being and are about much more than social housing; we are an investor both in communities and housing. In addition, the business environment has changed and we are in agreement with the HCA’s rationale for reviewing how the regulatory framework protects social housing assets in a more diverse sector, but believe the majority of the tools it requires are already available to it either within its existing Standards or the external environment.
Other areas which are important to consider in managing risk are ensuring that the Boards have the right skill set. In addition, the HCA will need to ensure that it has the right skill set to manage risk in diversified areas without stifling innovation.
In terms of the effect of EU procurement rules on the financial stability of the sector, the border between services contracts and public work should be redefined with increased legal certainty for partnerships. There should be improved flexibility of public procurement and it should be applied only if added‐value could be proved.
The EU procurement regulations complicate procurement activities due to the convoluted nature of the legalities involved and the resulting risk of challenge. Whilst all procurements vary, a realistic average cost for an organisation to undertake an OJEU-compliant tender would be a conservative estimate of about £25,000-£30,000. The introduction of the Remedies Directive in 2009 has made the potential of challenge greater primarily due to disgruntled bidders perceiving a misapplication of the regulations and the ease of initiating, and the impact of, a challenge. This, in turn, has led to the sector becoming increasing risk-averse and, in some instances, the introduction of increasingly burdensome evaluation criteria.
It is expensive for organisations to submit a bid and this prevents some from participating in the tender. SME’s were already reluctant to engage (as bidders) in procurements primarily due to the complexity and expense of completing procurement projects and the apparent knock-on effects of the Remedies Directive (see above) is that this has worsened the situation. The lack of SME engagement means that the chances of having a local organisation bid in a procurement subject to OJEU, is generally unlikely. Local firms not bidding make it infinitely more difficult for a contracting authority (a buyer) to award work to organisations based in the areas in which they operate. This means that organisations are not spending money in the local areas thereby affecting local employment and the economy which, coupled with Welfare Reform, can directly affect our revenue.
The lack of bidders means that competition is being restricted by the OJEU process thereby affecting value-for-money obtained. The procedures themselves are limiting—if the Restricted Procedure (2 stages) is used it excludes bidders at the PQQ stage on non-VFM grounds resulting in a smaller limited competition based on VFM criteria, if the Open Procedure (1 stage) is used the evaluation costs, and risk of challenge, can increase dramatically for the buyer. On top of this, in most cases negotiation is not allowed which can limit our ability to minimise cost whilst maximising benefits in the case of complex procurements.
3. Is the RC policing the financial regulatory regime adequately to address both the risks of the failure of individual registered providers and systemic failure? Has it the power and resources needed to regulate effectively?
There is a fair argument that the RC has not got the resources to implement their powers or to really understand the business the sector is now in. Decreasing HCA funding is pushing the sector to identify new income streams and activity—eg housing for sale, market rent, etc but HCA regulation is only recently looking at the consequences of that with its discussion paper. Experience with recent problem cases indicates opportunities are more complex now, which in turn highlights a greater need to understand the business of the sector.
4. In April, the HCA published a consultation document. Why are changes needed, and are those proposed adequate? Would the proposed changes have any adverse consequences?
We can see that the business environment has changed which has brought about a need to review how the Regulatory Framework protects social housing assets in a more diverse sector. We believe that the consultation document selects the appropriate elements of the Framework to review.
We feel the HCA has put forward some constructive ideas in its latest discussion paper which are helpful; for example a comprehensively prepared “living will” should address the key concern, protecting social housing assets.
We worry though that a small number of admittedly high profile difficulties in the sector may be used as a proxy for an overly restrictive “one size fits all” approach to regulating a sector, whose range and diversity requires a much more tailored approach. Moreover, it may inadvertently (and unnecessarily) prejudice exactly the sort of innovation in supply that will be so vital to finding solutions to the already burgeoning housing shortage throughout much of the Country. Any move that intentionally or unintentionally stifles that innovation will be of concern to our tenants and other customers.
We think there may be mileage in requiring associations with significant levels of non-regulatory activity (or plans to invest in such activity) to obtain independent credit ratings which are then annually updated. Many leading associations either have them or are planning to commission them as part of their future plans. The ratings process can provide an extremely detailed analysis of the overall exposures that individual associations face, and of the mitigations applied. In our view, reliance on ratings could provide a wholly more appropriate tailored approach to regulation than is currently offered through the discussion paper.
We start from the proposition that if we are to achieve our essential mission of creating and maintaining housing for those who are more vulnerable in our society in an environment with little or no capital subsidy, then we will need cross-subsidy. The alternative is that we stop developing affordable homes.
In addition, investing in the community is one of the best ways to invest in housing, after ensuring it is well maintained.
5. Are the arrangements in place sufficient to preserve the independence of the RC in relation to the HCA and the sector?
The independence of the RC in relation to the HCA and the sector as a whole is, if anything, stronger than the arrangements in place when the Housing Corporation was the Regulator of what were then Registered Social Landlords. That degree of independence is an important element in the robustness of the regulatory regime.
6. Are the standards set by the RC relating to consumer regulation adequate and are the monitoring arrangements sufficient?
The standards set relating to consumer regulation allow clarity over outcomes expected for tenants, landlords and stakeholders. There are no monitoring arrangements in reality with the exception of the serious detriment process. We feel this is a good thing as it suggests Government trusts the sector to provide good services, which is an interesting comparison with Care Quality Commission, which only regulates quality and has no financial or governance regulation because the quality of care is such a huge concern. The quality of housing management is generally good across the sector, which demonstrates that the monitoring arrangements are sufficient.
7. Concluding Comments and Additional Point
We believe that in setting out on the co-regulatory route, as detailed in the current Standards, we are well placed to deliver new affordable housing with minimal levels of Government capital grant support and in doing so to continue complying with the Standards.
We need to be allowed to continue on this path and be given the freedom to explore the ways in which we can achieve this individually. Clearly, because of the similarities of the businesses in our sector, there will be common themes. But, there are also significant dissimilarities.
Within this, we recognise that there are different risks we need to manage. We also recognise our fundamental duty as a not-for-dividend/community interest business in protecting our social housing assets.
Moving forward, we welcome the opportunity to engage about the use of our social housing assets, whilst maintaining our overall key mission as a not-for-dividend business; but with a greater ability to have a diverse housing portfolio.
June 2013