A guidance note by nqe48312

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									DELIVERING EFFICIENCY




    Housing Association
      Annual Efficiency
           Statements:
       A guidance note

                        HM
             1        Introduction


                    As independent businesses, housing associations have a keen interest in efficiency.

                    Within the current operating environment of target rents, costs rising faster than income, increased
                    customer expectations and sectoral commitment to In Business, many associations are actively
                    investigating ways of increasing their efficiency and effectiveness. As such, improved efficiency is a
                    key component of associations’ business planning and risk management processes.

                    The sector now needs to embrace the government’s efficiency agenda, which formally comes into
                    force on 1 April. Challenging targets have been set by ODPM for the housing sector, including
                    housing associations (RSLs). It is important to stress that these are efficiency gains and not savings –
                    housing associations will be able to reinvest these gains back into service delivery.

                    The following table sets out the ODPM’s expectation of the contribution that the sector will make
                    between in the three financial years between 2005 and 2008 to meeting its overall efficiency targets.


                       Total     Estimated total social     LA       Estimated LA gains          RSL       Estimated RSL gains
                      spend     housing efficiency gains spend in    contributing to LG       spend in    contributing to ODPM
                      04-05              (£m)              04-05    efficiency target (£m)      04-05     efficiency target (£m)
                       (£m)                                (£m)                                 (£m)
                               05-06    06-07     07-08           05-06     06-07     07-08              05-06    06-07    07-08

    New Supply         1,650    130      140      160       0          0        0       0      1,650      130      140     160

    Capital Works                14      170      340                12      140      280                   2       30       60

    M&M                         120      210      280                85      150      200                  35       60       80

    RSL
    Commodities                  10       30       55                  0        0       0                  10       30       55

    Total                       274      550      835                97      290      480                 177      260     355



                    To enable it to monitor housing association efficiency, ODPM will set out its minimum information
                    requirements in a social housing Efficiency Technical Note by 1 April 2005.

                    A key requirement is that lead regulated housing associations will be required to produce an
                    Annual Efficiency Statement each year. RASA associations will not be expected to provide an AES.
                    They should instead report efficiency gains through existing regulatory arrangements.

                    The Housing Corporation is responsible for collecting and assessing housing association Efficiency
                    Statements and reporting on the sector’s efficiency gains to ODPM.

                    The Annual Efficiency Statements, along with the outputs of its operating cost index, will inform
                    the Housing Corporation Assessment (HCA) of housing association performance. The Audit
                    Commission Housing Inspectorate’s inspection results, which will assess the efficiency of service
                    delivery as well as its quality, feed into the HCA for individual associations.

                    Following the publication of the ODPM social housing Efficiency Technical Note, the Housing
                    Corporation will issue a circular on its requirements for production and submission of associations’
                    Annual Efficiency Statements, which will include the date by which the first one is required.

                    However, consistent with its policy of minimising additional regulatory burdens on the sector, the
                    Corporation will expect associations to evaluate their efficiency on the basis of self-assessment.

                    This initial guidance sets out a process and framework for the production of Annual Efficiency
                    Statements. Further guidance on efficiency and self assessment will be issued by HouseMark, CIH
                    and NHF in due course.

2
2     Nature of Annual Efficiency Statements


    It is more important that associations act to improve their efficiency than they spend excessive time
    demonstrating it to their regulator. Therefore, the Statement should not be a lengthy document
    and probably no longer than six pages.

    In their Annual Efficiency Statements, associations should set out their efficiency targets for the
    new financial year together with an evidence-based report on efficiency achievement on the
    preceding year.

    The Efficiency Statement should follow a standard format:
       G   self assessment of efficiency in 2004/5 (the baseline year)
       G   estimated efficiency gains for 2005/6 onwards
       G   strategy and actions to be taken to achieve that outcome
       G   in future, evidence that efficiency targets for the previous year have been achieved

    The Annual Efficiency Statement should be signed off by the board of the association.

    A template Annual Efficiency Statement is attached as the Appendix.




      Further copies of this briefing can be downloaded from the CIH (www.cih.org)
                     or HouseMark (www.housemark.co.uk) websites.




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    3     Assessment of Annual Efficiency Statements


        Efficiencies should be reported – on a self assessment basis – against each of the following work
        streams identified in the ODPM Housing Efficiency Technical Note:
            G capital works
            G management/maintenance
            G commodities


        The Corporation will aggregate the efficiencies of all housing associations each year and report
        these to ODPM. This report will also record progress against the ODPM social housing efficiency
        targets set out on page 2.

        Efficiency gains on new supply will be measured through data collected by the Housing
        Corporation on grant approvals. The Housing Corporation does not wish to duplicate this data
        collection process by requiring housing associations to report new supply efficient targets and
        gains in the AES. However, associations should include contextual information in the AES about
        their approach to securing efficiency gains in new supply – as part of their discussion of their
        overall efficiency strategy.

        Efficiencies are required from capital investment as well as revenue expenditure, although
        associations have full flexibility on how they achieve efficiency.

        Although sectoral targets have been set (see page 2), there is no prescribed efficiency target for
        individual associations. Associations will be required to set out their own efficiency targets for
        2005/6 and beyond. These targets should be set to reflect each association’s scope for making
        efficiency gains and will therefore vary.

        The Corporation will wish to be satisfied that the targets set out in the Annual Efficiency
        Statement are:
           G appropriate – given the association’s operational context
           G challenging – in the context of continuous improvement
           G deliverable – as supported by an evidence-based action plan
           G realised – there is evidence that efficiency has actually been achieved


        In addition to the specified ODPM work streams, however, associations should report on the
        efficiency strategy of their organisation as a whole. This is an opportunity for associations to:
            G identify work on efficiency that is not covered in ODPM targets but is nonetheless important
                for business planning – e.g. treasury management
            G explain the impact of organisational context and policy on efficiency outcomes


        Overall efficiency reporting does not count towards the government’s efficiency targets, which are
        limited to the work streams specified on Page 1, but will provide a useful assessment of long-term
        sector-wide trends.

        Overall efficiency strategy and self assessment should, as appropriate, cover the following areas:
           G housing management and maintenance
           G capital works
           G new development
           G social cohesion, regeneration and community development
           G Supporting People and other business streams
           G customer involvement and satisfaction
           G treasury management
           G use of resources (including specific reference to commodity procurement)


4
4     Undertaking efficiency self assessment – recommended approach


    In the context of their strategic objectives, the key issues for associations to evaluate are:
        G operating and service costs/overheads and how they compare with others
        G effectiveness of service delivery and how this compares with others
        G impact of external factors on cost and performance
        G cost and performance factors within the association’s control
        G business areas where efficiency can be achieved without reducing effectiveness


    Most associations will already have processes in place which will assist them in producing their
    Annual Efficiency Statements and the following recommended approach can be adapted to reflect
    these.

    Step 1
    Develop a joint management/board approach to efficiency self assessment, with particular
    reference to the key business drivers of the association.

    This approach should be based on:
       G Housing Corporation Regulatory Code
       G ODPM social housing Efficiency Technical Note
       G this joint CIH, HouseMark and Housing Corporation guidance note
       G Audit Commission KLOE on Value for Money: Securing Efficiency and Effectiveness


    Annual Efficiency Statements should be made at group level, but associations in group structures
    will need to determine the extent to which targets and consequent action plans need to be set
    and delivered at parent or subsidiary level, according to the particular circumstances and structure
    arrangements.

    Step 2
    Analyse current relative efficiency of the association with reference to:
       G Housing Corporation Operating Cost Index and other returns and performance information
       G your organisation’s internal – and NHF – efficiency ratios
       G benchmarking comparisons with peers
       G key internal or external drivers of cost and performance


    Ensure that efficiency is assessed across both the whole business of the association and the
    specified ODPM efficiency work streams.

    Determine reasons for relatively high or low efficiency, either overall or in particular service areas.

    Step 3
    Set efficiency targets for the coming year and develop a succinct action plan to meet them,
    which is:
       G Specific
       G Measurable
       G Achievable
       G Realistic
       G Time-bound


    Discuss these proposed efficiency targets and action plans with service users (including BME users),
    other stakeholders and boards in a succinct and practical way. This approach to consultation and
    involvement will be one that many associations already adopt in developing their plans.

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    Step 4
    Secure board approval of the Annual Efficiency Statement, ensuring that the necessary measures
    are incorporated into operational plans and budgets.

    Submit the Annual Efficiency Statement (AES) to the Housing Corporation.

    Step 5
    On a regular basis:
       G   monitor efficiency outcomes
       G   review performance against target
       G   reconfigure targets
       G   amend action plan

    Where performance deviates significantly from targets, discuss with Housing Corporation
    regulator.




6
5     How to measure efficiency


    How to calculate efficiency
    An efficiency gain, calculable towards the ODPM 2005/6, 2006/7 and 2007/8 social housing
    targets, is the difference between:
       G   the actual cost of providing a service in that year, and
       G   the equivalent cost of providing the same level and quality of outputs in the baseline year
           (2004/5)

    Efficiency gains achieved during the baseline year, 2004/5, can count towards the 2005/6, 2006/7
    and 2007/8 targets if they recur throughout that period.

    Efficiency gains amongst housing associations should be calculated as follows:
       1. Establish the actual cost of service provision in the previous financial year (say 2005/6)
       2. Form an evidence-based assessment of what it would have cost to provide the same level
          and quality of outputs in 2004/5 – adding in the cash value of any enhancements you have
          since made to the service – to give an adjusted 2004/5 baseline cost
       3. Uplift the 2004/5 cost of provision using measures of inflation (see below)
       4. Compare the actual cost of provision in the previous financial year with the adjusted cost of
          provision in 2004/5. The difference between the two is the efficiency gain

    The inflation indices to be used in performing this calculation will be provided to social landlords
    each year by ODPM and the Housing Corporation. It is envisaged that the inflation indices
    provided will be based on:
       G   Housing capital works: BCIS ‘all-in’ Tender Price Index (TPI)
       G   Housing management and maintenance: a combination of the BCIS Building Maintenance
           Index, RPI, and regional pay indices
       G   Commodity procurement: a combination of DTI’s Quarterly Energy Prices Update and RPI


    How to generate efficiency
    Efficiency can be generated in a number of ways. ODPM specifies these methods as follows:
       G   (E1) reducing inputs (money, people, assets, etc) for the same outputs
       G   (E2) reducing prices (procurement, labour costs, etc) for the same outputs
       G   (E3) getting greater outputs or improved quality (extra service, productivity, etc.) for the
           same inputs
       G   (E4) getting more outputs or improved quality in return for an increase in resources that is
           proportionately less than the increase in output or quality

    Certain types of activity are not acceptable as efficiency gains:
       G   re-labelling activity (e.g. reclassifying housing management overheads as corporate
           overheads)
       G   making cuts that result in poorer quality services and outcomes for customers (any changes
           to services should result in a net improvement in outcomes for tenants)
       G   transferring costs from one area to another without a net reduction in costs and without an
           increase in the quality of outcomes
       G   increased income by charging customers higher rents and service charges



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    Distinguishing between ‘cashable’ and ‘non cashable’ efficiency gains
    Efficiency gains can be ‘cashable’ or ‘non-cashable’.

    ‘Cashable’ gains are those that transparently release resources – via methods E1 and E2 above –
    that can be reallocated elsewhere.

    ‘Cashable’ efficiency gains can also occur anywhere across an association’s business, including:
       G   procurement (e.g. efficiency gains realised through greater economies of scale or lower
           prices)
       G   corporate services or transactions (e.g. outcomes maintained whilst expenditure is reduced)
       G   productive time (e.g. productivity is increased by maintaining outcomes with reduced staff
           numbers)

    ‘Non-cashable’ gains involve method E3; increased quality or quantity of service outputs or
    outcomes at the same level of cost or resource input.

    ‘Non-cashable’ efficiency gains can also occur anywhere across an association’s business, including:
       G   procurement (e.g. fewer defects and/or increased user satisfaction in new build and
           refurbishment programmes)
       G   corporate services (e.g. higher IT support user satisfaction)
       G   transactions (e.g. faster and/or more accurate processing of rent or service charge payments)
       G   productive time (e.g. increased productivity arising from reduced absenteeism)

    Taking the example of responsive repairs, ‘non-cashable’ efficiency gains might involve:
       G   increased quality of service outputs (e.g. faster repairs)
       G   increased quantity of service outputs (e.g. increased volumes of repairs)
       G   increased quality of service outcomes (e.g. increased tenant satisfaction with repairs)


    Demonstrating that efficiencies are not achieved at the expense of quality
    When claiming efficiencies of reduced inputs or lower prices for the same outputs, the major
    challenge is to demonstrate that quality has been maintained.

    Associations should adopt a suitable set of quality cross-checks to demonstrate that this is the case.
    To show evidence that service quality has been maintained, associations could use a combination of
    customer satisfaction and other performance data.


    Non-cashable efficiency gains and imputed cash values
    HM Treasury has stated that ‘non-cashable’ efficiency gains must be given an imputed ‘cash value’
    if they are to count against the ODPM’s efficiency targets. It is widely acknowledged that this
    presents the greatest difficulty in measuring efficiency.

    The ODPM’s Local Government Efficiency Measurement Taskforce will be exploring approaches to
    assessing the monetary value of ‘cashable’ gains. In addition, ODPM will commission research in
    2005 to examine how to provide such quantification.

    However, there is an extra housing association dimension to this work – flowing from the sector’s
    commitment to the In Business agenda. As a result, NHF, HouseMark and the Housing Corporation
    are developing a set of standard methodologies for capturing the ‘quality’ dimension of efficiency.

    In drawing up their Annual Efficiency Statements, therefore, associations should submit evidence of
    ‘non-cashable’ efficiencies, drawing upon these methodologies as they develop.


8
Time-lags between costs and benefits
There may be a time-lag between undertaking a project, with its up-front costs, and achieving the
desired efficiency gains. In these circumstances, costs should be apportioned over the period of the
project in line with standard accounting practice on depreciation. Efficiency gains should then be
reported as the difference between annualised cost and annual improvement for the chosen
period.


One-off improvements in efficiency
One-off efficiency gains should only be reported against the year in which they occur. They cannot
be counted in the cumulative total for future years.


Efficiencies gained through partnerships or consortia
Associations should isolate the efficiencies they accrue through partnerships or consortia and not
double-count the efficiencies that accrue to other associations or partners. Cashable gains should
be identified through audited accounts.


Efficiencies in long term contracts
Associations may have signed long-term contracts with private suppliers for areas such as payroll
or IT support. Clauses in contracts requiring improvements in productivity will have an impact on
efficiency that can be quantified and then included in the Annual Efficiency Statement.


Treatment of capital receipts
Associations may find they obtain a lump-sum value in cases where they dispose of assets, but still
maintain service quality. If resources are released and the same level and quality of outputs is
maintained, this represents an efficiency gain. Capital receipts utilised to reduce borrowing or
attract interest payments represent an efficiency gain that can be assessed on an on-going annual
basis.


Flexibility in calculating efficiency against the 2004/5 baseline
The general rule that efficiency should be calculated against a 2004/5 net capital spend baseline is
relaxed in two respects.

Efficiencies achieved in 2004/5 that continue through to the end of 2007/8 can be counted
towards the 2005/6, 2006/7 and 2007/8 targets.

Where new major capital investment projects take place during the period 2005-8, associations
will be able to calculate their efficiency targets on the basis of average annual net capital spend
over the period 2005/6 to 2007/8 rather than against the 2004/5 net capital spend baseline.




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     6     Assembling the evidence base


         In assembling the evidence to demonstrate current efficiency and to predict efficiency gains,
         associations will wish to draw upon a number of data sources:
            G   management accounts (see below)
            G   Housing Corporation operating cost index and other returns
            G   Performance against NHF efficiency self assessment ratios
            G   benchmarking data and customer surveys
            G   internal analysis of key cost/performance drivers, efficiency action plan, targets and
                efficiency monitoring
            G   changes to long term service contracts
            G   staffing establishment profiles

         In order to remain succinct, the Annual Efficiency Statement should draw on the key findings
         (rather than the detail) of these sources.

         Depending on the 2005 Annual Efficiency Statement return date, associations may have to rely on
         management accounts for 2004/5 and budgets for 2005/6 when setting efficiency targets. A
         similar position may apply in respect of the 2006 Efficiency Statement (and thereafter) in terms of
         efficiency targets and providing evidence that in 2005/6 (and onwards) efficiency targets were
         realised.

         Associations will also wish to predict the impact of:
            G   proposed organisational developments (e.g. new IT systems, customer contact centres,
                mergers etc) on efficiency
            G   the external operating environment on efficiency
            G   any long term partnering arrangements, especially where the set up costs are masking the
                true whole life costing and efficiency gains to be released

         In demonstrating that efficiency targets are challenging yet realistic, associations can draw upon
         data from:
            G   time series analysis of past income/expenditure/performance
            G   estimates of future income/expenditure/performance
            G   benchmarking comparisons with peers

         Targets should be set for:
            G   overall organisational efficiency
            G   specified ODPM work streams – i.e. new supply, capital works, management and
                maintenance, commodity procurement

         An evidence and audit trail should be available to demonstrate the links between the Annual
         Efficiency Statement and key data sources. Associations should consider whether internal audit
         mechanisms should be employed to quality assure the association’s approach to measuring
         efficiency.




10
7     Conclusion: achieving greater efficiency


    The measurement of efficiency and the production of Annual Efficiency Statements are, of course,
    merely the processes involved in responding to the Government’s efficiency agenda.

    More important are the actual techniques associations employ to increase efficiency. Many of
    these are already embedded in housing association practice.

    A non-exhaustive list of potential efficiency techniques might include:
       G   re-evaluating procurement strategies
       G   outsourcing or otherwise streamlining back-office services
       G   collective procurement of commodities, materials and back-office services
       G   partnering with contractors, at all levels of the supply chain, for new build, refurbishment
           and maintenance contracts
       G   systems thinking and other forms of business process re-engineering
       G   reducing staff turnover, sickness and absenteeism

    None of these techniques are mandatory but lead regulators and the Housing Inspectorate will
    expect associations to demonstrate that they have considered the available range of efficiency
    techniques. Meeting the needs and aspirations of customers and their full involvement in an
    informed way throughout the whole process will also be a key consideration.

    Equally, lead regulators and the Housing Inspectorate will seek evidence that efficiency gains are
    not being achieved at the expense of organisational effectiveness. The quality of services received
    by communities is the distinguishing characteristic of the housing sector and must not be put at
    risk.

    The sector faces a major challenge in balancing efficiency and effectiveness. However, we believe
    that the most efficient associations are also the most able to respond effectively to an ever-
    changing operating environment. They are also more likely to be delivering high quality services for
    their customers.




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             Appendix: Annual Efficiency Statement Template


         Part 1: Overview
         G Brief statement of the association’s strategic objectives and key service areas
         G Brief self assessment of the association’s current overall efficiency
         G How the association is monitoring and improving efficiency and how customers and other
            stakeholders are involved in this process
         G 2 pages in length


         Part 2: ‘Forward Look’ element of AES
         G  Set an efficiency gain target for the coming year by:
            – comparing the budgeted cost of provision for the coming year (initially 2005/6) with
            – the adjusted cost of provision in the 2004/5 baseline year
            following the methodology set out on page 7.
         G Break down the target, and outline the strategy required to achieve it, in terms of:
            – whole organisation
            – capital works
            – housing management/maintenance
            – commodities
         G Identify key efficiency actions to be taken in the coming year to secure this target.
         G Explain how overall service standards will be maintained.
         G Briefly explain how the planned efficiency gain will assist the association to deliver its key
            objectives.
         G 2 pages in length


         Part 3: ‘Backward Look’ element of AES
         G  Demonstrate the efficiency gain achieved in the previous financial year.
         G For the 2005 AES, the Backward Look element of the AES will refer to:
            – 2004/5 baseline cost of provision, compared with
            – 2003/4 adjusted cost of provision
            following the methodology set out on page 7.
            This will demonstrate any efficiencies achieved in 2004/5 that can, if they recur over the
            period 2005 to 2008, be included in the formal 2005/6 targets and beyond.
         G For the 2006 AES onwards, the Backward Look element will refer to:
            – previous year cost of provision, compared with
            – 2004/5 adjusted cost of provision
            following the methodology set out on page 7.
            This will demonstrate whether efficiency targets predicted in the Forward Look element of
            the 2005 AES onwards have been achieved.
         G From the 2006 AES, the Backward Look element should also include:
            – cumulative efficiency (total efficiency gains achieved since the 20004/5 baseline)
         G In each year, break down the efficiency gain in terms of:
            – whole organisation
            – capital works
            – housing management/maintenance
            – commodities
            – one-off/recurring nature
            – capital spend/operating expenditure
         G List the activities undertaken to achieve efficiency gain
         G Demonstrate that efficiency gains have not been achieved at expense of service quality
         G Briefly explain how efficiency gains have assisted the association to deliver its key objectives
         G 2 pages in length




              Written by Ross Fraser, Chief Executive, HouseMark. Produced by Mark Lupton, CIH.
CIH and HouseMark are grateful for the contributions of Andrew Dench and Deborah Ilott of the Housing Corporation.
                                          Front cover photograph: Digital Vision

								
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