Making the Most of Council Housing

FiscaE Studies (1994) vol. 15, no. 1, pp. 44-63

Making the Most of Council Housing

STEVE WILCOX”

I. INTRODUCTION

During the 1980s, sales of individual council houses made up by far the largest component of the government’s various privatisation initiatives. In the 13 years to 1992/93 those sales raised almost f28 billion, more than the sum of the next three largest privatisations - gas, electricity and BT - put together.

However, the prospects for further “right to buy” sales are now limited, and this will not be greatly affected by the recent introduction of the “rents to mortgage” form of sales to replace the barely used “right to shared ownership’’ variant on the right to buy.’

In 1989 the value of council and new town dwellings sold in Great Britain amounted to around E3.4 billion; on current trends the out-turn 1993 figure will be little more than E800 million, before taking account of large-scale voluntary transfer (LSVT) disposals.

Despite the impact of earlier right to buy sales, local councils in Great Britain retain a significant asset base in their council housing, one that has been accumu-

* Steve Wilcox is Senior Research Associate, University of Wales College of Cardiff and Associate Consultant, HACAS. The author is grateful to the co-authors of the JRFfloH report, and particularly to Colin Woods of Chapman Hendy Associates for undertaking some further financial modelling on the Newcastle case study. He is also grateful to Geoff Meens for assistance in using his macroeconomic model, and to an anonymous referee for some very pertinent observations. ’ The “rents to mortgage” scheme will have little impact, as in most parts of the country tenants could already exercise the right to buy without having to incur mortgage costs greater than their rents (assuming a 25-year repayment mortgage, according to the criteria for the minimum “rents to mortgage” purchase calculation).


lated with the benefits of historic costs over the last century. One estimate has put its current national value as rented housing at around NO billion. Its replacement cost is assessed in the UK National Accounts at close to 2100 billion.

Two central questions for housing policy and government finances are, how should the benefits of that asset be maximised, and who should be the beneficiar- ies?

11. THE TREASURY TWO-STEP: CAPITAL AND REVENUE CONTROLS

The Local Government and Housing Act 1989 introduced a new local authority capital control system, covering housing as well as all forms of council investment. It also introduced a new structure for councils’ “Housing Revenue Accounts” (HRAs).

Both the capital and revenue financial regimes were designed to “target” central government support more efficiently, as advocated, for example, by the National Audit Office.*This has been achieved by ensuring that the benefits of the asset of local council housing with low historic costs accrue primarily to the Treasury.

Under the 1989 Act, 75 per cent of the receipts from council house sales must be set aside against outstanding HRA debt, while 25 per cent can be used for new investment. In addition, part of that 25 per cent “usable” receipt is taken into account in the formulae for allocating credit approvals which set the limits for council borrowing to support housing and other capital investment. Under the old financial regime, government limits had applied only to the rate at which councils could use their capital receipts.

The new revenue regime for council housing, introduced under Part VI of the 1989 Act, placed a “ring fence” around the Housing Revenue Account, prohibiting revenue transfers between the HRA and the General Fund, except where expressly directed by the Secretary of State. More significantly, the Act effectively com- bined the old “basic” housing subsidy with the subsidy paid towards the cost of housing benefits for individual council tenants. Before the Act was introduced, most councils had stopped receiving any basic housing subsidy, as they reaped the benefits of the low historic costs of their housing investment in earlier decades.

Under the 1989 Act, however, it is calculated that such councils should generate a notional surplus, and this is deducted from their entitlement to housing benefit subsidy. Across England and Wales as a whole, those surpluses have been estimated at just over €750 million in 1993/94, and are set to rise close to €950

Department of the Environment Housing Needs and Allocations, National Audit Office, HoC 567 1988/89.

45

Fiscal Studies

million in 1994/95.3 These surpluses meet some 20 per cent of the total cost of housing benefits to council tenants and, if this factor is taken into account, projections of growth trends in DSS expenditures are significantly reduced?

More fundamentally it should be recognised that the offset arrangement against housing benefit subsidy is simply the particular device used to transfer the financial gains derived from low debt council housing from the councils to the Treasury. It follows earlier attempts, such as the Housing Finance Act 1972, and subsequently the definition of the “E7” component in the Rate Support Grant formula in the early 1980s, which sought the same Treasury objective by other means.5

The key point about the 1989 Act provisions, from the perspective of the Treasury, is that they have succeeded where the earlier attempts failed, and they have secured a financial return that can understandably be viewed as some recompense for the subsidies it has provided in previous decades.

The 1989 Act expenditure controls have typically borne down most on the English and Welsh District Councils, which until April 1990 enjoyed the benefits of low historic costs. At the same time, since 1990 councils’ capacity to invest to repair, improve and develop their housing stock has been further restricted by reducing levels of credit approvals and declining levels of council house sale receipts.

Table 1 shows just how sharply gross housing investment by English councils has fallen since 1990, with investment in 1992/93 at only just over 50 per cent of the average level through the 1 9 8 0 ~ ~ Following the 1993 Autumn Statement, and the sharp decline in the levels of capital receipts from council house sales, etc., investment levels are set to fall again in the years ahead.

111. THE GREAT ESCAPE: LARGE-SCALE VOLUNTARY TRANSFERS (LSVT)

The recent initiatives by a number of local councils which have transferred their council housing to new landlords under what has become the LSVT programme, has been a significant response to the constraints on councils’ ability to make the most effective use of their housing assets.

’ Answer given in written answer to Parliamentary Question (30/11/93) by Nick Raynsford, MP. See DSS (1993). The impact of rent surpluses in offsetting the growth in the cost of housing benefit payments

to council tenants is recognised in a footnote to Table 8 in the DSS report, but is ignored in the main analysis. The savings in housing subsidy achieved by the Department of the Environment through higher rents are also ignored in this very partial document.

For a good general account of these earlier Treasury attempts to secure a share in the current surpluses now being generated by much council housing, see Malpass (1990).

This is derived from Table 48C in Wilcox (1993).

46

TA

BL

E 1

G

ross

Hou

sing

Inve

stm

ent b

y E

nglis

h C

ounc

ils, Em, 19

91/9

2 Pr

ices

1979

1 19

80/

1981

1 19

82/

1983

/ 19

84/

1985

/ 19

86/

1987

1 19

88/

1989

/ 19

90/

1991

1 19

921

80

81

82

83

84

85

86

87

88

89

90

91

92

93

6791

53

24

4675

53

52

5648

52

72

4304

41

69

4283

43

92

5887

33

39

2690

25

41

Not

e: E

xpen

ditu

re sh

ould

rise

to a

roun

d f3

billi

on in

199

3/94

, as

a re

sult

of th

e ca

pita

l rec

eipt

s “h

olid

ay”.

How

ever

, fol

low

ing

the

1993

A

utum

n St

atem

ent,

expe

nditu

re is

like

ly t

o fa

ll ba

ck to

roun

d f2

billi

on b

y 19

95/9

6.

Sour

ce: T

able

48c

, Housing

Fina

nce

Rev

iew

199

3, J

osep

h R

ownt

ree

Foun

datio

n.

3 E 9‘

oc

Fiscal Studies

By May 1993, 23 councils had successfully transferred their housing stock, involving some 118,000 dwellings (see Table 2). In the process they have been paid El018 million, which in the first instance must be used to set against council HRA debt, or to redeem it fully. For the 23 councils this amounted to f.489 million. Up to 25 per cent of the gross receipt, if available, can be used by the council for new investment. Any balance of the receipt must then be applied against General Fund debt.’

Something over &250 million from the sale receipts have become available for new investment by the councils, but not all of this has been used for housing investment. In some cases some of the resources have been used for investment in new leisure centres, and more generally to relieve financial pressures on council General Funds. Some LSVT councils have also seen the levels of credit approvals for non-housing investment fall, as the Department of Environment has taken into account the usable element of their LSVT receipts.

Nevertheless, in the majority of cases most of those usable receipts seem to have been used for housing investment, very often financing the new landlord to build new homes. Broadland District Council, for example, has provided &5 million in Housing Association Grant (HAG) mainly to Wherry HA, from areceipt of E25 million. El8 million have been set against the HRA debt, and some 21.8 million were used to meet the setting-up and transaction costs of the transfer.

South Bucks DC has provided over 28 million in HAG to Beacon HA from a LSVT receipt of E34.5 million. Some E7.5 million are still available, however, after allowing for the E17.3 million used to redeem the HRA and General Fund debt, and the E l .75 million costs of undertaking the transfer and the investment so far undertaken.

A number of the councils benefiting from LSVT in this way were among those which, prior to the 1989 Act restrictions, had chosen to transfer revenue surpluses from the HRA to their General Fund. While the revenue benefits from General Fund debt redemption accrue to the local council, the government nonetheless achieves a PSBR reduction through the application of the capital receipt to both HRA and General Fund debt redemption.

A further significant impact on housing investment has also been achieved by new landlord bodies, who have been able to raise private finance to carry out major repairs and improvements to the transferred stock, and to undertake new building programmes. An allowance for “catch-up” repairs is a key element in the LSVT

’ Councils are free to use any further balance remaining, once the General Fund debt has been covered, for further investment (with some qualifications).


TABLE 2 Large-Scale Voluntary Transfers by Councils

Total Housing Stock Transfer bans debt Usable

LSVT authority size receipt arranged (HRA) receipt Balance tw

Chiltern Sevenoaks Newbury South Wight Medina RochesterlMedway Ryedale Swale North Beds Broadland Mid Sussex East Dorset Tonbridge & Malling South Bucks Christchurch Suffolk Coastal Tunbridge Wells Bromley Surrey Heath East Cambs Breckland Hambleton West Dorset

Total

4650 6530 7050 2120 2830 8030 3350 7350 7470 3720 4430 2250 6390 3320 1540 5270 5520

12,390 3070 4270 6680 4270 5280

117,760

33 66 47 23 28 77 28 55 64 25 44 22 54 34 14 34 58

118 29 32 60 34 40

1018

63 68 49 37 35 90 54 75

130 41 90 41 97 60 34 75

102 136 45 48 90 55 73

1586

21 25 43 23 17 53 13 37 45 18 25 11 22 16 7

25 40 0

13 0

21 8 6

489

8.2 16.4 4 0 7

19.3 7.1

13.8 16.1 6.3

11.1 5.4

13.6 8.5 3.5 8.5

14.5 29.3 7.3 7.9

15.1 8.4

10.1

241.1

3.7 24.1 0 0 3.9 4.8 8.2 4.4 3.2 0.8 8.2 5.2

18.8 9.5 3.6 0.5 3.6

87.8 8.8

23.6 24.4 17.3 24.4

288.6

Notes: a to nearest 10. must first be set against General Fund debt; any net balance in a further usable receipt.

49

Fiscal Studies

valuation exercise, amounting to some &36 million in the case of the Bromley to Broomleigh transfer.8

In total, LSVT landlords have raised private finance amounting to almost f 1.6 billion, some &570 million more than required to purchase the housing stock. However, a good part of those facilities will be used to cover the cost of short-term operational deficits, rather than being earmarked for new investment.

There are no comprehensive data available on the investment undertaken and planned by LSVT landlords, but some indication can be given by a few examples. Broomleigh HA plans to invest E78 million on major repairs and stock improvements in the seven years to the end of the decade. It also intends to invest some E28 million in new developments (in addition to its share of the f25 million in HAG provided by Bromley since the transfer took place).

West Berkshire HA plans &46 million investment in major repairs and improvements over the same period, Beacon HA some &20 million, and Ryedale HA and Wherry HA El2 million each. By March 1993 Wherry HA had also raised f18.5 million in private finance for various new developments and initiatives, including E4.7 million in BES funding for Wherry Properties plc. As in a number of other cases, Wherry HA has rapidly set out an ambitious programme for new developments, operating over a far wider geographical area than just its originating council district?

What is clear from these cases is that housing investment undertaken by the new LSVT landlords, using private finance, is likely to exceed rapidly the levels of investment undertaken by the LSVT councils utilising the stock transfer receipt.

One particular factor to note is how LSVT has effectively been restricted to councils where the transfer would fully redeem the outstanding debt on the housing stock, and generally leave a significant balance available to the council. In the limiting case of South Wight the receipt was just sufficient to clear the HRA debt. Bromley and North Bedfordshire taken together, in contrast, obtained receipts of well over E200 million in excess of their HRA debt.

IV. THE LSVT REVIEW

Following the last election the government undertook an extended LSVT Review, as the DSS and the Treasury became alarmed at increases in housing benefit

* LSVT valuations are arrived at by a “Net Present Valuation” calculation based on the future streams of rental income and right to buy receipts, offset by the future streams of management and maintenance costs, including the cost of “catch-up’’ repairs. While the broad methodology is well established, individual valuations are clearly a matter of local negotiation and have varied significantly from one transfer to another (see Gardiner and Hills, 1992). gThe author is grateful to the individual LSVT councils and new landlords for providing these data on investments.

50


subsidy costs resulting from the loss of contributions from council rent surpluses. In the case of Bromley alone, for example, those costs amounted to some 57 million per annum.

In effect, the LSVT councils were escaping from the controls imposed by the 1989 Act that were quite efficiently securing a financial return for central government. LSVT both capitalised those benefits, and secured a greater propor- tion for the LSVT councils, local gains achieved at the expense of the Treasury, however.

Following consultations, the government has now imposed a 20 per cent levy on the transfer receipt available after the HRA debt has been covered. This is broadly intended to compensate the Treasury for the loss of rent surpluses contributing towards the costs of housing benefit. If it had been applied in the 19 LSVT transfers that took place before the LSVT review was concluded, it would have raised &80 million for the Treasury.

The government has also imposed stricter limits on the maximum size of any one transfer, and now requires any council stock of more than 5000 dwellings to be split on transfer. It also now requires stock transfers to form part of an annual programme, linked to interdepartmental budget arrangements to compensate the DSS for the increased housing benefit costs following transfers. For 1993/94 that programme included 13 councils seeking to transfer some 43,500 dwellings.

In practice, fewer than 30,000 dwellings will be transferred, as tenants in a number of cases (such as Maidstone) have rejected the proposals. More generally, it remains the case that roughly half the proposed stock transfers to new landlord bodies are rejected by tenants in ballots following consultation, despite the lessons that have been learned from some of the early failures at Torbay and elsewhere.

There are many particular reasons for such failure, including political contro- versy, and poor and/or inaccurate presentation of the issues." A common factor, however, is that in all cases the councils have needed to persuade tenants to accept a radically different form of landlord body (generally a housing association), over which the council will have very little future influence. LSVT guidelines restrict council representation to a maximum of 20 per cent of the membership of the new landlord body.

In 1994/95 the government will expand the transfer programme slightly. It has given an initial green light to 12 councils to transfer some 55,000 dwellings, subject to the results of tenants' consultation, and agreement on the detailed terms and conditions for transfer.

lo The sometimes one-sided presentation of the issues in LSVT tenant consultation exercises have been criticised in a number of places, including Mullins et al. (1992). The Secretary of State must be satisfied that a majority of tenants is not opposed, before he gives his consent to the transfer going ahead ( Section 6, Housing and Planning Act 1986 ). In practice a formal tenant ballot requiring a simple majority is generally undertaken.

51

Fiscal Studies

To date all but one of the new LSVT landlords are registered housing associations and, by the middle of 1993, they already accounted for over 25 per cent of the housing stock owned by all housing associations in Englmd. On current trends, LSVT landlords will own nearly 50 per cent of all housing association dwellings by the end of the decade, and will have fundamentally altered the composition of the housing association sector.

V. LOCAL HOUSING COMPANIES

While the LSVT review was being undertaken, the idea of “local housing companies” was also being examined in the study by the Joseph Rowntree Foundation and Institute of Housing (JRWIoH), published in March 1993. This study set out to examine alternative new financial and constitutional options for the future of council housing. Such alternatives would remove the constraints of public spending controls, and at the same time prove more acceptable to councils and tenants than the limited options currently offered by LSVT.

The study involved detailed financial modelling of alternative “stock retention” and transfer options, for a broadly representative range of 13 English and Scottish councils. This specifically included a range of councils with both relatively high and low levels of outstanding debt on their HRA. It included urban councils such as Bristol, Derby and Newcastle, as well as district councils such as St Edmundsbury and Sedgemoor.”

The Financial Options As discussed above, every LSVT undertaken to date has involved councils where the transfer receipt has exceeded the historic debt for the housing stock. On average the receipt has been worth just over twice the amount of the debt.

The financial rationale for these authorities is fairly clear. The transfer not only allows the new landlord to undertake major repairs and improvements to the housing stock, but also provides the council with a very substantial net capital receipt, for both new investment and to redeem General Fund debt, in turn improving the council’s revenue position.

” See the JRFnoH study (Wilcox et al., 1993). Altogether 13 authorities provided financial and other data to the study. The authors were very grateful for their assistance with the study, and it must be stressed that the conclusions drawn in the report are wholly the responsibility of the authors, and in no way reflect the views of the authorities concerned. The JRF/IoH study also examined the impact of transfers at outstanding debt, rather than following the methodology adopted for LSVT valuations, and examined the option of transfers based on revenue rather than capital payments. Transfers at historic debt would have been very advantageous for some councils, but would have made transfer impractical for others. Historic debt transfers would have a disadvantageous effect on the Treasury, and would also create a “business relationship” between the council and the new landlord body, within the meaning of Part V of the 1989 Act.

52


However, despite the 20 per cent LSVT levy introduced following the government’s review, the impact on the Treasury can vary significantly at local level. Some transfers still impose net long-term costs on the Treasury, while others see gains for the Treasury as well as for the local council, depending on the balance of the various financial flows which impact on the PSBR (see Figure 1).

From a Treasury perspective, future savings in credit approvals for investment in the housing stock must also be taken into account, as well as the VAT income the Treasury receives from the repair and improvement work contracted out by the new landlord bodies.12 While VAT does not enter into the impact of LSVT on “General Government Expenditure” (GGE) it is clearly appropriate to take account of its impact on the PSBR, not least because that VAT expenditure is in turn one of the factors taken into account in arriving at the LSVT valuation.

Among those councils with LSVT valuations sufficient to cover their HRA debt completely, the JRF/IoH study clearly showed the uneven impact of LSVT on the Treasury. In the case of Sedgemoor, LSVT (with the 20 per cent levy) was calculated to give the Treasury a net gain of 56.2 million net present value (NPV), while in the case of Sutton there would be a cost of 558.3 million (NPV), notwithstanding the levy. The main reason for the difference is that the forgone rent surpluses at Sedgemoor were estimated at 525.3 million (NPV), compared to 5102.1 million (NPV) at Sutton.

One rather perverse finding was that the LSVT levy would cancel out any net local financial gains for Bristol, thus removing any incentive for the council to contemplate transfer. Yet if such a transfer were to proceed, the Treasury would stand to gain almost &195 million (NPV), even if it did not apply the LSVT levy in that case. In each case the above figures are expressed as a summary “net present value” of the financial flows modelled over a 30-year pe13od.l~

Turning LSVT Upside Down More significantly, however, the JRF/IoH study found that transfers where the sale receipt would not be sufficient to redeem the outstanding HRA debt fully, were more likely to provide gains both locally and to the Treasury.

l 2 While it is clear enough what the central elements are to be included in the financial evaluation of stock transfers, drawing the precise boundaries around which factors to include and exclude involves some judgement. For example, while the 5+ per cent of housing benefit costs that fall to council General Funds following stock transfers still form part of General Government Expenditure, it nonetheless represents a revenue saving to the Exchequer and to the PSBR. l 3 In the main JRFlIoH study a discount rate of 8 per cent was used to derive all the NPV figures, following the rate required by the DOE for the purpose of LSVT valuations. The Treasury-preferred convention for assessing major capital projects is a 6 per cent discount rate. Recalculation of the JRF/IoH results for the Newcastle case study, using a 6 per cent discount rate, somewhat changed the figures but did not significantly alter the relativities or the general conclusion.

53

Fiscal Studies

FIGURE 1 Financial Impact of LSVT on the Treasury

1 ~ ~ v ~ t e v y I

Repaid debt L l Gains costs

This pattern was repeated in the results for Derby, Edinburgh and Newcastle. This is largely because the authorities in those circumstances are also those that are not currently contributing rental income towards the costs of housing benefit. On transfer, there is therefore no increase in central government housing benefit expenditure.

For those councils such transfers would generate no usable capital receipts nor direct revenue benefits to the General Fund, in the process switching resources from central to local government. They would, however, release substantial resources for investment in repairs and improvements to the housing stock, and free up any future credit approvals for other investment.

For central government, the sale receipt would serve to reduce the PSBR, even if it did not fully redeem the outstanding debt, and remove the need to provide future credit approvals for investment in the housing stock. While the transfer would impose a cost on government in the form of subsidy on the residual housing debt, the Treasury would still see financial gains in the form of VAT income on repairs and improvements expenditure by the new landlord body.

Hitherto, central government and local councils have only considered ownership transfers that would leave a residual debt, in the context of strategies to revitalise individual estates. The central financial message from the JRF/IoH report was that such transfers could also be mutually advantageous where they involved the whole stock.

54


“All Win” at Newcastle These findings were exemplified by the “all win” case of Newcastle, as set out in Tables 3 and 4. Table 3 shows how, over the first five years, stock transfer would permit a net 277 million increase in housing investment, at the same time as securing a E l 15 million reduction in the PSBR.14

This seeming magic is achieved by the sale of the stock for E78 million (all of which is used to redeem HRA debt) to an organisation that stands outside the definition of “general government”, by reduced levels of future credit approvals for council housing investment, and by the use of private finance by the new landlord for a significantly increased programme of investment in repairs and improvements to the housing stock.

There are increases in government expenditure in the form of residual debt subsidy, but there are no losses of rent surpluses towards the costs of housing benefit. Indeed there is a transfer of 5(+) per cent of the benefit costs from central government to the local councils.

The Treasury will also see gains, not only in the form of VAT revenue, but also from other tax revenues and benefit savings flowing from the employment effects of the net increase in capital investment. While the other tax revenues may be seen as slightly separate, the VAT revenues must logically be considered, as the VAT liability of the new landlord is reflected in the LSVT valuation.

Table 4 shows the results of the Newcastle case study, with the financial flows over a 30-year period condensed and expressed as “net present values”.15 These figures do not include the tax revenues and benefit savings that would flow from increased investment, other than VAT, as they were outside the scope of the main financial modelling in the JRF/IoH study.

The results of the longer-term modelling essentially show that the financial gains of the stock transfer option in the early years are broadly maintained over the full period of the modelling. One item shown in Table 4 is the cost of the General Fund contributions the council is required to pay towards the cost of housing benefit paid to the tenants of the new landlord body. For LSVT councils this has not generally been an issue, as the net capital receipt from the transfer has brought compensating financial gains to the General Fund,

l4 Table 3 shows figures over the first five years following transfer, and the opportunity was taken to take account of the tax revenues and benefit savings to the Treasury resulting from the net increase in housing investment, rather than just the VAT income from total contracted-out expenditure by the new landlord. These figures were calculated using Geoff Meens’ OEFlJRF Housing and the Macroeconomy model. ”The figures in Table 4 are Net Present Values, calculated using the 6 per cent discount rate preferred by the Treasury for such exercises, rather than the 8 per cent discount rate generally applied in the JRF/IoH study.

55

Fiscal Studies

TABLE 3 Financial Impacts of Transfer in the First Five Years

Year1 Year2 Year3 Year4 Year5 (fm)

Capital Increase in local capital investment +13.5 +16.2 +16.3 +16.2 +15.2 Net capital impact on PSBR -81.8 -6.4 -6.6 -6.7 -6.8

Revenue Impact on Treasury Increase in HRA subsidy +15.1 +15.2 +15.1 +15.0 +15.0 VAT income +8.4 +8.8 +9.1 +9.4 +9.8 Revenue gains from employment impact of increased capital investment +3.6 +7.0 +9.0 +9.0 +8.5

Net revenue impact on PSBR +3.1 +0.4 -3.0 -3.4 -3.3

Total Net Capital and Revenue Impact on PSBR -78.7 -6.0 -9.6 -10.1 -10.1

Notes: Increase in investment is shown net of VAT. The PSBR reduction results from the initial capital receipt on the sale of the stock, and the subsequent reductions in levels of credit approvals to the council. The investment by the new landlord is wholly funded by private finance and is outside GGE and the PSBR. The increase in HRA subsidy results from the need to cover the residual debt on the stock following transfer. There is also a small transfer of housing benefit costs from central to local government. VAT income is based on the revenue (maintenance only) and capital expenditure of the new landlord body.

~ ~~ ~

Watch the Definitions It should be stressed that both the Newcastle and other case study results are particular to the conventions of current PSBR definitions, and the prevailing structures and policies for taxation, subsidies and local government capital controls. Two factors are fundamental to the financial gains shown to follow from stock transfers.

Firstly, the PSBR reflects the receipts obtained from the LSVT sale, with no corresponding adjustment to reflect the reduction in the “balance sheet” of remaining public sector assets. Secondly, the investment by the new landlord bodies is financed privately, while council borrowing for investment forms part of GGE and consequently counts against the PSBR.

56


TABLE 4 Newcastle Metropolitan Borough Council

Financial Modelling over a 30-Year Period (all figures expressed in SOOOs as “net present values”,

calculated using a 6% discount rate)

Option 1 Option 2 Stock retention Stock transfer

Local Resources Landlord body

Capital repairs and improvements (net of VAT)

Council General Fund + Housing capital resources

= Total local capital Comparison to Option 1

Council General Fund - revenue impacts - Contributions to housing benefits

= Total local revenue

228,182

11,540

247,765

76,834

239,722 0

324,599 84,877

0 0

0 29,733

0

Comparison to Option 1 0

Total local impact Comparison to Option 1

239,722 0

Treasury Expenditure General housing subsidy 41,385

+ Housing benefit subsidy 575,715 + Net additional capital 126,85 1 - Additional VAT income 0

0 - Income from LSVT levy

(29,733)

(29,733)

294,866 55,144

202,125 564,925 (31,652) 88,021

0

= Total Treasury impact 743,95 1 Comparison to Option 1 0

647,377 (96,574)

57

Fiscal Studies

It is often argued that councils should be free to invest capital receipts, as they were for receipts obtained during the “holiday” announced in the 1992 Autumn Statement, which ran until the end of December 1993. That freedom for local councils has, however, both subsidy and capital costs for central government that impact on the PSBR. While capital receipts are “counted in” to the Exchequer, albeit in the peculiar form of “negative expenditure”, it follows logically that they should be “counted out” when they are spent.

It can be argued very readily that capital receipts should be wholly excluded from the definitions of GGE and the PSBR, and treated as a local self-financing item, in the same way as council investment funded by rental income. This would not reduce the PSBR, as it would follow that capital receipts are excluded not only as expenditure but also as income, and over a run of years this will balance out.I6

The impact of prevailing policies on the modelled financial impacts of stock transfer can also easily be seen by comparing the results of the English and the Scottish case studies, which are subject to rather different revenue and capital financial regimes. Scottish authorities are not required to contribute rents towards the cost of housing benefits, and General Funds are required to contribute 5+ per cent of all housing benefit costs, including those paid to council tenants.

In consequence, on existing policies, stock transfer in Scotland does not involve central government in forgoing rent surpluses towards the cost of housing benefits. It would, however, take away the opportunity for the Scottish Office to introduce policies similar to those in England and Wales, to share in the benefits flowing from the low historic costs that are even more characteristic of Scottish authorities. In that sense stock transfer involves an opportunity cost to the Scottish Office that is not recorded in the modelled results.

The Scottish case studies nevertheless show an increase in central government housing benefit costs. This is because, following stock transfer, the “right to buy” is not available to future tenants, and the resulting lower level of sales leaves the new landlord with a larger rented housing stock than would be the case if it were retained by the council.

The impact of this factor in the modelling for the Scottish case studies was quite substantial, reflecting the higher rates of right to buy sales generally in Scotland, compared to England, in the base year for the financial modelling. In Perth and Kinross, for example, stock transfer increased central government housing benefit costs by 10 per cent, from E48.5 to E53.4 million (NPV).

Discount Rates One other element of LSVT policy that was followed in the financial modelling should be particularly noted. The discount rate required by the Department of the

I6There would, however, be financial effects in individual years due to the time lags between receipts being obtained and spent.

58


Environment in LSVT valuations is 8 per cent. This rate is set in part to reflect the risks and responsibilities being undertaken by the new landlord bodies, and the costs they face in raising private finance.

If the government were prepared to support some form of arrangement to provide guarantees for that borrowing, as has been more generally advocated for housing association borrowing, it would be possible for the loan charges to be reduced. This in turn would enable the discount rate used for LSVT valuations to be lower, increasing the resulting valuations. On average a reduction in the discount rate from 8 per cent to 6 per cent has been shown potentially to increase LSVT valuations by over 20 per cent.I8

A policy change in this area could substantially increase the financial gains from stock transfers. Conversely, without such a change it should also be recognised that stock transfers impose a cost, as local authority debt refinanced by the new landlords in the private sector will generally incur higher loan charges.

Catch-Up Repairs : A Limiting Factor The Leicester case study indicated another important factor determining the potential gains and costs from LSVT transfer. In that case, the level of necessary catch-up repairs was assessed by the council at an average of over &7000 per dwelling, and this produced a negative LSVT valuation.

On that basis, transfer at Leicester would commit the government to doubling the capital resources it would otherwise have been likely to make available, and underwriting that investment through a massive increase in subsidy payments on a residual debt increased by &77 million.

In contrast, the catch-up repair figures in Derby and Newcastle were around &3,000 per dwelling, and the transfer was assessed to increase local investment resources by about 50 per cent over the full 30-year period. In Edinburgh, the catch-up repair figure was over 25000, but under the rather different financial regime applying in Scotland, this was assessed to increase local capital resources only by a minimum of 15 per cent.I9

The relevant criteria for the Treasury are not so much the absolute level of required catch-up repairs, as the extent to which these result in increases in

See, e.g., Pryke and Whitehead (1993). ‘*An average figure of a 23 per cent increase in valuations is reported in “What Price Housing?’ (see n8 above). l 9 There is also no mechanism in Scotland equivalent to the “General Needs Index” (GNI) used in England to allocate basic credit approvals for housing investment to councils. In England the JRF/IoH study used the GNI by excluding the components related to council housing stock condition, to calculate the lower level of credit approvals that might be made to councils following stock transfer. In Scotland the initial assumption was that the council would receive no capital allocation for HRA housing following a transfer. In all the Scottish cases, however, the financial gains to the Treasury would have been sufficient to permit the Scottish Office to commit additional capital resources to the individual councils, so as to ensure that the transfer could be mutually advantageous.

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investment beyond those it would have otherwise have been likely to finance, and whether those increases are more or less than the other net financial gains resulting from the transfer.

The further reductions in the level of future credit approvals for council housing investment, announced following the 1993 Autumn Statement, will consequently reduce the potential savings to the Treasury from stock transfers, while increasing the net local gains in the investment resources available for stock renovation.

Financial Conclusions The findings of the JRF/IoH study are important, not least because about 60 per cent of the council housing stock is owned by urban and other councils where an LSVT receipt would not be sufficient fully to redeem the HRA debt. The main potential Treasury gains from stock transfer, assessed at roughly some El6 billion by the JRF/IoH study, lie with councils that LSVT has not yet reached.

The Constitutional Options

So new investment opportunities may be seen to arise from the refinancing of the asset represented by council housing. If that asset is placed outside public sector expenditure controls, this leaves open the question of the constitutional form the new landlord bodies should take.

Under the guidelines for LSVT, the government has restricted council partici- pation to no more than 20 per cent of the board membership of the new landlord body. In all but one case to date, transfers have been to housing associations, and in all cases they have followed the council membership guidelines. In a number of cases, however, the new landlords have also included tenant representatives on their boards.

The JRF/IoH report argues that the LSVT guidelines are unnecessarily restric- tive. There is no reason why local councils should not have a greater degree of involvement in the running of the new landlord bodies, with no loss of the financial freedoms that flow from being placed formally outside the “public sector”.

Part V of the Local Government and Housing Act 1989 In Sweden, local housing companies are distinct corporate bodies, wholly owned by, but quite separate from the local authorities. For national accounting purposes their borrowing is not counted as part of public spending.

In the UK, however, companies on the Swedish model would be defined as “controlled” companies, within the meaning of Part V of the Local Government and Housing Act 1989. This definition applies to all companies that are majority controlled by local authority councillors, and in consequence any borrowing by those companies falls within the same capital expenditure controls that are applied to councils.

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For central government, expenditure by such companies is counted as part of General Government Expenditure, in just the same way as expenditure by central and local government. While this approach is not dictated by international public sector accounting conventions, it is consistent with those conventions, and also with earlier Treasury precedents used to define the boundaries of which bodies may include borrowing as “public expenditure”.

The 1989 Act also defines local authority “influenced” companies as those in which the council has more than 20 per cent representation on the company committee, and there is a “business relationship” between the council and the company. The 20 per cent membership limit corresponds with the limit imposed on post-LSVT landlord bodies.

Borrowing by “influenced” companies is also counted by the Treasury as part of General Government Expenditure, and is once again counted against local council capital expenditure controls. It can readily be argued that the expenditure rules imposed by the Treasury on “influenced” companies are excessively zealous, and are in marked contrast with the more relaxed approach taken in Sweden, and in France, Germany and other EU countries.2o

The more immediate point, however, is that local authority stock transfers do not create a “business relationship” within the meaning of the 1989 Act. Such a relationship can be established in a number of ways, such as disposal of council assets to the company at below market value. LSVT-style transfers, however, are based on sale at prevailing values, for a stock of housing that is contracted to be made continuously available for the purpose of social renting.

There is therefore no legal necessity for the government to impose the 20 per cent limit on council representation that it has applied to LSVT to date. Techni- cally, provided that new landlord bodies are not majority controlled, and do not have a business relationship with the council, they are simply “minority interest” companies within the meaning of the 1989 Act. It is planned that minority interest companies should be subject to a number of minor regulations, such as prohibiting disqualified councillors from their boards, but they are not included within the scope of council capital expenditure controls.

The central constitutional argument in the JRFAoH report is that local housing companies could have up to 49 per cent council representation on their committees, with no need for changes to existing local government legislation or public expenditure rules.

Within that single constraint, such “companies” could take a number of legal forms. For example, Nick Raynsford MP has suggested that the committees for companies might consist of one-third councillors, one-third tenants, and one-third

2o In European countries that flexibility also arises because the principal social landlords are to a greater or lesser degree remote from central and local government, and do not inescapably form part of general government.

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useful professionals. Alternatively companies could be structured to provide an “ownership” equivalent of estate management boards.

It is also possible that these “companies” could be a form of registered housing association. Provided that neither tenants nor council representatives were considered individually to have effective control over the company, they would readily fall within the scope of the existing regulations governing housing association registration.

Such modified LSVT housing associations would also have the advantage of being familiar to the private finance institutions in the LSVT market, who take comfort from the safeguards involved in the monitoring and regulatory role of the Housing Corporation.

VI. NEW JOINT PILOT STUDY

Following the JRF/IoH study, the local housing company idea is now being considered as a hard option by five urban councils (Camden, Enfield, Manchester, Middlesborough and Sheffield) and the Department of the Environment and the Housing Corporation, who have agreed to participate in a joint study with those councils.

In that context the Department of the Environment has already indicated that it is prepared to be more flexible in looking at the constitution of companies, and that it accepts the case for some relaxation of the current 20 per cent council membership limit imposed by the LSVT guidelines (while at the same time ruling out anything approaching 49 per cent council membership).

Within that framework the joint study will examine in more detail than the JRF/ IoH report the constitutional, taxation and funding issues involved in setting up local housing companies, or other bodies with an appreciable measure of council involvement.

Similar government flexibility will be needed in taking account of the impact of the transfer of an element of housing benefit costs to council General Funds, and in reaching an understanding on future levels of financial support for council investment following the transfer.

As seen in the Newcastle results, for councils where the whole of the transfer receipt will be applied towards reducing the level of the outstanding HRA debt, there are no net receipts available either to benefit the General Fund, or provide resources for future investment as part of the councils “enabling” role.

One method of resolving those concerns would be to offer those councils a form of “negative” LSVT levy, but the important point is simply that some way needs to be found of ensuring that all parties can share in the potential financial gains from the transfer.

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The new joint study is intended to report by the summer of 1994, so that new guidelines for stock transfers can be put in place to operate in 1995/96. The financial methodology for the joint study will be similar to that used for the JRFI IoH study, but with a more structured examination of the costs associated with the condition of the housing stock in each case study.

Future Prospects There is a clear financial rationale for transfers of council housing to new ownership to expand rapidly in the years ahead. In addition to the financial pressures on councils, which were exacerbated by the 1993 Autumn Statement, there are also pressures for change arising from local government reorganisation, and the extension of compulsory competitive tendering to the council housing management function.

LSVT has been a district council initiative, designed to secure local benefits from the mature asset of their housing stock. As such, it has had mixed financial impacts on central government finances, not wholly resolved by the advent of the 20 per cent LSVT levy.

The extension of the large-scale transfer option to large urban authorities opens up the prospects for a radical restructuring of most of the housing stock now owned by local authorities, with clear financial gains both locally and for central government.

Whatever the financial rationale, agreement to such transfers remains depend- ent on securing local political and tenant support. Agreement to a greater measure of council involvement in the new landlord bodies, so that they can be viewed as fitting successors, is likely in many cases to be a critical factor in securing that support.

REFERENCES

Department of Social Security (1993) The Growth of Social Security, London: HMSO. Gardiner, K. and Hills, J. (1992) “What price housing? Valuing ‘voluntary transfers’ of council

Malpass, P. (1990) Reshaping Housing Policy, London: Routledge. Mullins, D., Niner, P. and Riseborough, M. (1992) Evaluating Large Scale Voluntary Transfers of

Local Authority Housing, London: HMSO. Pryke, M. and Whitehead, C. (1993) “The provision of private finance for social housing: an outline

of recent developments in funding existing housing associations in England”, Housing Studies, vol. 8, no. 4.

housing”, Fiscal Studies, vol. 13, no. 1, pp. 54-70.

Wilcox, S. (1993) Housing Finance Review 1993, Joseph Rowntree Foundation. Wilcox. S., Bramley, G., Ferguson, A., Perry, J. and Woods, C. (1993) Local Housing Companies:

New Opportunities for Council Housing, Joseph Rowntree FoundationlInstitute of Housing.

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Documents

Making the Most of Council Housing