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                                     Destiny in
                                     our hands
                                     Housing associations can borrow from the Dutch if
                                     they are looking for a way to ease the regulatory burden,
                                     says Mervyn Jones

                                     The economic and financial models task group of
                                     the National Housing Federation’s iN business for
                                     neighbourhoods project considered a number of
                                                                                                         If it ain’t broke,
                                     approaches to funding affordable housing from around the
                                     world. One that grabbed our imagination was a trust fund
                                                                                                         why fix it?
                                     for social housing on the Dutch model. The Dutch appear            Reasons for a new deal on grant
                                     to have achieved less regulation and lower interest rates.
                                     At the same time they have completely sidestepped the UK           ● the Housing                   it finances having a
                                     debate about the risk of a reduction in the population of          Corporation’s duty to           finite life, and certainly
                                     lenders.                                                           protect the public subsidy      needing considerable
                                         There have been three main ingredients in the Dutch            heavily influences its          new spending to
                                     story since the late 1980s:                                        regulation. Assets funded       maintain them as
                                     ● a radical step was ‘brutering’, the cancellation of state        partly with grant cannot        effective. Moreover the
                                     loans which still had to be repaid, against the entitlement        be used to support non-         original grant invested
                                     to subsidies which associations still had to receive for           social housing activities,      may now be a tiny
                                     developments already undertaken, as well as most subsidy           even if those activities        proportion of the value
                                     for new development;                                               then in turn support the        of the property; and
                                     ● a guarantee fund which consists of state contributions           association to undertake        ● while grant is
                                     and premiums on loans and which, with triple A rating,             more social housing;            subordinate to any claims
                                     backs almost all the loans taken out by Dutch housing              ● bureaucratic rules            by lenders over assets
                                     associations; and                                                  over grant recycling            on which they have a
                                     ● a central housing fund or trust fund (the CFV) established       in the event of grant-          charge, its presence in
                                     through association contributions which provides financial         funded assets being sold,       the balance sheet and
                                     support where necessary to associations to help maintain           despite the fact that this      with the encumbrances
                                     the sector’s good name and provide a high social return in         represents good asset           above means that some
                                     protection of tenants.                                             management and creates          associations have found
                                         Brutering is not directly transferable to England because      resources to plough back        its present status a
                                     of the different position our associations are in, with up front   into social housing;            difficulty as they extend
                                     grant still needed to ensure future housing development            ● grant is never ‘written       their borrowing and
                                     at affordable rents. A guarantee fund has previously been          off’ despite the assets         gearing.
                                     researched as a means of buttressing private funding, but its
                                     backing by the state (with its negative effect on public sector
                                     borrowing) and the extent of funding needed to achieve             has been done on the cost of regulation; most would
                                     a triple A rating from scratch – the Dutch started in 1983         speculate that it is significant. The regulatory burden is
                                     – mean it is a near certain non-starter.                           increasing with further proposals for external validation of
                                         The central housing fund is, however, a different beast.       performance indicators. It means chief executives spend
                                     It started from a different place and so inherits a different      a high proportion of their time dealing with an avalanche
                                     culture than the Housing Corporation’s. This involves              of regulatory requirements rather than managing their
                                     associations contributing to the sector’s need to solve            businesses.
                                     problems for itself.                                                  Despite valiant efforts, the corporation is trapped in an
                                         Since 1974 housing associations in the UK have been            environment where stakeholders are bound to criticise if it
                                     regulated by the Housing Corporation. This has brought             relaxes its grip. The only way out is for housing associations
                                     many benefits, not least the ready availability of private         to take their destiny into their own hands. There are some
                                     finance on exceptionally good terms. No research                   ➔ Continued overleaf

38 Inside Housing 21 November 2003                                                                                               21 November 2003 Inside Housing 39
Finance
encouraging signs that the corporation might in fact
welcome this approach. For example, it is asking housing
associations participating in the Challenge Fund to make
                                                                  Key insights
their own arrangements for compliance audit.
   The dilemma becomes even sharper when one
                                                                  The Dutch social housing model
considers the idea of writing off social housing grant in
housing associations’ balance sheets. On the one hand,            ● independence                   to the UK because of
the Treasury does not expect to receive its investment back       – the Dutch severed              the ‘upfront’ nature of
and in several parallel cases (regeneration, for example)         the financial subsidy            social housing grant
grant aid is simply written off. On the other hand, once the      pipeline and associations        in England. Moreover
situation has been reached where a massive investment of          seemingly gained more            there are no longer
public funds sits on the published accounts of associations       independence as a result;        public loans to cancel.
it will take courage simply to write it off at a stroke           ● active asset                   If English associations
– perhaps depreciation provides a model.                          management – the Dutch           were to surrender
   The creation of a trust fund is intended to result in a new    housing association              entitlement to grant on
settlement between associations and the state. In return          sector is now highly             future developments,
for financial freedom, associations would be expected to          dependent on sales               they would be seeking
self-regulate. This means an acceptance of intervention,          revenues and land                different benefits,
but from peers rather than external organisations.                price concessions for its        probably relating to
   In the Netherlands one impact of this has been                 continuing development;          much reduced regulation
the steady rationalisation of the housing association             ● guarantee fund                 as well as financial
movement, not by central dictat but by negotiated                 – a National Housing             concessions;
settlement among themselves. Weaker associations                  Federation and Housing           ● central housing fund
have been assisted by the central housing fund and                Corporation investigation        – the CFV performs some
merged into the stronger associations to create improved          into the potential of            of the same functions
organisations. It is a feature of the policy landscape that       such a fund in the early         as the corporation but
the corporation does wish to see rationalisation and              1990s to buttress private        has a different culture
restructuring. They are unlikely to provide funding to            finance was deemed               in which associations
achieve this, expecting the sector to sort it out for itself.     unworkable. A further            contribute to the sector’s
                                                                  investigation of the             need to solve its own
Underpinning from guarantee fund                                  use of such a fund for           problems. In the English
The trust fund provides one of the gateways to financing.         more diverse borrowing           situation, where there
There is no debate in the Netherlands about whether               needs again failed to            is no back-up guarantee
there are too few lenders. Essentially the movement               make a case. There               from the state, there are
either uses two main banks or goes direct to the capital          is no likelihood of a            certain attractions in a
markets through a non-profit intermediary specialising            government safety net            combination of a fund
in the sector. This is a highly efficient mechanism for           similar to the Netherlands       with an active ‘sorting
raising finance. However the guarantee fund, backed by            due to its implications for      out’ role to protect the
the government in extremis, underpins this method of              public sector borrowing;         reputation of the sector
borrowing. The central housing fund’s role in monitoring          ● interest rate structure        both in political terms
performance which may threaten financial viability is             – interest rates achieved        and in dealing with first
an important part of the Dutch financing web. The scale           by associations in the           level financial problems;
and scope of a trust fund for England, where there is no          competitive lending              and
guaranteed funding, will need to be tuned to achieve such         market in the UK are             • rationalisation and
confidence among funders and at least as good an interest         probably significantly           restructuring – a shake-
rate as we enjoy now.                                             below those the Dutch            out in the Dutch housing
    The fund has the potential to improve the poor public         believe would be                 association sector up
image of associations because affiliation to a self-              payable in the absence           to the present time
regulatory body is a very powerful marketing tool. A model        of a guarantee. But are          has been dramatic,
is to be found in the travel industry where ABTA and ATOL         higher than the Dutch            and comparable to the
cover a very wide range of large and small operators              rates achieved with that         reduction in British
through a common insurance fund. This increases the               guarantee;                       building societies
public’s confidence in the sector overall and hence               ● ‘brutering’ – the              over the same period.
improves profitability.                                           Dutch exchange of loan           It appears to have
    As well as helping to restore the sector’s battered image     liabilities for subsidy          been precipitated by
the fund can support iN business for neighbourhoods.              receipts still due on            brutering which left some
Released from the inevitable tendency of the regulator            past developments in             associations financially
to standardise, greater innovation and diversity are to           the mid 1990s is not             exposed.
be expected. These will be critically necessary to manage         directly transferable
the wide variety of neighbourhoods in which associations
operate. The corollary of greater diversification is of course
higher risk, which will inevitably make the corporation             In the present relatively benign private finance climate
nervous. If this were coupled with a commitment to a trust       it may be hard to see the motivation to subscribe to a
fund it would again have a greater chance of success.            trust fund. It took the Dutch some years to build up their
    If the benefits to be gained from adaptation of the Dutch    fund to the scale at which it could fulfil its purpose. But for
model are so great, how can we make a start over here?           the last two years Dutch associations have not needed to
In my view, the best things that housing associations have       contribute further as the fund is considered large enough
ever done are in partnership with one another. During my         for its purpose. It would be a wise and mature housing
career I have worked with three major consortia: to acquire      association movement if it laid the foundations now
National Coal Board homes in the east midlands, to acquire       against the risk that there might be a shock to the system
1,400 homes from Hackney Council and now through the             in the future.
Sappling consortium in the south-east. The potential gains       ● Mervyn Jones is chief executive of Pavilion Housing
are enormous but everyone does have to jump together.            Association

				
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