40. This chapter outlines our proposals for development consortia. It explains the role of the head of a consortium, formation of consortia, the importance of consortium agreements and the bodies we consider should be able to join a consortium. It complements the discussion of Lead Developers in chapter 3.
41. In recent years, many Scottish RSLs have sought ways to work more closely together, especially on procurement and development issues. We consider that, in order to secure the required increase in efficiency in procurement and investment, most RSLs will need to operate with the backing and support of a number of other RSLs. After pre-qualification, the first step for any RSL seeking to become a Lead Developer will therefore be to establish relationships with other RSLs in order to form a consortium.
42. There should be flexibility in how consortia are structured, so that any RSL wishing to add to its stock is free to apply to join any consortium, or indeed more than one consortium 13.
43. Of course, RSLs will work out for themselves what suits them best and a successful consortium will depend on strong and positive relationships amongst all consortium members. Previous experience and good practice suggests that these relationships must be formalised in an agreement which is clear about responsibilities and where accountability for decision making lies. We propose not to prescribe either which consortia RSLs should join, nor how a formal agreement between consortium members is structured. But we do propose that each consortium head and members should put a formal agreement in place and that this will be a requirement for any consortium that bids for subsidy.
Responsibilities of a consortium head
44. We propose that an RSL in the role of consortium head will be responsible for the investment programme and development processes for themselves, and on behalf of the other members of their consortium. The expected scope of these responsibilities are set out in Table 5:
Table 5 - Expected roles for consortium heads
- Leadership - It is anticipated that consortium members will contribute resources (which may be land, or local knowledge, or appropriately experienced staff) to the overall development activities of the consortium, so that maximum value can be secured from new investment. Consortium heads will agree with the other consortium members what the nature of their contribution will be, how relationships within the consortium will work and which organisation will eventually pay for, own and manage the new homes. They will also agree with consortium members how to manage contracting and procurement in order to secure the most value from the process, and how completion and transfer of new homes to the eventual owners and managers will work.
- Contracting and procurement - With the consent and support of other consortium members, the consortium head will negotiate and contract as necessary with private sector and public sector organisations. They will use the opportunities available from longer-term planning to put in place Framework Agreements for the development of new homes and will take advantage of opportunities for more efficient and effective procurement.
- Quality - The consortium head will be expected to ensure that the quality of the new homes to be delivered will continue to be of a good standard. This starts with meeting new higher Building Standards consistent with the Sullivan report 14 which aims to reduce carbon emissions from new build by 30% in 2010, and extends to ensuring a high quality of design, ensuring that the new homes have a positive impact on the local neighbourhood.
- Grant agreements-The consortium head will be the body that receives and manages subsidy and will be accountable for spend to Government and to other RSL partners. The consortium head will be expected to affirm progress during the course of the development period and this progress will be judged against targets and milestones set out in the grant agreement. Should there be slippage in the programme or other difficulties, the consortium head will be expected to take corrective action. To do this successfully it will be very important that the other consortium members recognise the consortium head's role in this and allow it sufficient authority.
Formation of consortia
45. We wish to encourage formation of RSL consortia as early as possible. It is preferable, though not essential, for consortia to be formed before a pre-qualification application is made by the prospective consortium head. It is also possible that some RSLs that already operate in a grouping with like-minded RSLs can quickly form consortia. They will then be well-placed to seek pre-qualification and to begin work on a long-term proposal that is intended to lead to appointment as a Lead Developer.
46. We propose that an RSL does not have to be pre-qualified in order to join a consortium. But they do have to be pre-qualified in order to lead a consortium. RSLs which aspire to lead a consortium but need more time to formalise arrangements can still apply to be pre-qualified. If successful at pre-qualification, they will have the opportunity to form a consortium and to work towards future appointment as a Lead Developer.
47. There will need to be flexibility for the membership of consortia to change from time to time, as RSLs' priorities and plans evolve. However, there also needs to be clarity over the structure of the consortia at the point when applications are made for subsidy from the Government. A key principle is that awards of subsidy are made to the consortium head.
48. The success of consortia will depend on constructive collaboration between the various RSL members and with other stakeholders. As indicated earlier the relationships between the head and members of a consortium, and the risks they will face and require to manage, will need to be worked through and reflected in a formal agreement.
49. RSLs are advised to seek appropriate professional advice as there are a range of risks and issues which will need local solutions that reflect the circumstances of the individual RSLs concerned. We have identified some of these risks and issues and they are discussed in Table 6.
50. There is a considerable body of advice and good practice available on partnership working and identifying and managing risk. However, we believe that the sector and individual RSLs could find specific guidance and support helpful when working out whether to seek pre-qualification or deciding whether to join or set up a consortium. We propose to work with the SFHA and local authorities to develop principles and guidance on these issues as appropriate.
a) Do you agree with the proposed principles of consortia and responsibilities for consortium heads?
a) Do you agree with the proposals on formation of consortia, including the requirement of a formal agreement to govern relationships within consortia?
b) What guidance would be helpful to support the sector in setting up consortia and Lead Developer arrangements?
c) What guidance would be helpful to ensure tenant and community engagement in decision-making?
Table 6 - Issues likely to be considered when setting up development consortia
- The size of consortia - We consider this is a decision that is best left to the sector and individual RSLs. RSLs should think this through carefully as the number of consortium members will impact on decision-making as well as determine the skills and financial capacity that may be brought to bear, through the consortium head, on the projects for which it bids.
- How funding might work - The combined financial strength of all consortium members will influence the size of programme the consortium head will be willing and able to bid for, and will affect its capacity to be appointed as a Lead Developer. This will also determine the minimum amount of subsidy that will be acceptable to consortium members. However, there will also need to be a trade-off amongst consortium members about the level of subsidy they can work with and the extent to which existing resources in the possession of some partners (whether land or finance) can be brought to bear to help fund new developments.
- Borrowing and finance - the consortium will need to adopt a consistent approach to raising and managing finance, whether the Lead Developer or individual consortium members are responsible for arranging private finance.
- Access to resources - Consortium members need to be clear what resources - including land and skills and experience of staff members - can be brought to bear on new investment. How these are then made available and applied to the investment programme will also need careful evaluation. Employment law, VAT rules, other taxation implications and EU procurement regulations will also need to be considered.
- Targets and indicators - establishing these will be very important as the consortia will need to demonstrate improved efficiency and improved performance throughout the development process. They will require careful negotiation between all the parties and will form the basis of grant agreements for Lead Developers (see paragraphs 85-87).
- Development process - This is connected to performance and targets as a more efficient and streamlined process should aid improved delivery and management of costs. Care will be needed in order to secure efficiencies in the development process whilst also protecting quality and keeping costs under control. The consortium head should be in a position to control costs and process, and report on performance to other consortium members. But the other consortium members will also need to be confident that the consortium head will deliver the new homes on time and to the required standards.
- Ownership and management of the new homes - All consortium members will need to agree up front where the homes are to be built and which members of the consortium will own and/or manage them. These decisions must be informed by a combination of the priorities set out in Prospectuses, the financial strength of each of the consortium members and the type of new housing that is required. There must also be clear agreement about how completed homes which the Lead Developer is not intending to retain would be transferred to another consortium member. Crucially, all parties need to be clear what will happen to the new homes if the intended owner or manager is no longer in a position to take them on. This will require careful long-term business planning and evaluation of the financial capacity of all consortium members.
- Tenant and community involvement - The consortium will need to work out how the views and concerns of local tenants and the community are taken into account in the investment in new affordable homes. In progressing the objectives of increased efficiency it will be important to ensure that the local connection and understanding of local need is not lost. There will also need to be agreement about how the views and concerns of tenants are used to continuously improve the processes.
Organisations other than RSLs
51. Firm Foundations envisaged that Lead Developers and all the members of consortia would be landlords on the Register of Social Landlords in Scotland. This includes RSLs that are subsidiaries of social landlords registered in other parts of the UK. We do not propose that RSLs registered in other parts of the UK would be able to become consortium members in their own right. This is because, should they wish to be involved in consortium, the option of seeking registration of a Scottish subsidiary should be an adequate mechanism.
52. However, we would be interested in views on whether bodies other than RSLs should be eligible to join consortia or to become either consortium heads or Lead Developers. We have not ruled this out, but consider that different and additional risks and potential conflicts of interest could arise as a consequence. These would need to be properly understood and evaluated. If and when such arrangements were permitted these issues would also need to be addressed within the formal agreement between the consortium members.
53. The Government supports the increased development of affordable housing by those local authorities in a position to do this. One option for the future would be to allow local authorities to become members of RSL-led consortia in order to pool development expertise and participate in joint procurement.
Non-registered bodies set up by RSLs
54. We propose that consortium leadership should not be open to non-registered bodies which have been set up by groups of Scottish-registered RSLs for the purposes of more efficient and effective development of new homes. Instead, we propose that all parties will need to agree that one RSL (ie the consortium head) is in overall control of the development function. This is in order to ensure that all recipients of subsidy are subject to regulation and the Government's investment is protected. We accept that this means that some bodies that are operating existing models may need to reform their structure. Nonetheless, we would be interested in receiving views about the risks and benefits of including bodies set up by RSLs within consortia.
Other private sector bodies
55. Firm Foundations suggested that, over time, it might make sense for private developers or house builders to become heads of consortia and recipients of subsidy. We believe this remains a possibility for the future although this could bring with it additional risks and issues as these are not regulated bodies and there would need to be processes introduced to protect the Government's investment. At this point, we consider that the costs of doing this outweigh the possible benefits this might bring.
56. A separate question is whether consortium membership could be widened to other private sector bodies, for example where there are existing commercial relationships between some RSLs and some private sector organisations. However, this might be incompatible with EU procurement regulations and the requirement for fair and equal competition between contractors. We therefore propose that consortium membership should only be open to those which procure new developments.
a) Do you consider that there may be circumstances in which consortium membership should include local authorities or other non- RSL bodies?
b) In what circumstances would you see this as appropriate?
Are there circumstances in which bodies other than RSLs might be eligible to become heads of consortia and Lead Developers?