Select Committee on Public Accounts Minutes of Evidence

Examination of Witnesses (Questions 40 - 59)



  40. It is not?
  (Dr Perry) Our lead regulators are quite senior people.

  41. I got the impression that they were not senior posts and if these officers, if you want to call them that, are going round to some of these housing associations—and I have seen some of the slick chief executives and financial directors—what is to say that they are not being bamboozled by them?
  (Dr Perry) The survey which the NAO did showed that in 1999 there was about one-third of associations which were a bit worried about the skills and qualifications of our regulatory staff. We have done a lot of work since then. As I mentioned previously, we have now hired special purpose financial regulation teams and I think if the NAO repeats its survey in a couple of years' time hopefully they would find a different picture in the sector.

  Chairman: Thank you, Mr Steinberg. Mr David Rendel?

Mr Rendel

  42. Dr Perry, can I start by—I am not sure if warning is the right word—telling you that a chap called John Gatward, who is my brother-in-law, is currently head of a housing association so I want to lay that on the record for the Committee's information and yours before I start. Paragraph 2.13 of the Report mentions among the high risks that are frequently brought up by housing associations the question of falling demand. Coming from the area I do in central southern England around West Berkshire, that is a staggering idea. In our case demand is soaring and there is a desperate shortage of housing owned by housing associations and available for rent. Is this something to do with the north/south divide or is it to do with specialist housing associations where specialist demand may be falling?
  (Dr Perry) It is geographical variation. It is very much an issue in the north of England and to an extent in the northern part of the Midlands as well. There is a phenomenon which is affecting all types of tenure—owner occupation, private rented, council rented and housing association rented—where there is beginning to emerge, apparently, a surplus of housing over people who wish to occupy that housing. Housing associations have been no more affected by that than any other form of landlord and probably less affected than local authority landlords at the moment, but it is something that is becoming an issue.

  43. Before I go back to that issue, is there any particular specialist area where the housing associations are noting a drop in demand?
  (Dr Perry) There are unpopular types of construction—

  44. I really meant are there housing associations that deal with a particular specialist area, like those who deal with people who are disabled, where the demand is falling?
  (Dr Perry) Not to my knowledge. This is an issue of general needs housing.

  45. To go back to the question of the north/south divide which seems to be the main problem here, firstly, what are you doing to try to overcome that or to re-balance demand or to suggest new policies to Government so that where they might try to get the balance of demand right?
  (Dr Perry) The issue is such that the housing associations can do very little of their own accord so we have to work in partnership. At the national level we have been working with the Social Exclusion Unit and the DETR and, indeed, the National Strategy for Neighbourhood Renewal specifically mentioned the role of registered social landlords in overcoming it. The 80 or so Local Strategic Partnership areas which are eligible for the Neighbourhood Renewal Fund will be a key part of the solution because much of the fall in demand is in those LSP areas.

  46. One of the ways in which it has been suggested that demand could be better balanced across the country is by enabling more people to work from home using cabling facilities and so on. Is there anything that the Corporation can do to encourage that sort of move?
  (Dr Perry) Separately we are interested in that particular aspect. In fact, we have got some home-working pilots in the Corporation. Where investment proposals came forward from RSLs which involved that we would be interested. I think it is fair to say—

  47. Do they know that? Have you publicised that?
  (Dr Perry) They would know that through our innovation and good practice programme. Housing associations are well aware that we are open to innovative ideas. The point I was going to make, Mr Rendel, was in the particular neighbourhoods where demand is falling I am not sure that home-working is the issue; we also have very high unemployment in those areas.

  48. That is precisely the point. There are perhaps jobs which are currently based in other parts of the country where there is very low unemployment like mine which could be done down the line by cable, and perhaps by making sure that the right cabling systems are in place you could both improve employment in those areas where demand is falling and at the same time improve the demand for housing.
  (Dr Perry) I hear that but I think that the areas that we are talking about are ones where the level of unemployment and the level of social deprivation makes it unlikely that cascaded "brain" jobs from other parts of the country could be taken up. It is an issue of importance perhaps in rural areas where we have areas of demand and stress in the countryside where home-working has been very successful. I know it has in the Highlands of Scotland. But, say, in east Manchester, or north Liverpool it does not seem quite as likely.

  49. I am sorry to hear your estimation of the capabilities of some of those people. It seems to me that there are of number of home-working jobs which you call "brain jobs" which do not demand a huge amount of skills or intelligence which could be done in all sorts of parts of the country where people are currently finding it difficult to get work.
  (Dr Perry) We would be happy to act almost as an intermediary between employers who had the jobs and housing associations who had local demand and, indeed, were working in community regeneration programmes.

  50. Excellent. I hope I have been encouraging you to do just that because that seems to be a useful thing that you could concentrate on. In paragraph 2.3 the indication is given that to some extent the Corporation acts as a fallback where housing associations may be in some sort of trouble. This brings me back very much to something which has been one of the worries of this Committee for a long time, that what tends to happen sometimes, particularly in things like the private finance initiative, is that people take great risks thinking that the risk is being passed on in some way to somebody else and actually the risk remains with the public sector. There is a concern here that the real risk that housing associations individually are getting themselves into may in the end fall back on you in the public sector because they take greater risks than they should. Is that something that you are worried about?
  (Dr Perry) We hope that is unlikely. We are always aware of the problem of moral hazard where you have a public sector regulator. The lenders certainly do not think that the Housing Corporation stands behind RSLs financially. The Report mentions 13 instances in four years where the Corporation had to organise what used to be the equivalent of the Bank of England's "lifeboat" to get other people in. What we always do is to get other associations into the system. No extra funds from us are normally put into play in this matter. Since there are invariably quite drastic consequences for the senior management of these associations and boards, it is not something that they would do lightly. They would not take risks on the basis that if it does not work out they will get rescued because it will cost them their jobs on the way.

  51. Turning to table 6 on page 16 of the Report, which the Chairman mentioned earlier, this strikes me as a rather frightening table, not simply because in so many instances is the figure under the 85 margin, but because it indicates in terms of rent gearing, and rent arrears, which are the two ratios that have been under 85 per cent the whole time, it is getting very considerably worse and, particularly, there is a rapid deterioration in the last two or three years. Would you like to comment on that?
  (Mrs Miller) If I can start with rent arrears, first of all. The issue which faces housing associations here is largely around the administration and the payment of housing benefit. What we are doing in that area is to work with the DSS and in particular we are looking at associations taking part in a pilot exercise to take on some of the verification checks in the hope that that would assist in improving the performance of housing benefit. That is the specific initiative we have there. You also pointed to rent gearing. If I can also point you to the ratio just underneath rent gearing, gearing reserves. We have two gearing measures which we use in tandem. As you are aware, these are measures which indicate the increase in borrowing and the capacity that associations have for future borrowing. The trend in both of those has been down over the seven-year period and I think that reflects the increase in borrowing that associations are taking on and, over the same period of time, the reduction in Government funding that is going into those associations. I think the trend is understandable. The question that you asked is what we are doing about it. I think we are monitoring very closely associations on an individual basis whose borrowings would seem to indicate that in a short period of time they will run out of future capacity to borrow.

  52. It is all very well monitoring them, that is partly what these figures do, but the figures have, in the case of gearing reserves, been collapsing quite quickly over the last four years and, in the case of rent gearing, collapsing over a longer time than that, and even the gearing reserves are now only just about the 85 per cent. Rent gearing is down to 55 per cent—a very, very long way under your target. Your monitoring them is all very well but something has to be done about it, not just looking and seeing that it is happening.
  (Mrs Miller) I mentioned earlier on that we were undertaking an exercise to look at the entire range of our ratios and this is a particular area that we wish to focus on. We have conducted quite extensive discussions with lenders in the field because we hope that our ratios match industry norms in this area and so lenders are a particular source of information for us. They have suggested to us that perhaps our ratios are slightly out of step with the ratios that they would expect to see in this field. This is an area that is under discussion.

  53. You mean, rather as the Chairman was indicating earlier on, that if the ratios seemed to be falling dramatically you are going to change the ratios and monitor something else?
  (Mrs Miller) We have been resisting that over the seven years that you have in front of you. We have definitely not reduced our ratios and, indeed, we have stuck to them even though associations are seeming to find it more difficult to meet our requirements.

  54. Surely if they are finding it more difficult to meet them that is not a reason for changing the ratios you monitor; it is a reason for doing something about the fact that they are going downhill the whole time, and in the most recent years in, frankly, a rather worrying way. If this trend continues you are going to find that none of the associations will have their rent gearing at an acceptable level within a few years' time. You are down to 55 per cent now and you have fallen by 20 per cent in the last few years. That to me is very worrying. Just changing the ratios you monitor is not going to cure that.
  (Dr Perry) Not of itself. The picture that this is showing is of a sector which is coming under increasing stress but part of that is a deliberate policy intention because these are social businesses, their purpose is not to rack up large surpluses but to operate with their 50/50 mix of public money and private money relatively close to the margin. The specific issue of rents is very much geared to the problems that are being experienced in the administration of housing benefit. That is specific and that is quite concerning to us, but in that sense working with the DSS is the most that we can do because this is something that covers the whole of the local authority sector as well as RSLs.

  55. I understand the problem about housing benefit. It has been a long-standing concern to many of us. Given the trend that you have got at present, do you think that the sort of changes you have been suggesting—making housing associations take on some of the work which, after all, is going to put up their costs—in the end is good enough or do we have to look for real changes to the whole housing benefit system? Is it no longer going to work for housing associations?
  (Dr Perry) Those are matters of policy for the DSS. We are talking—

  56. If they do not change it are some housing associations going to collapse in the near future?
  (Dr Perry) I have to distinguish between the policy and the way that it is being administered. Clearly, there are a number of local authorities where their administration of housing benefit is a mess and quite a large number of housing associations are being affected. Some of the larger ones can take it within their system but you may notice a difference in their reserves at the year end. We are quite concerned that some smaller housing associations, if things do not improve before too long, will get into cashflow problems. Yes, that is a fact.

  57. Have you warned the Government of this?
  (Dr Perry) We constantly talk to the DETR and the DSS about this.

  58. Can I ask one final question. You set your targets at 85 per cent as a proportion of RSLs that pass each financial ratio. You want more than 85 per cent of the totality of RSLs to pass each ratio. Why do you do it that way rather than saying that each RSL has to pass at least 85 per cent of the ratios?
  (Dr Perry) I will answer the first question myself and then perhaps pass the second one to Mrs Miller. The 85 per cent is not an absolute judgment. It was related to our workload. Arguably, if we have more staff we would lower it so that we then looked at more associations, but we do not regard it as an absolute.

  59. Fair enough. The point is why are you monitoring over the whole sector to make sure that more than 85 per cent of the sector passes rather than monitoring each association to make sure that each association is getting most of its ratios right? That seems to be a much more relevant thing for you to monitor.
  (Mrs Miller) We do both. Our target, as Dr Perry said, was set originally in order to target our resources at those most at risk but we do also monitor on a sector-wide basis how many housing associations pass all of the ratios, how many pass seven of the eight ratios, how many pass six. If you took the 85 per cent, for instance, three per cent of associations would pass more than 85 per cent on that basis.

  Mr Rendel.: A pretty small number.

  Chairman: Thank you. Mr Nigel Griffiths?

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