The big bang theory
As local authorities prepare for the brave new world of self-financing, we gather some council heavyweights for a round table discussion on what the future holds. Gavriel Hollander reports.
If there was a single word that sums up councils’ reaction to the impending big bang that is the start of self-financing, it is ‘but’.
There is no doubt that the council representatives - and a smattering of advisors - assembled at Inside Housing’s round table discussion of the housing revenue account reforms, supported by Kier, all welcome the prospect of wresting control of their finances back from central government.
While they are collectively taking on billions of pounds worth of debt, the opportunity to decide how to spend HRA income and, even more importantly, how to set tenants’ rents, is something local authorities have been looking forward to for a long time.
Despite this general positivity, however, most statements are couched with that one three-letter cautionary word.
With the final settlements agreed earlier this month and the £29 billion debt due to go on to local authorities’ balance sheets from 1 April, there is also a good deal of uncertainty about what the new environment will look like - and how councils will respond.
So, what are the risks? What are the opportunities? And what are councils doing to minimise the former and take advantage of the latter?
Top of the agenda for many would appear to be that age-old problem of what to charge for a roof over a head.
‘Self-financing allows us to have a much more intelligent conversation with tenants,’ begins Robin Lawler, chief executive of arm’s-length management organisation Northwards Housing in Manchester and president of the Chartered Institute of Housing.
Local authorities’ relationships with tenants will alter under the new system, though, as now the buck stops with them in terms of the rents they charge. ‘We always had the easy get-out-of-jail card that the government sets the rent,’ he adds, ‘but now…’
‘One of the areas we have most concern about is the rent increases this year,’ agrees Paul Price, head of life opportunities at Tendring Council in Essex and treasurer of the Association of Retained Council Housing.
For others, the concern isn’t so much about the impact of rent rises of up to 9 per cent, but that, for political reasons, some councils won’t impose the kind of increase needed to ensure sufficient rental income to meet HRA debt repayments.
‘I’ve had some very difficult discussions with our members about keeping the business plan intact,’ continues Mr Price. ‘You could screw it up from day one by not imposing the rent increase that you’ve built into your business plan and there’s a danger that some local authorities might go off the rails.’
Putting it to a vote
Those increases may well be dictated by the fact that councils suddenly have extra debt to pay off. But without being able to pass these hikes off to voters as central government-inflicted, the likelihood is that there will be tension at some councils between the needs of the balance sheet, and those of the ballot box.
‘In north Tyneside, I could feel the hurt coming from members,’ Kier’s managing director for maintenance Peter Brynes tells the group, reflecting on the north east council’s recent decision to raise rents by 9 per cent.
‘We can’t justify putting rent up like that for the working poor,’ argues Phil Waker, cabinet member for housing at Labour-controlled Barking and Dagenham Council. ‘As we do good work [on people’s homes], then we can look to put rent up, but just to impose it at the moment is something we have to pull back from.
‘Barking and Dagenham is one of the few councils in England that has chosen not to apply the full Communities and Local Government department-set maximum increase this year - 6.1 per cent, plus up to £2 a week - and Mr Waker insists that its post-HRA business plan still works.
A range of resources
That’s not the case for everyone, according to Robin Tebbutt, executive director at the Housing Quality Network. ‘But there is a group of councils where the HRA is still non-viable; whose need to invest in stock is still less than the amount of resources they can expect [to have],’ he says. ‘It means they’re better off, but not sufficiently better off.’
Rob Beiley, a partner at law firm Trowers & Hamlins echoes that worry. ‘There is an incredibly broad range of authorities,’ he says. ‘There are some who are well geared up for this; there are some who may have thought this wouldn’t happen; and there is a significant number that are significantly behind the pace in terms of thinking through their strategy.’
The problem is that every council’s individual settlement - how much they either have to pay the Treasury or will receive from them in April - is different. That means that every business plan is also different; that there is no magic formula that every authority can apply.
Councils have varying plans for how quickly they want to pay off the debt and what they want to do with the newly won rental income beyond those first few years.
While Barking, which will gain a debt of £266 million, has set its heart on taking on long-awaited home improvement work - Mr Waker says up to 35 per cent of stock in the borough remains non-decent - the story is different on the other side of London.
Conservative-controlled Wandsworth Council will be burdened with more extra debt than any council in the country when April comes around (£434 million of additional debt), but it is looking to pay it off as soon as possible, says Paul Ellis, its cabinet member for housing.
‘We are traditionally debt-free as an authority so we want to pay it off in 10 to 12 years,’ he explains. Like all local authorities, Wandsworth will borrow from the Public Works Loans Board to service its new debt, but unlike most large urban councils, Mr Ellis insists it will not have to borrow the full amount of its settlement.
‘The current proposal is that we will go for borrowing £250 million and use our own resources to pay the rest,’ he says.
Wandsworth ‘took the opposite view’ from some of its peers by charging higher rents over the past 10 years. As a result, it was able to bring its properties up to the decent homes standard in 2007, freeing up capital, now it finally has control of its income.
‘We are possibly in a happier position than some councils,’ concludes Mr Ellis, ‘but that’s because our high rent policy has enabled us to be.’
One small step
Not everyone gathered at London’s Park Lane Hilton hotel is quite as confident about the prospect of self-financing.
‘It’s an over-welcome opportunity for change, but it’s a small step,’ says Andrew Murray, head of housing at Harlow Council. ‘If it linked to the national housing policy in a coherent way, it’s got a chance, but it doesn’t.
‘We have embraced the opportunities that self-financing brings, but there are risks around getting the treasury and asset management strategy right. There are issues around getting not just the rent policy, but the income policy right over the longer term. It’s around affordability, not just for the business plan but the tenants as well.’
Indeed, council treasurers now need to make decisions about how to balance making investments with paying off the amounts they owe.
Sheffield Council is hoping that control of its income will help it reduce a huge backlog of long overdue maintenance work. The difference is that Sheffield is one of the few councils that will receive money from the Treasury under the HRA deal - in its case to the tune of £518 million.
‘I am really happy with the settlement but we’ve still got a massive [repairs] backlog [of around £250 million] and we’re trying to eat into that,’ says Derek Martin, director of housing, enterprise and regeneration at Sheffield Council.
However, along with a number of his peers round the table, Mr Martin sees a pair of threats approaching just as self-financing kicks in.
The first is the impact of the Welfare Reform Bill, which is expected to receive royal assent at the end of February and threatens to derail councils’ new freedoms just as they are getting to grips with them.
‘The impact of welfare reform is the biggest risk we have to make the business plan stack up,’ says Mr Martin. The reaction around the table suggests that this is no exaggeration.
The second is the government’s proposal that councils replace new right to buy sales with so-called ‘one-for-one’ replacements. ‘You’d have to be Paul Daniels to make that one work,’ suggests Mr Brynes to general agreement.
One of the main reasons councils have embraced the theory behind self-financing is they would be able to build new homes again. And that’s exactly what Birmingham intends to do, with an ambitious plan to develop 2,000 of its own homes over the next decade at a time when budgets across the council are being cut.
‘We’ll take the short-term pain,’ says Elaine Elkington, director of communities at Birmingham Council, which currently owns 69,000-homes ‘because the long-term gain gives us the opportunity to reinvent ourselves as a big social housing business and that’s what we intend to do.
‘We do feel that we’ve got some minimum obligations to our tenants having taken on this debt.’
Unlike Wandsworth, Birmingham is happy to keep its debt on its books long term. Ms Elkington sees HRA reform as a charter for councils to build, build, build.
‘We won’t be paying off any debt short term, otherwise our waiting list is going to go up and up,’ she says. ‘We need to incentivise councils, particularly if they’ve got land, to build more homes, rather than divest those assets to another registered provider.’
The problem is that, to start building now, you need capital. ‘There is massive, massive capacity [to build] in these business plans in the latter years [as interest payments on the debt reduce], but how can you release that capacity into the early years because the demand is there now?’ asks Trowers & Hamlins’ Mr Beiley.
‘There is capacity in these business plans,’ agrees Richard Parker, a partner at Pricewaterhouse Coopers. ‘Some councils that we are working with are looking to how they can work to extract some of that financial headroom that exists.’
The answer may lie with the private sector, suggests Mr Parker. Manchester Council recently launched a £25 million scheme to use its own land as an equity investment in addition to pension fund money, while using private sector expertise to develop new housing, has been seen as a model of good partnering.
‘They want us to do more,’ says Mr Lawler. ‘The council is keen for us to take on a broader regenerative role and we can work with other providers in a more joined-up way.’
Despite her commitment to council-built housing, Ms Elkington also sees the opportunity presented by the partnering with other providers.
‘Long term, we’d like to do some wholesale regeneration. If we could just get a start somewhere with the private sector we could do something very special.’
Despite facing eye-watering new levels of debt, Ms Elkington’s positivity does reflect the general mood around the table. However, there are always those ‘buts’ laying in wait.