Compound X – Regulation’s Secret Ingredient

A recurrent nightmare of developing RSL’s has quietly raised its head and peeked out from Brussels. Social Housing Grant (SHG) might be considered by the European Union as an unfair form of subsidy, to be opened up to competition.  This prospect is not new. Every few years the idea of opening up SHG to house builders is floated.  Such proposals have been seen off by effective lobbying by the NHF and RSL’s in the past, but is the European Commission is about to put its weight behind this idea?  If so, does it matter?

Before considering whether access to SHG should be opened up to competition, we should pause to reflect on what it is that the Government is seeking to obtain in exchange for making SHG available.

In the past the Government was ‘purchasing’ an increased supply of affordable housing to meet an unmet demand. However, the 1990’s saw Government progressively increase the price for access to SHG.  This now covers not just the provision of additional housing, but compliance with a detailed set of standards for how the properties are to be let, how they are to be managed and maintained, requirements on consultation and complaints policies and procedures and last – but by no means least – restrictions on the rents to be charged and the rate of rental increases.  There has never been a more all-encompassing set of requirements attached to SHG or any of its predecessors since local and central governments started intervening in housing markets in the 19th century.

These obligations are monitored and policed through the Housing Corporation’s regulatory powers.  How would this mesh with an EU-driven change to our systems to open up SHG availability to others?

If regulation is the means of enforcement, does it mean that non-RSL’s will have to register with the Housing Corporation, and allow themselves to be subject to regulatory jurisdiction?  What would this mean in practice?  If the majority of a developer’s turnover was in social housing, perhaps they could successfully register. But if only a small part of their activity involved the provision of social housing, under current Housing Corporation rules they could not register.  Could the ‘Social Housing Division’ of the developer alone register and be subject to regulatory checks.  Why not?

But there is another method, apart from the regulatory model, of seeking to ensure that we keep to the deal that we have entered into.  This is the contractual route.  Compulsory competitive tendering (CCT), stock transfer agreements and the Private Finance Initiative (PFI) all show how long-term operational obligations can be monitored and policed.  If the obligations are not kept, another party has the contractual ability to enforce performance.  We see this approach being used ever more widely – witness the move to a contractual basis for procurement under Supporting People.

There are a number of issues that would need to be resolved if we considered using a contractual basis for policing the long-term obligations associated with the availability of SHG.  For example, who is the contract between?  The RSL and the Housing Corporation?  The local authority (as strategic housing enabler)?  The tenants?  It would might depend upon who benefits from the obligation undertaken by the RSL.  On issues of management and maintenance, it would be the tenant.  What about issues such as probity during the development process?  Who benefits from this undertaking? Or, turn it round the other way – who loses?  Society at large?

Let’s assume that such issues could be resolved, leading to a prospect that SHG may be able to be opened up to competition without going through the cumbersome requirement of registering with the Housing Corporation.  Is such a prospect likely or desirable?

One of the reasons why the prospect of developers accessing SHG in the past has faded away has been the lack of appetite of most developers for the long-term responsibilities that go with it.  However, some developers have indicated that they would like to sign up to the whole package, as they would sub-contract the long-term operational responsibilities (and obligations) to RSL’s.  So, the developer develops, using their expertise, and the long-term landlord manages and maintains, using their expertise.   The overall public policy objectives of SHG will have been met – additional accommodation will have been provided to the prescribed standards and good quality long-term management of the stock is secured.  But, even better than the current situation, this has been done through an open and competitive manner not by engaging in the restrictive practices of limiting availability of SHG to one sector of potential providers.

Is there anything wrong with this approach?  Do we feel uncomfortable with this scenario? If we do – and my experience is that we certainly do! – what are our reasons and do they bear scrutiny?

RSL’s want to undertake development and regeneration work to meet the needs of local people. But there can be a strong feeling that it must be OUR RSL that meets the needs of local people, not our neighbouring RSL or – heaven forfend – anybody else!  We have demonstrated our fiercely competitive instincts very publicly for more than ten years now.  The drive for organisational growth – as opposed to the drive to meet people’s housing needs – has in some cases been breath-taking, and in most cases is tangible.

So let’s take a deep, deep breath and put those producer interests to one side, and consider this from the point of view of the consumer – the tenant – or the commissioner – central and local government.  Does the prospect of opening up SHG to wider competition really matter, if good quality accommodation and management can be delivered through a contractual framework?

Perhaps the answer to this question is “no it doesn’t” – but there’s a big ‘if’ in there!’  How effective is a contractual basis – or a regulatory one come to that – for securing best practice landlord behaviour over many years?

What constitutes best practice?  Is it the rate of rent increase, or is it the way that the landlord communicates with the tenant about rent increases?  Is it about meeting maintenance response times, or is it even more about whether the resident is treated with consideration when the work is being undertaken?  In short, is best practice something that can be described in contract documentation?  If it can, can it be effectively monitored and enforced?  What is the balance between producing detailed requirements and being able to check whether or not they are being delivered?

We have some experience of this in the CCT and PFI arenas. It can prove difficult to monitor all of the CCT requirements.  Equally, having seen some PFI contracts, I suspect that the most satisfied purchasers will be those who have set a limited number of performance standards for their partners to achieve, so that they can make sure that those at least are being delivered upon.

How does the system work at the moment?  How does the Housing Corporation get a grip on whether RSL’s are meeting the spirit as well as the letter of the regulatory requirements?  Well, I don’t think they do.  I don’t think it is possible for them to do this without much more detailed – and therefore intrusive – monitoring.  Instead, they rely on the culture of the organisations that they are regulating.  And this, I think, is the key point.

In any set of regulatory or contractual requirements there will be gaps where judgement has to be made over what is the right thing to do. The differences in “quality” between one landlord and another will generally arise from the judgements and actions that the landlord makes in these ‘grey areas’.  Those judgements and behaviours will themselves be driven by the organisational culture and objectives.

RSL’s are involved in the provision and management of accommodation for those in housing need because we want to help.  We don’t have to do it, we just want to – the motivation is to contribute to the social good.  Private companies are obliged to meet the demands of their shareholders, whose objective is a financial return.  This is fair enough.  However it does imply that when those judgements have to be made in the ‘grey areas’ protecting the financial interests of the organisation must have a higher priority for private companies than it would for RSL’s.

Thus, whether government wishes to purchase the long-term obligations that are attached to SHG through a regulatory or contractual framework, they will need to work with organisations whose culture is in tune with the spirit of those obligations. The alternative is to establish such a detailed regulatory/contractual regime that potential players will be seriously turned off, or it will have to fall back on only monitoring a limited set of requirements, and give no thought to ‘the grey areas’.  In summary, the choices seem to be the current system, a bureaucratic nightmare or a deliberate reduction in standards for the vulnerable in society.  I wonder if the European Commission will see it that way.

Published: Thursday, February 3rd, 2005, 12:56 pm | Posted in: Blog
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