The finance frontier

Stardate: 28 March 2012. As the sun rises council housing bosses in England will find themselves looking over a brave new world. The 171 authorities which still own homes will find themselves floating free of the much-hated housing revenue account: the centralised regime which allowed Whitehall, rather than town halls, to decide how their tenants’ rents should be spent.

Around a quarter of stock-owning authorities - 33 - will be better off as the government clears £5.3 billion of their housing debt. The majority of authorities, however - 136 - will embark on their self-financing voyage carrying more of a financial burden. As part of the deal, the government has split the £13.4 billion of historic housing debt held by councils, between them.

The offloading of this princely sum onto cash-strapped councils’ backs will place local authorities under varying degrees of strain. They’ve been given the freedom to explore new frontiers, but some will be so severely weighed down by debt, they will be unable to journey far. Others, however, will be able to boldly go and build new homes and spruce up their properties to a standard well beyond the ‘decent’ one set by the last government. So what will set councils apart from each other in this new era?

Councils’ ability to launch themselves into ambitious schemes is not simply determined by whether their debt goes up or down. For example, Southwark Council will have £200 million wiped off its debt, yet it will initially be in a worse state than before it became self-financing. Housing policy advisors and consultants point to three critical factors which influence local authorities’ capacity to make the most of their new-found independence.

The first and second of these are the two types of ‘headrooms’ in the 30-year business plans which authorities have drawn up for their futures under self-financing. The third factor is something best described as ‘gumption’ or ‘guts’: their willingness to prudently manage higher levels of debt rather than clearing it as quickly as possible out of fear of the minus sign.

The pay-off

‘My sense is that there are a number of authorities that don’t like debt full-stop,’ says Steve Partridge, managing director of Chartered Institute of Housing Consultancy, which has helped many councils with their business plans. ‘They will do whatever they can to pay it off as quickly as possible. But that isn’t the majority.’

The headroom in authorities’ business plans are for ‘borrowing’ and ‘revenue’. The former is determined by a borrowing cap which the government has set for each authority. This places a ceiling on the amount of debt they can rack up. The borrowing headroom is the space between their starting level of debt and the cap. Most local authorities will, of course, see this starting debt soar into the stratosphere as they help pay off the historic £13.4 billion they collectively owe the government.

Lambeth Council’s £408 million cap creates the largest borrowing headroom of £148 million. Southwark comes in a close second with a borrowing headroom of £126 million thanks to a £577 million cap.

In total, the government had given the nod to an extra £2.9 billion of local authority borrowing. Our analysis shows that just four councils have a borrowing headroom exceeding £100 million. Three-quarters have the capacity to boost their loan portfolios by between £1 million and £50 million.

Not all councils will - or can - rush to the City with their borrowing requests, however. Southwark, for example, has no plans to make use of its £148 million headroom during the next five years. The reasons for this seeming reticence are twofold: it is still saddled with high-interest payments from its house building sprees in the 1960s and 1970s and it lacks the necessary ‘revenue headroom’ to service any new loans.

Spending spree

Revenue headroom is essentially the surplus that authorities make on rental income after paying their bills. Waverley Council, which campaigned vigorously for the self-financing regime, has immediate plans to spend its £4 million revenue surplus on house building and refurbishment programmes - something it was unable to do under the HRA.

Not all local authorities will be so quick off the mark, according to Matthew Warburton, policy advisor for the Association of Retained Council Housing, which represents around half the self-financing authorities. ‘There is a certain amount of caution,’ he says. ‘They don’t want to take risks until they are used to working with these arrangements.’

He predicts that most authorities will focus on refurbishment programmes before embarking on ambitious building programmes. ‘I think first of all, most councils will take the opportunity to catch up on repairs to existing stock which they couldn’t do previously.’

Proceeding with caution

John Whitehouse, associate director at consultancy Sector, agrees that some councils are taking a careful approach. Some tenants may have to wait some time before feeling the benefits of the new self-financing regime, he adds.

‘They [councils] are prepared for the self-financing regime but I am not convinced they are geared up to spend any additional resources. In the immediate future we will see little change.’

While all local authorities must have their business plans agreed before 28 March, many are yet to work out the finer details, such as where surplus revenue or new loans will be spent. Lincoln Council, for example, will first quiz its tenants about what they want before setting its plan in stone.

A rise in building

The CIH’s Mr Partridge thinks local politicians’ enthusiasm for new homes could, however, prompt a quick-sharp rise in the number embarking on building programmes. The 22 local authorities which have already begun house building programmes will shoot up to 122 within the next three to five years, he predicts.

‘A very great number of authorities could be building [new homes] within the next few years,’ he says. ‘I think the appetite is there, even in the smallest districts.’

Regeneration and development is likely to be the most popular of the four main areas into which councils channel their resources, believes
Mr Partridge: ‘It is the one that lights up members’ eyes’. Surplus cash could also be used to introduce new services, make existing homes more eco-friendly or pay off debt, he adds.

One authority which has already put a number on the new homes it will build is Cambridge. The city hopes to build 250 properties over the first five years of its business plan. This will be funded in part by its £16 million borrowing headroom.

Julia Hovells, finance and business manager at the city authority describes the self-financing regime as a new territory. ‘The big difference for local authorities is the move from annual settlements from the government in the national HRA financing system to an environment where you know what your debt is from day one so you are able to plan more effectively to meet local needs.’

Waverley Council is also planning to make the most of its new found freedom - it’s venturing into previously unexplored worlds.

‘We were so used to having no money to spend. Now we have the opportunity to invest in our stock and increase it,’ sums up Angela Smithers, head of housing at Waverley. ‘We will be a bit busy.’