1. AWICS Independence….. Integrity.….Value Self Financing and the Comprehensive Spending Review: Implications for Local Authority Housing A presentation for Southwark Tenants’ Group Adrian Waite – 24 th November 2010

2. AWICS Independence….. Integrity.….Value Self-Financing  All Councils to become self financing  Debt to be redistributed based on tenanted market value  Stronger guidance around the HRA ring fence  Legislation required unless all Councils can agree the formula

3. AWICS Independence….. Integrity.….Value Redistribution Justified “There is a clear rationale for the current redistributive housing revenue account subsidy system. Councils have different spending needs and different capacities to raise income. Without redistribution, some councils would have to charge higher rents or deliver lower quality services. By redistributing money, all councils should be able to deliver a similar level of service while charging a similar level of rent.” John Healey MP – Minister of Housing

4. AWICS Independence….. Integrity.….Value No Debt Write Off “It has been suggested that Government should pay off all the housing debt held by local authorities (currently in excess of some £18bn), leaving rents to support only the day to day running costs of the stock. This debt was incurred in building and maintaining council housing. It is therefore right that it should continue to be serviced from council rents. It would be unaffordable and unfair to ask the general taxpayer to support this debt in future.” Consultation Paper

5. AWICS Independence….. Integrity.….Value Tenanted Market Value  Method of valuing council housing used in Stock Transfer  Based on thirty year cash flow model in which the valuation is the balancing factor –It calculates how much debt the landlord can afford based on assumptions about rent, revenue expenditure, investment and interest rates

6. AWICS Independence….. Integrity.….Value Basis of Tenanted Market Value - Revenue  Based mainly on subsidy allowances –Guideline Rent –Management & Maintenance Allowances plus 5% –Major Repairs Allowance plus 24% BRE research suggested it should be 43% –But how these increases would be distributed geographically is yet to be determined

7. AWICS Independence….. Integrity.….Value Basis of Tenanted Market Value - Capital  Based on Stock Condition Survey or excluded from Tenanted Market Value? –Decent Homes Standard plus works to lifts and common parts  Capital grants to fund decent homes (£1.4billion to £2.9billion) and backlog of works (£6billion)  How can all this be affordable?

8. AWICS Independence….. Integrity.….Value Borrowing under Self- Financing “Ending the current subsidy system and moving to a self-financing model without constraints could… enable a significant increase in prudential borrowing. “Allowing unlimited prudential borrowing would be inconsistent with the government’s overall fiscal and macro-economic policy. The department would therefore need to ration or limit in some way any additional borrowing over what was implied by the notional initial business plan.” Consultation Paper

9. AWICS Independence….. Integrity.….Value The New Coalition Government “The Council house finance system is a mess. For far too many years this unfair system has tied the hands of councils, stopping them from best meeting the housing needs of the communities they serve. “The four million tenants living in council housing deserve better. That is why this coalition government is committed to genuine action to overhaul the system. “I want to see a new devolved system that puts councils firmly in control and gives them the financial freedom they need to make the best long term decisions about their housing. But it is important I hear from councils and other experts themselves that the current proposal genuinely allows them to do this. And in these tough economic times I need to be convinced this approach offers the best possible value for money. “So I encourage everyone to… send me their views. Once I have considered these I will announce the next steps to return power and money to councils and communities themselves.” Grant Shapps MP, Minister of Housing

10. AWICS Independence….. Integrity.….Value Comprehensive Spending Review 2010 (1)  Reforming the Council housing finance system so local authorities have greater control over their own finances and can re-invest to meet local housing need –Implementation 2012/13  Reform of the council housing finance system will build in the resources needed to carry out future disabled housing adaptations required in the housing stock  Social landlords will be able to offer a growing proportion of new social tenants new intermediate rental contracts that are more flexible, and rent levels between current market and social rents (80% of market rents) –Target to build 150,000 new social homes –End to tenancies for life

11. AWICS Independence….. Integrity.….Value Comprehensive Spending Review 2010 (2)  Commitment to decent homes remains with £2billion committed (consultation paper suggested £9billion for decent homes and backlogs) –Insufficient capital grants  Priorities will be Disabled Facilities Grants and Supporting People  1% increase in PWLB rates  £7billion of savings in housing benefits  Public Expenditure reduced by 19%, Local Government by 28% and Housing by 51%.

12. AWICS Independence….. Integrity.….Value Capital Receipts  Consultation proposed an end to Pooling –75% ring fenced to housing –Reductions in other CLG housing budgets  Comprehensive Spending Review –Suspended this proposal until 2015 –25% retained locally –75% returned to Treasury –No increase in capital receipts –How viable will new build schemes be?

13. AWICS Independence….. Integrity.….Value Depreciation and Major Repairs Allowance  The self-financing settlement is based on uprated Major Repairs Allowance  The proposal is to use Depreciation as a source of funding for major repairs  Depreciation is a higher figure than major repairs allowance –Councils may not be able to afford depreciation –This may demonstrate that uprated major repairs allowance is insufficient  Technical problems in calculating depreciation –Component Accounting –Land –Residual element

14. AWICS Independence….. Integrity.….Value Modelling Business Plans – March 2010  Scenario Valuation Base (rents less revised M&M and MRA allowances) - £27.68billion  Base plus PFI schemes signed prior to April 2011 - £26.35billion  The current level of debt assumed is: –2010/11 SCFR and ALMO debt £21.49billion  Increase in debt £4.86billion at 6.5% discount rate or £3.66billion at 7% discount rate

15. AWICS Independence….. Integrity.….Value Proposed Debt Settlement for Southwark Borough Council  Net Present Value Debt - £468.1million  Existing Debt - £775.1million  Proposed Debt Write Off - £307.0million  Housing Subsidy received 2009/10 - £33.5million

16. AWICS Independence….. Integrity.….Value Potential Changes to the Model  Updated data – the data in the consultation paper is based on 2011/12. Self-financing will happen in 2012/13.  The effect of 80% intermediate market rents?  Will Housing Revenue Accounts escape the 19% reduction in public expenditure?  Potential Mechanisms for change? –Reduced allowances –Assumed efficiency gains –Reinstated Minimum Repayment Provision

17. AWICS Independence….. Integrity.….Value Homes & Communities Agency Proposals for Capital Grant  Not much money –2011/12 £260m; 2012/13 £352m; 2013/14 £389m; 2014/15 £594m –2009 consultation paper identified £8.9billion was needed for decent homes and backlogs  Councils to bid for their share –Level playing field for retention and almo authorities  2011/12 to be allocated through Supported Capital Expenditure  2012/13 to be allocated through adjusting opening debt

18. AWICS Independence….. Integrity.….Value Communities & Local Government Business Plan – November 2010  Policy Paper on Reform of Social Housing – November 2010  Publish details of how the ‘affordable rent scheme’ will work – January 2011  Publish responses to the earlier HRA reform consultation - overdue (July 2010)  Publish detailed proposals for HRA reform – already started, to be completed January 2011  Consult on final self-financing HRA settlement – November 2011 to January 2012  Final determinations published – January to April 2012  Consult on New Homes Bonus Scheme – November to December 2010  Abolish the TSA – November 2011

19. AWICS Independence….. Integrity.….Value Housing Subsidy Determination 2011/12  Guideline Rents up 6.8% based on 4.6% inflation and convergence in 2015/16  Management and Maintenance Allowances to at least equal 2010/11  Major Repairs Allowance up 1.9%  No new capital allocations –HCA to manage consultation and bidding

20. AWICS Independence….. Integrity.….Value Housing Subsidy Determination 2011/12 – Implications for Southwark  Guideline Rent - £4,477.47 (+5.9%)  Management - £1,113.90 (+0.6%)  Maintenance - £1,535.43 (+3.4%)  Major Repairs - £980.94 (+4.0%)  Loss of Subsidy - £153.75/unit - £6.0million in total

21. AWICS Independence….. Integrity.….Value What does Self-Financing Offer?  An end to Housing Subsidy  An end to Prudential Borrowing, continued capital receipts pooling and insufficient capital grants  Pressure on the HRA caused by the Depreciation mechanism  Potential adverse changes to the financial model following the Comprehensive Spending Review  No incentive to continue with ALMOs  Stock transfer back on the agenda but without central government financial support

22. AWICS Independence….. Integrity.….Value Self Financing and the Comprehensive Spending Review: Implications for Local Authority Housing The End – Any Questions or Comments? Adrian Waite (Independent Consultancy Services) Limited, Appleby Business Centre, Bridge Street, Appleby in Westmorland, Cumbria. CA16 6QH. Tel: 017683-52165, 52347 or 07502-142658. Fax: 017683-54005. E-mail: adrian.waite@awics.co.ukadrian.waite@awics.co.uk Websites: www.awics.co.uk and www.awics.euwww.awics.co.uk