Major repairs contracts could be used to raise money for development
Outsourcing model to fund new build
A new repairs outsourcing model has been developed that could increase the borrowing power of councils and finance new house building projects.
If successfully implemented, it could create hundreds of millions of pounds of additional ‘headroom’ underneath councils’ government-imposed borrowing caps following reform of the housing revenue account system.
The new model works by delivering a minimum 10 per cent saving on major works by using private sector partners.
The savings would be used to make regular payments to a private sector company, which it could use to borrow against and return the capital funding for investment.
According to proposals from housing consultancy Is4, councils faced with limited borrowing capacity as a result of self-financing rules would be able to fund new house building programmes by outsourcing major repairs work.
In March, 171 English councils took on £29.2 billion of historic debt from central government in return for the ability to keep their future rental receipts for reinvestment.
The move has been broadly welcomed, but councils have expressed concern that the increased debt combined with austere credit limits will leave them unable to invest in the first five years following self-financing reform as most debt will still be unpaid.
‘It’s effectively capitalising the revenue stream for councils,’ said Bill Best, a director at Is4. ‘If you generate efficiencies you can leverage in extra capital and that is all we are doing.’
In a model similar to the private finance initiative, using private sector borrowing would create extra ‘headroom’ on councils’ balance sheets.
‘Theoretically it works,’ said Robin Tebbutt, an associate at Housing Quality Network. ‘If a council can make these savings then it would have more money to spend. The problem is value for money if it means paying a premium to borrow in the private sector.’
Each council’s debt cap is calculated by estimating its total spending needs over the course of a 30-year business plan. Using the private sector to bring that spending down would increase the ‘headroom’ between spending and the debt cap.
The model has been developed with advice from Gleeds, Ernst & Young and Addleshaw Goddard. Mr Best said he was ‘in discussion’ with around seven local authorities and five private companies. Three banks, that did not wish to be named, have also been lined up to provide capital funding for the outsourcing company.