Memorandum by Chartered Institute of Housing
The Chartered Institute of Housing (CIH) welcomes
the opportunity to submit written evidence on the Draft Local
Government Bill. We will deal solely with the implications of
the Bill for the financing of council housing. After general comments
on the provisions, we will concentrate on the issues of whether
the Bill gives local authorities any greater financial freedom
in running their housing stock, and in particular whether it could
provide new investment options. We will do this by making comparisons
with housing associations, in particular those taking over local
authority housing stock. For brevity we will not describe the
Bill's provisions in any detail.
The Bill's main purpose is to codify the new
financial framework for LA housing which began in April 2001 but
can only be fully implemented once legislation is in place. It
completes the transition to a resource accounting basis for housing
revenue accounts (HRAs). It separates out the payment of housing
benefit (rent rebates) for council tenants, and it simplifies
the capital control regime. As we shall make clear, the more flexible
financial arrangements which it introduces are in practice severely
limited in their application. The basic features of the present
system, whereby income is largely determined by central government
formulae, are retained. In particular, the arrangements by which
resources (both capital and revenue) are pooled nationally remain
and are strengthened (see Annex for a diagram describing how an
The effect of the Bill on local housing authorities
as a whole is financially neutral. Thus, for example, although
the existing requirements to set aside part of capital receipts
against debt, and to cross-subsidise housing benefit payments
from other tenants' rents, will be removed, "pooling"
arrangements will ensure that any resources that would have been
released form part of a national pot to be distributed by centrally-determined
Much has been made of the "prudential borrowing"
regime introduced by the Bill. Whilst welcome, this will have
much more direct application in non-housing LA business activities
such as municipal markets, the remaining municipal bus companies,
leisure centres and other facilities with locally-decided incomes.
Because income to the HRA is largely decided by central government,
the new regime will not lead to more council housing investment
unless there are substantial increases in subsidy.
This means that the existing financial attractions
of stock transfer to a housing association will remain. High debt
authorities, which benefit from the national pooling arrangements,
will achieve more financial freedom through transfer because their
old debt will be paid off. Low debt authorities will also get
more financial freedom through transfer because they "escape"
the pooling arrangements whereby they pay into the national pot.
The impression is often given that the key aim
of local authorities in considering stock transfer is "borrowing
freedom", and that this enables them to achieve the required
investment in their stock. If the issue were this simple, the
Bill would indeed provide the means by which councils could be
put on a "level playing field" with housing associations.
But housing associations have a range of "business
freedoms" which are not enjoyed by councils, and which are
gained through stock transfer. They include:
1. The ability to borrow "prudentially";
2. Ability to borrow outside public sector
3. Borrowing directly against the value
of (and income stream from) the stock;
4. Ability to use their revenue stream more
flexibly, notably to allow them to borrow against future rents
to enable them to finance investment now;
5. In the case of stock transfers, freedom
from the liability of past debts;
6. Command of all the revenues relating
to the stock (rents, HB payments, etc) with no dependence on government
revenue subsidy (except indirectly through HB);
7. Project-specific grants for new house
building (ie social housing grant);
8. Much greater control of their own assetsin
particular, the ability to replace stock which is in demand and
which is sold to sitting tenants.
HAs previously had more freedom to set rents
and therefore to determine their future revenue streams, but this
difference has largely been nullified by the Government's rent
restructuring policy. Even so, they have greater freedom at the
margin than LAs, and may well have greater freedom still once
rent restructuring is complete (if controls are then relaxed).
The answer is "no". The Bill will
allow the Government to deliver the first of the eight freedoms
listed above, but none of the others. In relation to item two,
borrowing will remain within the main measure of government borrowing
(Public Sector Net Borrowingthe replacement for the PSBR)
even though councils will have more freedom. The Treasury will
make estimates of the level of borrowing, as it does now, and
as it will for (say) the proposed "foundation" hospitals
within the NHS. No doubt it will act if local government greatly
exceeds its estimates of new borrowing.
The draft Bill specifically rules out items
three and four. It says nothing on the remaining items.
The answer to this is also "no" except
in certain circumstances. Some councils may find that, at the
margin, they can borrow more than previously because they have
sufficient "spare capacity" in their HRAs to sustain
more debt, although such capacity is likely to be "squeezed
out" by the progressive effects of rent restructuring (which
will increase, not relax, central government control of HRAs).
More importantly, councils which create Arms
Length Management Organisations (ALMOs), and meet ODPM requirements,
will be allowed to retain more of their rental income and will
therefore be able to pay for the extra borrowing required to meet
the Decent Homes Standard (DHS). So far 21 councils have set up
or are setting up eligible ALMOs for part or the whole of their
Unless they achieve ALMO status (see below),
councils such as Birmingham and Sheffield which were planning
stock transfer will be in broadly the same position after the
Bill becomes law as they are now, in relation to housing investment.
Apart from day-to-day running costs, councils have three main
calls on their HRA resources in relation to investment in their
Costs of paying old debt;
Costs of achieving the DHS and dealing
with their repairs backlog;
Providing for future repairs (to
avoid future repairs backlogs).
These costs have to be met from rents, HB payments
and from HRA subsidy. The amounts available are decided by government
through the subsidy system and rents policy. In practice, whilst
the costs of old debt and future repairs are largely reflected
in the level of HRA subsidy, the cost of the middle item (the
backlog) is not: subsidy is limited to the level of credit approvals
availableusually much less than an urban authority needs
to deal with its backlog within the ten-year target set by ODPM.
Stock transfer HAs avoid these limitations for
two main reasons. First, they do not inherit the (often substantial)
costs of old debt. Second, although they do not get revenue subsidy,
they have full control over their income from rents and HB and
are able to borrow against future rental income, both to deal
with the repairs backlog and plan for future repairs. A stock
transfer HA starts with a clean sheet: the business plan encompasses
all the new investment required as well as the costs of running
a modern housing service, and is designed to be affordable from
the rents charged. The balancing factor is the transfer price
(the higher the investment required, the lower the price and hence
the capital receipt to the LA).
To put councils in a comparable position to
transfer HAs, the Treasury would have to provide the extra subsidy
needed to deal with the £19bn repairs backlog. Local authorities
would also need several more of the financial freedoms mentioned
at the beginning of this submission.
It might be argued that the Treasury does take
over debt costs on transfer, to the extent that they are not met
from the receipt, and that this could become a substantial commitment
with urban transfers such as Birmingham. The Treasury would probably
say that it meets debt costs through subsidy anyway, and transfer
means the end of any future commitment to subsidy for running
costs, improvements or repairs.
The potential for ALMOs
As already indicated, unlike other councils,
those with ALMOs will be able to exercise their new borrowing
freedom because they will receive extra subsidy. Could ALMOs be
the route to greater autonomy for council housing, if they were
to become more like HAs? CIH believes that the Government should
promote ALMOs by providing extra resources and setting a somewhat
less stringent test for access to them. However, ALMOs at present
do not address the real issue that separates council housing from
housing associations, which is the dependence on revenue subsidy,
the pooling of costs and resources with other authorities, and
hence the tight control of the Treasury's "purse strings".
If ALMOs are to be a real alternative to transfer,
they need more of the eight financial freedoms set out above.
This cannot be achieved quickly, but there could be a phased programme
of reform which includes steps such as allowing ALMOs to keep
part of the benefit of rent increases, and provision to pay off
part of their historic debt once their stock achieves the DHS.
The Government could aim to give ALMOs financial autonomy within
a defined period, for example by 2010 (the target date for achieving
DHS). This would provide a strong incentive for councils who wish
to retain their stock to follow the ALMO route, as well as providing
an effective answer to those arguing that councils should simply
be given the extra resources to improve their housing stock with
"no questions asked".
CIH believes that developing the ALMO model
in this way is the best response to authorities who wish to retain
their council housing and deal properly with their repairs backlog.
It could provide a programme of reform, including performance
measures, which could convince the Treasury that council housing
should have greater financial autonomy and most of the business
freedoms of housing associations, without stock transfer. It could
be argued that, by providing these freedoms whilst retaining public
ownership, there is greater control over the future quality of
the service and the use of the assets than is the case if housing
stock is moved out of the public sector.
Chartered Institute of Housing