HRA Reform – Risks and Issues

Posted: 25th June 2011

HRA Reform – Risks and Issues

In general, the principles behind HRA reform and self-financing are laudable and to be welcomed – self-financing offers greater local control, accountability and the opportunity for longer term planning.

We shouldn’t forget that the previous government first conceived the plans, and there is broad agreement that reform is needed, both at the political and technical level. We do, however, have concerns if grandiose claims are made about what the reforms will deliver.

Everyone knows the existing system is labyrinthine and technically complex. HRA business planning is mostly science, but there’s some art in there too – it is pretty easy to plug in some barely justifiable variables and come up with some large numbers to prove a case. This is magnified on a national scale. The danger is that simplistic claims could be made using a technical model – suggesting a degree of scientific sophistication that just isn’t there. This may have been interesting but fairly harmless before self-financing, with the comfort blanket/straightjacket of government subsidy determinations.

But in future, we must temper the boldness of decisions on (for example) debt strategy and new build proposals with an injection of realism. How sympathetic would a government be towards a local council that borrowed to the hilt (i.e. its cap) on the basis of assumptions on assumptions, and then struggled to repay debt because some of those assumptions, for reasons beyond the control of the council, proved to be incorrect?

We have many excellent housing & finance professionals working in local government supported by other specialist organisations who can help guide local housing authorities through the complexity. However, we’ve got to be realistic – many authorities don’t have the expertise or the capacity to have enough confidence to use HRA business planning, either to inform real decision-making or to address the issues arising from the complex treasury management that is required.

But this is what we face from next year. So another risk is the simple lack of capacity and steep learning curve. This is not insurmountable, but will take time – perhaps years – before local authorities are capable of using business planning to inform confidently medium- and long-term decisions on investment and borrowing. History has taught us that in these circumstances, most councils are (ultra) conservative with borrowing and tentative (to a fault) when driving through budget reductions required in the business model. This will at least postpone, and maybe negate the full benefits of self-financing which are there to be unlocked.

Some specific issues regarding HRA reform:

– the quantum of rent income will vary due to a number of factors. Government policy; affordable rents strategies; the size of stock which will fluctuate through sales and regeneration; the level of voids; collection rates, especially with the universal credit. These will all be factored into the modelling, but the issue is that rents won’t precisely rise by inflation + ½% in the long term.

– similarly, although government required reductions may help costs to stay at or below RPI in the short-term, costs are unlikely to continuously rise linked with RPI. Recent evidence suggests that relevant industry inflation rates are quite volatile and difficult to predict.

– HRA business planning and the self-financing model is subject to the vagaries of government policy and, as we have seen, world economics. We are trying to predict 30 years hence in this environment. That’s OK, we know and appreciate the uncertainty – we should even be able to access funding for investment on the back of the planning – but, in our opinion, it would be risky to factor into economic plans assumptions of huge investment resources being freed up.

As ever the devil is in the detail…

Susan Kane is a Partner at Altair

Tim Willis is a Director at Altair

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