Scottish Government

Chapter 5:
PROPOSED COMPETITIVE MECHANISMS FOR AWARDING SUBSIDY AND APPOINTING LEAD DEVELOPERS

Introduction

57. The role and purpose of Prospectuses to define the investment priorities for affordable housing were discussed in chapter 2. The concepts of pre-qualification, formation of consortia and appointment of Lead Developers were introduced in chapter 3, and chapter 4 explained the set-up and benefits of working in development consortia.

58. This chapter describes the underlying processes behind this in more detail. This includes how RSLs can be pre-qualified, how pre-qualified RSLs will be able to bid for subsidy and how Lead Developers will be appointed.

59. The role for local authorities and proposals for their involvement in the process are also discussed. The Scottish Government and COSLA have agreed that in the short term, the Scottish Government will work with local authorities to increase the consistency and transparency of decision-making on projects funded by Housing Association Grant ( HAG). A systematic and coordinated approach to pre-qualification, awards of HAG and appointment of Lead Developers will be part of this.

Pre-qualification

Overview

60. The first stage of the reformed investment system will be to identify suitable RSLs though a process of pre-qualification. Pre-qualification will be on a national basis. Any RSL that wishes to apply for subsidy to invest in new affordable homes must first be pre-qualified. Only pre-qualified RSLs will be eligible to bid for subsidy to develop new homes in any part of the country ¹⁵.

61. The purpose of introducing pre-qualification is to focus the future development of new homes in the hands of the most able and strongest-performing RSLs. This is also intended to reduce the administrative burden of the subsequent process for award of subsidy. One of the consequences of introducing pre-qualification will be that the total number of RSLs that will be eligible for subsidy will be fewer than the number of RSLs that currently receive HAG.

Eligibility for subsidy

62. All pre-qualified RSLs will be eligible to bid for subsidy, but they will not have an automatic right to receive subsidy. Subsidy will only be awarded on the basis of an acceptable proposal in a competitive process. However, recognition as a pre-qualified RSL is a significant step as it indicates the Government's willingness in principle to invest in developments led by this RSL.

Development consortia

63. Pre-qualified RSLs will be encouraged to set up development consortia with other RSLs. This way, RSLs that either choose not to develop new homes themselves, or do not meet the pre-qualification criteria, can still have access to a supply of new affordable homes in the future by being a consortium member. Although pre-qualified RSLs can bid for subsidy to develop new affordable homes anywhere in Scotland it is likely that most will have an interest only in one region or a small number of regions, depending on the geographic focus of their own organisation and of the other organisations within their consortium. Pre-qualification: the process

64. We will issue an invitation to all RSLs to apply for pre-qualification and propose to do this in the form of a questionnaire. As far as reasonably possible the information required will come from existing information either held by RSLs or already provided by them to the Scottish Housing Regulator. In this way the burden on an RSL applying for pre-qualification should be minimised.

Pre-qualification criteria

65. An application for pre-qualification should not be too onerous for well managed RSLs with a sound governing body and a track record in providing both quality services and quality new homes. The overall approach and the criteria we propose for pre-qualification are described in detail in Annex C; this may be summarised as:

• sound governance;
• financial capacity and ability to plan and effectiveness in managing finances;
• quality of service delivery; and
• the capacity to manage the development of larger projects, adoption of best practice in procurement and development processes and track record in the delivery of high quality homes.

66. The intention will be to develop a process for assessment of pre-qualification applications which is transparent and objective and which also minimises bureaucracy. We expect to make use of information from other partners such as the Scottish Housing Regulator and local authorities in reaching a decision about whether to accept or reject an application from an RSL.

67. In order to retain their pre-qualified status RSLs will need to maintain satisfactory performance and there may need to be a process to re-affirm the RSLs' pre-qualified status from time to time. And, in the interests of tenants and taxpayers, if an RSL's governance or financial management or overall performance fall below the level expected then it would risk losing its pre-qualified status and any further access to subsidy.

68. It should also be possible for additional RSLs to be pre-qualified in the future through re-running the process from time to time.

69. We propose to work with the Scottish Housing Regulator, the SFHA and COSLA in order to refine and agree the pre-qualification process.

Bidding for subsidy by pre-qualified RSLs

70. We intend that awards of subsidy under the reformed investment system will be determined on a competitive basis, with all pre-qualified RSLs eligible to take part and submit proposals. Pre-qualified RSLs can submit proposals on their own behalf, or on behalf of other consortium members if they have a formal agreement in place. Their proposals will also need to satisfy the funding criteria.

71. In the initial round of the new competitive systems, it is intended that all subsidy will be awarded through this competitive process, with all pre-qualified RSLs able to compete for subsidy on an equal footing. However, in future rounds, a proportion of the available subsidy would have been committed in advance to Lead Developers, and the scope for other RSLs' individual projects to gain subsidy will therefore be reduced. As explained in Chapter 1, our aim is to allocate a majority of the Investment Programme to Lead Developers.

Funding criteria

72. The amount of subsidy required will be one criterion against which proposals will be assessed. However, this will also need to be balanced against additional criteria in order to ensure that a rounded assessment of value for money can be carried out. We propose that all bids should require to meet four further standard criteria:

• Deliverability - The pre-qualified RSL or other consortium member must have ownership or be able to secure ownership of the land; there should be a clear and timetabled plan for developing the units; and the RSL must be in a position to confirm the total amount of subsidy required.
• Quality - The proposal must meet the quality requirements set out in the Prospectus.
• Local authority endorsement - The proposal must contribute to the local authority's strategic plans for the region and reflect the investment priorities as set out in the Prospectus.
• Ownership and management -The eventual owner and manager of the new homes must be specified. Where this is another consortium member and not the pre-qualified RSL, then the arrangements for handover or transfer of the completed properties must be part of a formal agreement between the parties.

73. Only those proposals that satisfy all of the above criteria can be considered. Following this assessment, there will need to be a further transparent framework, based around the price and other criteria, to select those proposals which will receive subsidy. Our aim is to have as objective a framework as possible but we recognise that some elements of assessment will require the exercise of judgement, especially if minimum requirements in terms of quality or subsidy levels are exceeded. There are also opportunities for local authorities to contribute to the assessment, such as in the strategic fit of proposals against the priorities set out in the Prospectuses. As part of our agreement to work with local authorities to increase the transparency and consistency of decision-making on projects, we propose working with the SFHA and COSLA to develop the assessment framework and to clarify roles and responsibilities in the assessment process.

74. The assessment of proposals will also need to take account of the investment priorities set out in the regional prospectus, including the priority given to supported or specialist accommodation, and to remote and rural areas.

75. It will be in the interest of pre-qualified RSLs to submit proposals that satisfy the funding criteria the first time round because, depending on the number and quality of other proposals received, the opportunity to re-submit a rejected proposal and receive funding that year may be limited.

Lead Developers

The principles

76. Our goal, as explained earlier, is for the majority of the Investment Programme to be delivered through Lead Developers. Only pre-qualified RSLs will be eligible to become Lead Developers and our objective is to see an increasing number of pre-qualified RSLs setting up consortia and seeking appointment as Lead Developers.

77. Lead Developers will be appointed for periods of up to five years. They will use all the resources at their disposal to plan and develop longer-term programmes of investment and will have access to subsidy over longer periods of time instead of having to rely on annual funding allocations, as most RSLs do at present. And Lead Developers will benefit from greater freedom in how they manage and deliver their agreed investment programme compared with other pre-qualified RSLs.

78. When considering a regional Prospectus, if a pre-qualified RSL is in a position to put together a proposal that involves delivery of a substantial proportion of the investment required for a number of years, then we would look to them to apply to be a Lead Developer for that area when they submit their funding proposal.

Application to be a Lead Developer

79. The process for applying to be a Lead Developer will be set out as part of the regional Prospectuses. RSLs that seek to be a Lead Developer will need to:

• Confirm that if a consortium is in place it is governed by a formal agreement between the parties about how the development process will work and which RSLs will own and manage the homes to be built;
• Specify an initial set of firm projects that can be commenced within the next twelve to twenty four months and which meet the funding criteria (see paragraph 72);
• Include a further programme of investment for up to five years ahead which will continue to reflect the priorities set out in the Prospectus and fit with the local authorities' plans; and
• Specify how clear targets, indicators and milestones will be used to track delivery of the programme.

Our assessment of a Lead Developer application

80. In deciding whether or not to appoint a pre-qualified RSL to be a Lead Developer in an area we will have regard to:

• Its commitment to develop housing appropriate to the area;
• Its financial capacity and governance (which may need to be re-visited if an RSL applies to be a Lead Developer some time after it was pre-qualified);
• Its assurance that the development process has been agreed with all consortium members;
• Its proposals for projects that are expected to commence within the first twelve to twenty four months, which will have to be fully costed, be properly scheduled and reflect access to a secure supply of land (projects scheduled to commence later on in the five years will not be expected to be fully costed at this point, but the initial costings and timescales used for the initial projects will form the basis for future negotiations);
• Clarity over eventual ownership and management of the new homes; and
• Proposed performance indicators (which will include timescales and milestones for completing projects) against which efficiency, effectiveness, and value for money will be demonstrated and which will form the basis for grant agreements.

81. In addition to this we propose to seek the advice of the relevant local authorities about the scope of the investment planned in affordable housing and their advice on the suitability of the RSL concerned to be appointed as Lead Developer.

Funding commitment

82. When we appoint a pre-qualified RSL as a Lead Developer this will include a commitment to make a significant proportion of the subsidy for that area available only to the Lead Developer during that period. In this way access to subsidy beyond the initial projects set out in the proposal should be straightforward. It will not require submission of further bids for subsidy in competition with other bidders, but it will be conditional on performance and delivery of new homes by the Lead Developer and its consortium over the period for which funding is agreed.

83. In consultation with the relevant local authorities we will have discretion over how many Lead Developers to recognise, and what proportion of the total investment programme would conditionally be committed to each. In due course it is intended to commit to more than one Lead Developer in each region in order to retain maximum scope for efficient development. However, it is also possible that there might not be any Lead Developers appointed initially in some regions, if proposals were judged not to be satisfactory or not to offer sufficient value for tenants and taxpayers.

84. Lead Developers will need to seek re-appointment at the end of their term, in competition with other candidates. It will also be possible for an RSL to have its Lead Developer position withdrawn in the event that it fails to perform in line with agreed targets and milestones, if the Scottish Housing Regulator has significant concerns about the RSL's regulatory profile or if it is subject to statutory intervention. This sanction is an important element in ensuring continued value for money and delivery of quality new homes.

Grant agreements

85. Offers of grant agreements will only be provided to Lead Developers or those RSLs that have pre-qualified and have successfully bid for grant.

86. As is evident from the longer-term planning and tracking of performance that we propose for Lead Developers, we propose a fresh approach to grant agreements for them. This will entail review of current grant agreements and the conditions set out in them with the objective of introducing a more streamlined approach to administration of grant payments. The principle to be adopted will be to link subsidy to progress against agreed outcomes and outputs, recognising the maturity of the RSL sector, its experience in managing development programmes and the strong leadership role to be adopted by Lead Developers. We will therefore look to the Lead Developers to report their progress periodically against the milestones and targets that they have set for themselves. This approach will give RSLs much more flexibility in how they manage individual projects and it will reduce bureaucracy because the monitoring arrangements should be considerably reduced.

87. We propose to work with the SFHA and Glasgow and City of Edinburgh Councils ¹⁶ to develop a revised grant agreement for Lead Developers.

Frequency of appointing Lead Developers and awarding subsidy

88. In conjunction with our local authority partners we will decide how often to run competitions to appoint Lead Developers. Ideally, this would be every three to five years which will encourage the sector to plan over the medium term, and which will also support the introduction of more efficient and effective procurement practices. Future rounds of competition for subsidy would be conducted as and when necessary, bearing in mind that, where Lead Developers have been appointed, much of the Investment Programme may already have been committed to them.