Future Funding of WCC Housing Stock by rottentees


									    APPENDIX A

Review of Financial Options for Future Funding of
WCC Housing Stock - Executive Summary

Westminster City Council

October 2006
                                                         Westminster City Council - Option Appraisal September 2006

1            Background
1.1          Westminster City Council (WCC) commissioned Tribal in June 2006 to undertake
             a review of the financial options for the future funding of WCC housing stock to
             enable a strategic view to inform the forward strategy.
1.2          The Council set up an Arms Length Management Organisation (ALMO), City
             West Homes (CWH) in 2002 and managed to attain the necessary ‘three star
             status’ from the Housing Inspectorate to secure funds as part of the government’s
             decent homes programme. The Council / CWH managed to obtain £74m from
             Round 1 from the Department of Communities and Local Government (DCLG).
1.3          The original management contract was designed to last 10 years but with an
             option to review the position after 5 years. This option appraisal coincides,
             broadly, with the completion of the decent home programme, an up to date stock
             condition survey and a number of changes and potentially new opportunities for
             both ALMOs and local authorities. It also coincides with the reporting timetable of
             the Council's Housing Commission.

2            Assessment of Baseline Position
2.1          In order to assess the future options available to the Council an up to date
             assessment of the Council’s Housing Revenue Account (HRA) and Housing
             Capital programme was carried out taking into account the investment
             requirements of the stock identified in condition survey and the latest information
             on the current financial regime. The current system is heavily controlled by
             DCLG with rent surpluses paid back to the government along with 75% of Right to
             Buy sales receipts.
2.2          Despite adverse changes in the current financial regime the Council / CWH has
             managed to build a significant level of balances in its Operating Account and
             Major Repairs Reserve to help meet the Decent Home programme and provide a
             cushion for the medium term. In order to ensure longer term sustainability a
             number of other measures are being assumed as part of the plan. This includes:
             ■       Income form the Commercial properties in the HRA will continue to rise by inflation

             ■       The Council / CWH are able to introduce tenant service charges of around £5 per
                     week on average

             ■       Preliminaries on works contracts can be managed at 20% (rather than 30% as has
                     previously been assumed)

             ■       Further savings of around £1m in the responsive / cyclical budget can be achieved
                     over the next 2 years (in addition to the £0.5m this year)

             ■       Management and service cost budgets can be held at inflation only.

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             ■       The Council will continue to receive around £5m in supported borrowing after 2010.

2.3          If all these assumptions were to be put into effect the Council would be able to
             meet the investment requirements identified in the stock condition survey and
             would have a small balance at the end of the 30 year modelling period. In our
             view some of these assumptions, whilst not impossible, are challenging but
             Citywest Homes officers are confident of these, and are also targeting some
             further savings, not included in the base model. Further detail is included in the
             main report.
2.4          The Council also has the option of discontinuing the ALMO contract after the first
             5 years and bringing the service back in-house. Whilst this may potentially
             reduce some costs for example in connection with finance, monitoring or
             additional governance functions, the evidence to date would appear to indicate
             that the operation of the ALMO has helped to deliver improved services and
             greater tenant accountability and satisfaction. This is supported by the latest
             Housing Inspection outcome which takes on board latest recent performance
2.5          Terminating the ALMO contract at this stage could, this could also have a number
             of other knock on effects including:
             ■       Potential loss of access to new financial freedoms if these are directly linked to

             ■       Further losses in the ALMO subsidy allowance

             ■       The removal of the current strategic / landlord split

             ■       Less opportunity for tenant involvement and independent input through the ALMO
                     governance model

             ■       Reduction in service standards achieved to date by CWH

2.6          It is also worth noting, as evidenced as part of this review, that the ALMO senior
             management team has taken ownership of the assumptions included within the
             HRA business plan and the explicit targets set as part of that process. In our
             view if the Council is to retain the ownership of the stock it would be preferable to
             continue with the current ALMO model at least until the end of the 10 year
             contract and review the position at that stage given the potential consequences
             otherwise. During that period it would be worth reviewing the existing subcontract
             arrangement as there may be some duplication of functions there and scope for
             savings. This will help towards the challenging targets identified above.

3            Alternative Options – Stock Transfer
3.1          Whilst retention of the stock would appear to be a viable option, local authorities
             and ALMOs are subject to continued government controls unlike registered social
             landlords (RSLs) who operate in a more flexible environment. In particular RSLs
             can access grants from the Housing Corporation, have more freedom to borrow

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             and to build and acquire assets. One option which the Council has is to transfer
             some or all of its stock to one or more RSLs. In order to do this there would need
             to be a ballot of all affected secure tenants. The government runs a programme
             for stock transfers of over 500 units. Bids for the last round closed in July 2006,
             although it is anticipated that there will be future rounds.
3.2          RSLs are not subject to the same rules on recycling of rent surpluses and RTB
             receipts and have more scope to grow. They are nevertheless subject to VAT
             (which could impact upon leaseholders particularly) and non-charitable activities
             are subject to Corporation Tax.
3.3          In order to assess the entire transfer option we carried out a valuation of the
             entire stock. This indicated that, largely because of the VAT liability on repairs
             and management contracts, the valuation was likely to be negative (around minus
             £30m). However we believe that it would be possible to make this positive
             through making savings in VAT (e.g. through VAT savings in management costs /
             VAT shelter) and by transferring some of the vacant land on the estates which
             has a potentially high value.
3.4          An entire transfer would enable any residual debt to be written off by the DCLG
             and present more scope for the new landlord to better utilise the assets available
             as well as grow. It would be possible to convert CWH to a RSL. Against this it
             would be necessary to secure a positive vote.                 Given the significant
             improvements which tenants have received in recent years there may be less to
             offer residents in the short term and this could affect the likelihood of obtaining a
             positive ballot. The Council would also have to be aware of any residual costs
             following closure of the HRA.
3.5          A further option would be to explore a partial option of a specific group of stock
             (eg an estate). Again given the works programme recently carried out, the
             justification for this would need to be examined carefully. Transfer may be an
             option for estates which require some form of redevelopment. This may require
             some form of gap funding (perhaps from the DCLG) depending on the scope for
             cross subsidy from private sale. A small scale transfer might need to involve an
             existing RSL. We were specifically asked to look at the street properties or
             Queens Park as an option for transfer (rather than redevelopment). Whilst the
             street properties in particular indicated a high level of investment need in the early
             years and higher preliminaries (eg scaffolding) over 30 years the costs were not
             hugely dissimilar from the average. Subject to a more detailed analysis of rent
             income levels the valuation might therefore be similar to the overall average.
3.6          Overall the RSL model does offer more flexibility than the current Council and
             ALMO models in terms of future growth and flexibility. However in order to
             secure a transfer it would be necessary to get a positive vote and this could be
             difficult unless there was a major case for investment.

4            Financial Freedoms Model
4.1          CWH, in common with other ALMOs, was set up with a specific purpose to enable
             access to additional government funding. It has been successful in achieving that
             aim and delivering the corresponding decent homes targets. In doing so it has

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             also been successful in achieving the necessary high performance service
             standards to secure that funding. In addition the ALMO structure has led to a
             more focussed approach to the landlord function through the setting up of the
             ALMO Board.
4.2          However the role of an ALMO is limited when compared with that of the RSL
             sector. As ALMOs do not own the stock they have to date had less scope, to
             utilise opportunities to facilitate development and grow in the same way as some
             RSLs. ALMOs, like local authorities, have also been subject to the effect of a
             gradual reduction of stock through the Right to Buy, albeit that sales have
             reduced in recent years.
4.3          The DCLG recently agreed to carry out a review itself of the scope for the ALMO
             sector to take on new responsibilities and in particular the option of high
             performing authorities, including those with ALMOs to withdraw from the current
             subsidy regime. This followed a report by the Chartered Institute of Housing
             (CIH) / National Federation of ALMOs (NFA) / Housemark in 2005 on the
             opportunities this might present. The case study work for that report was carried
             out by Tribal and included as one of the case studies, City West Homes.
4.4          The exercise now being carried by the DCLG includes six new case studies and
             is expected to report in March 2007 in time to inform the next government
             Comprehensive Spending Review (CSR). Tribal is providing financial support to
             the DCLG as part of the review.
4.5          The basic premise of the financial freedoms model is that the authority / ALMO is
             able to withdraw from the subsidy regime without transferring its stock. This
             would mean, in Westminster’s case some of the existing debt being written off
             and the Council / CWH thereafter being dependent on the income it could secure
             from its own assets in much the same way as RSL. It would also give more
             scope for new development and growth.
4.6          There are, however, a number of issues around this model which need to be
             addressed first:
             ■       The DCLG has indicated that the impact on the Exchequer would have to be
                     neutral (unlike on stock transfer) based on its interpretation of future subsidy
                     entitlement. This means that it could be less easy to negotiate a favourable deal.

             ■       The accounting arrangements would need to be addressed and the vehicle for the
                     new arrangements would also need to be agreed – i.e. would this involve CWH and
                     in what capacity

             ■       Arrangements for monitoring performance of the self sustaining HRA would need to
                     be put in place including steps to deal with underperformance – what regulatory
                     powers would the DCLG retain

             ■       If introduced this would probably be through an annual programme and the Council
                     would probably need to bid against other authorities

4.7          These issues and others will hopefully be addressed as part of the forthcoming
             review but the outcome of this will not be known until next March at the earliest.

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5            Other options for utilising assets / securing resources
5.1          In addition to its housing assets Westminster also owns significant landholdings
             on many of its housing estates and adjoining areas which could be used for future
             development. This was highlighted by the Housing Commission and an indicative
             schedule of sites was provided as part of our appraisal. It has been estimated
             that around 500 new units may be built on these sites.
5.2          In order to maximise the use of this land the traditional model would involve using
             a RSL along with a developer. In some cases the sites may be best used for
             private development in order to optimise the cross subsidy available for affordable
             housing on the least valuable sites. This will need to be subject to a more
             detailed examination.
5.3          Recent changes in the capital financing rules have meant that it is now possible
             for Councils and ALMOs to explore this sort of project as well, although the
             arrangements are still in their infancy. Whilst access to SHG may still be limited
             at present, the new prudential borrowing rules do not prohibit authorities and their
             ALMOs from developing these sites themselves although given the current
             subsidy rules this would need to be outside the HRA (unless the financial freedom
             model is put into effect). There may also be scope for CWH to become the
             delivery vehicle for social housing on S106 schemes.
5.4          If CWH or another Council owned vehicle outside the HRA was to explore these
             opportunities more fully it would need to:
             ■       Be aware of the risks associated with any development scheme – CWH has no
                     experience of developing at present and would need to carry out a full feasibility on
                     each scheme

             ■       Probably need to start on a small scale site to begin with in order to test its ability to
                     do this

             ■       Decide on where the new assets would sit and how any land transfers were to be
                     put into effect – ensuring that the assets do not classify as Part II housing (which
                     would mean being part of the HRA)

             ■       Look to form a partnership with one of the Housing Corporations agreed RSL
                     partners if SHG was being sought

5.5          When looking at individual sites further thought may need to be given to wider
             redevelopment options on the estate depending on the existing and potential
             density and the private development land values. Redevelopment options are
             potentially more risky and each scheme would need to be carefully assessed.
             Under current rules CWH could not access gap funding from the DCLG to support
             such a redevelopment.
5.6          A further option to access additional resources would be to explore the Private
             Finance Initiative (PFI). The government has made considerable resources
             available to support both new housing schemes and refurbishments /
             redevelopments. A number of authorities are now exploring PFI as a way of
             providing new affordable housing.
5.7          The main downside to PFI, to date, has been the lengthy and expensive process
             to set up and procure the contracts. Whilst the DCLG has made attempts in

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             recent years to shorten this process and reduce costs by introducing a more
             standardised approach and sub regional arrangements this has acted as a
             deterrent for many authorities and potential bidders. It should also be noted that
             PFI specifically precludes public sector bodies from bidding directly for these
             contracts and so CWH would be unable to bid in its current guise. The last
             bidding round closed in March 2006 but it is anticipated that there may be further
             bids next year.

6            Conclusions
6.1          Our analysis of the Council's current Housing Revenue Account position and
             future forecasts suggests that the HRA will be sustainable over the short to
             medium term (up to 15 years). It should also be sustainable over the longer term
             although this will be dependent on achieving the more challenging assumptions
             as set out in section 2.
6.2          The current ALMO contract with CWH has a further 5 years to run. Given the
             potential opportunities that may yet emerge from the current DCLG review of
             financial freedoms we believe it would be worth continuing with the current ALMO
             contract for that period. Bringing the contract back in-house at this stage may
             also have other disadvantages such as reducing tenant involvement, external
             governance and potentially losing the ALMO allowance.
6.3          Large scale transfer would provide a long term sustainable model for the stock if
             a positive valuation can be agreed. This would allow existing debt to be written
             off and would give the new landlord more scope to exploit opportunities for
             development in future. However this would require a positive ballot of tenants.
             This may be more difficult to secure at Westminster as tenants have had the
             benefit of a large programme of improvements over the last few years and there
             will be less incentive to vote for a transfer.
6.4          As highlighted above the financial freedoms model is currently being reviewed by
             the DCLG and may offer some scope for Westminster and CWH although initial
             indications are that it will not be as financially attractive as transfer.
6.5          In the meantime it would be worth the authority further exploring the opportunities
             available within its own land assets as also highlighted by the Housing
             Commission. There may be scope to cross subsidise new social housing from
             private sales without the need for social housing grant. The usual model for this
             would involve a RSL but there may be scope to use CWH or another council
             owned vehicle to develop the new affordable housing outside the HRA pending
             the outcome of the financial freedoms review.       This needs to be subject to a
             value for money assessment to identify the best use of public funding and assets.
             When looking at the land sites it might also be worth looking at wider estate
             redevelopment options where appropriate.
6.6          One further option would be to convert CWH to an RSL. This would hopefully
             increase the prospects of securing a positive transfer vote from tenants who
             might be more likely to support continuation of the current managers and would
             open up access to the Housing Corporation grants and other freedoms enjoyed
             by RSL’s.

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6.7          The Council might also look at PFI as a way of securing extra government
             resources towards new build or regeneration although these schemes can take a
             while to see through and can be quite expensive to set up. Further analysis of
             individual schemes would be required.

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