The panel was asked to ‘advise on how the development capacity in LSVT housing associations and stock-holding local authorities can be maximised especially after 2020 when all existing stock meets the WHQS’.
Key recommendations
- Welsh Government should commission an independent financial review of the Welsh Large Scale Voluntary Transfers (LSVTs) in receipt of Dowry and the Housing Revenue Accounts of local authorities in receipt of Major Repairs Allowance (MRA). The Review should scrutinise business plans post the achievement of Welsh Housing Quality Standard (WHQS) in 2020, including financial metrics together with cost KPIs to examine whether continued receipt of Dowry/MRA on a rolling five-yearly review period basis can be justified.
- LSVTs and local authorities should be required to demonstrate an accelerated programme of decarbonisation of existing homes in return for an ongoing commitment to Dowry and MRA.
Context
Of the 225,000 social rent homes in Wales, 68,000 are provided by LSVT associations and 87,000 by local authorities.
LSVTs get annual Dowry gap funding paid annually (£43.8m in 2018/19 with a remaining £858m due over the life of their initial business plans) and this has given them leverage to raise significant additional private finance.
MRA capital funding (£60.4m in 2018/19) is paid annually to the 11 stock-holding local authorities and is used to meet the WHQS by December 2020. There is no long-term agreement with councils.
The two mechanisms enable landlords to achieve and sustain WHQS but also fund aids and adaptations, housing management support and environmental improvements associated with the physical re-modelling of large estates with non-traditional properties.
Responses
The panel looked primarily at the Dowry and says that LSVTs had a natural incentive to ‘fully load’ business plan costings on stock condition etc and that the risks of under-estimating investment requirements may have loomed larger at the point of transfer than they turned out to be:
‘In Wales, like England, the resulting experience has been a near universal “out-performance” of these original business plans as spending programmes and operating and economic assumptions were better in the real world than anticipated.’
In England the Dowry was paid upfront, whereas in Wales it is paid annually, allowing Welsh Government to review the current position on the basis of value for money, viability, capacity and performance.
MRA goes towards the cost of achieving WHQS by 2020 and maintaining it after that. Not all Welsh councils have achieved WHQS so far, with four planning it in 2020.
The panel says it recognises that each social landlord is unique and that there is no ‘one size fits all’ policy. It also notes concerns that removing or changing Dowry payments could constitute ‘an event of default’ and induce renegotiation of LSVTs’ existing loan terms.
A new framework
Despite these arguments, the panel concluded that the current system ‘should not go unchallenged’ for either LSVTs or councils.
It calls for ‘an urgent and independent review’ of all of the landlords using common and consistent benchmarks and looking at factors such as business plan capacity, cost and performance KPIs and future investment plans. The review should scrutinise business plans post the achievement of WHQS in w2020 and investment that may be required to meet new standards that may replace WHQs.
A framework should then be developed in which there would be ‘clear links between continued receipt of funding under a rolling five-yearly review mechanism and the achievement of value for money and meeting quality standards in respect of existing housing stock’.
The panel argues that LSVTs and councils should be ‘required to demonstatred an accelerated programme of decarbonisation of existing homes’ in return for a continuing commitment to Dowry and MRA.
Welsh Government should be prepared to support new financing arrangements if an individual LSVT’s existing financing and an inability to refinance is identified as a potential barrier to effective delivery.
The panel acknowledges that the review will involve a period of uncertainty for LSVTs and the need to provide assurance for lenders and investors but notes that lending to Welsh LSVTs was always on the basis of an annual Dowry payment and an assumption of a committed position over the full life of the plan:
‘The panel is not recommending that this position should change, but rather that continued receipt of Dowry (whether in full or in part) should be based on clear evidence of additionality, value for money and return on investment.’
Additional recommendation
- As part of the independent financial review, where an inability to refinance was a potential barrier to effective delivery within reasonable financial parameters, then the use of other options such as contingent debt guarantees should be considered.