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7. CHAPTER FIVE: PROPOSED COMPETITIVE MECHANISMS FOR AWARDING SUBSIDY AND APPOINTING LEAD DEVELOPERS

Introduction

7.1 This section summarises the responses to Chapter Five: Proposed Competitive mechanisms for Awarding Subsidy and Appointing Lead Developers. The chapter:

• Describes the underlying processes behind pre-qualification, formation of consortia and appointment of Lead Developers;
• Explains the proposed bidding arrangements for pre-qualified RSLs, including application of the proposed funding criteria in an assessment process;
• explains the route for pre-qualified RSLs to be recognised as a Lead Developer; and
• sets out proposals for a more streamlined and outcome-focussed grant agreement for Lead Developers.

Question 16

Do you agree that a pre-qualification process should be included in the new arrangements?

Table 7.1: Responses to Q16 by Stakeholder Group

7.2 Three-quarters of respondents answered this question. Most respondents, including the vast majority of local authorities and a high proportion of RSLs agreed there was merit in introducing a pre-qualification process in any new arrangements. However, a number of local authorities suggested that they had a role in the assessment process as the strategic housing authority.

"If the lead developer proposals are to be progressed then the Council would see merit in the proposed pre-qualification process. Local authorities should have a key role in this process as the strategic housing authority" (Dumfries and Galloway Council)

"We would agree that a pre-qualification process should be established to ensure subsidy is directed to the most able and strongest performing RSLs. Local authorities need to be closely involved in both setting the criteria to ensure close links wider strategic priorities are achieved and should also be involved in the assessment process". (South Lanarkshire Council)

7.3 One RSL (Trust) raised the issue of a conflict of interest if a local authority was a member of a consortium and they or their representative body was involved in pre-qualification selection.

7.4 Another (Atrium Homes) highlighted the lack of any appeals process being identified in the consultation document. They suggested that this requires to be included in the selection process.

7.5 One RSL (Hjatland) suggested that there might be circumstances in which a pre-qualification process was not beneficial. In keeping with the proposed treatment of Orkney, Shetland Islands and the Western Isles described in the consultation they suggested that, in areas where there is only one RSL operating, a pre-qualification process would not deliver good value for money.

7.6 Of the organisations that were opposed to the proposal, three main reasons were cited. Firstly, many disagreed with the principle of introducing lead developers.

"…pre-qualification may be 'putting the cart before the horse'. Pre-qualification and the creation of lead developers appear in the consultation to be given greater weight and therefore greater importance than partnership working through a consortia approach". ( CIH Scotland)

7.7 A number of these respondents did however suggest that they would support the introduction of some form of accreditation.

7.8 Secondly, some suggested that criteria should already be in place to assess the performance of developing RSLs through scheme assessment and inspection processes.

"It is felt questionable whether a separate process is required - could qualification be the outcome of a satisfactory report under the current regulatory measures?" (Perth and Kinross Council)

7.9 Finally, a small number questioned whether the motive was to filter out the number of RSLs that would be eligible to apply to become lead developers.

"Why should there be pre-qualification for RSLs when we are already accepted developers. Is this a new artificial device to remove a number of RSLs at an early stage?" (Argyll Community Housing Association)

Question 17

Are the pre-qualification criteria and information requirements set out in Appendix C a reasonable basis on which to work with the Regulator, the SFHA and COSLA to refine the pre-qualification process?

Table 7.2: Responses to Q17 by Stakeholder Group

7.10 Only two-thirds of respondents answered this question. Of those who did three-quarters agreed that that the criteria were appropriate as the basis for further work. Suggestions made for additional areas to be considered included:

• customer involvement in design and development of projects;
• programme management skills;
• some form of quality / price index to measure proposals against;
• record of partnership working with local authorities;
• criteria for innovation, design and sustainability;
• equalities;
• approach to sustainable rural development; and
• where and how risks will be borne;

7.11 The Council of Mortgage Lenders indicated that more detailed consideration of financial standing was required than the latest audited accounts and five year financial forecasts.

"It would in our view be also appropriate to consider the long-term viability and capacity of the HA concerned to both develop new stock and to continue to invest in existing stock. Lenders would normally do this by looking at 30 year business plans". (The Council of Mortgage Lenders)

7.12 Castlerock Edinvar suggested that the pre-qualifying prospectus should identify the scale of programme to be managed in each region. Trust Housing Association suggested that the criteria should be proportionate to the size of development an RSL wishes to bid for.

7.13 A number of RSLs highlighted that it was not yet clear what weighting would be given to different criteria or how the assessment would be carried out.

"…key in the process will be the weightings and criteria used for assessment" (Servite Housing Association)

7.14 Some queried how the information already collected would be used.

"It is not clear how the wealth of information the Government itself already holds (or should hold) about past performance, standards, costs would be factored into the assessment. For example, no mention is made of post-completion review assessments which the Government and TMDF local authorities should be carrying out as part of the existing HAG procedures".

( GWSFHA)

7.15 Thirty-nine (25 per cent) respondents indicated that they did not consider the criteria to be a reasonable basis on which to proceed. In many cases this was because specific criteria had been omitted. Examples included:

• partnership working to deliver LHSs and SHIPs;
• formal account being taken of the local authority's perspective as strategic housing enabler;
• post completion resident satisfaction surveys;
• experience in the development of specialist housing for developers proposing to undertake such activity;
• quality of build standards; and
• housing management and property maintenance.

Question 18

Do you agree with the proposed funding criteria for bids for specific projects?

Table 7.3: Responses to Q18 by Stakeholder Group

7.16 Only two-thirds of respondents answered this question. Just over half of these supported the proposed funding criteria. However, many of these responses were qualified.

7.17 Twenty-one local authorities broadly supported the proposals.

"The funding criteria capture the key considerations of quality, cost, management and capacity to deliver". (North Ayrshire Council)

7.18 However, there were a number of underlying concerns, particularly in relation to the relative level of weighting that would be given to different criteria.

"We would ask the question of how much weighting would be given to each criteria. For example, if a local authority did not endorse a particular bid would that in effect stop the bid?" (Shetland Islands Council)

"The Council would advocate in favour of a consistent approach which puts quality at a minimum 60% as a means of not replicating the mistakes of past generations….It is our belief that the housing association movement in the past 5 years has produced a standard of product in design, space and energy efficiency that is a cost worth paying". (Clackmannanshire Council)

"If the easy projects only are allowed to be funded this may inhibit problem solving and prevent strategic important sites being taken forward. This would have a significant impact in rural and regeneration areas". (Aberdeenshire Council)

7.19 Of the eight local authorities raising concerns, a number questioned whether it was it was viable for RSLs to be certain about their proposals.

"We cannot see that an RSL would be in a position to accurately confirm the total amount of subsidy required at the stage the information requested". (Glasgow City Council)

"(The RSL's) ability to confirm that it can secure ownership of the site is likely to be heavily caveated….Having ownership in itself does not guarantee the site may be developed". (East Ayrshire Council)

7.20 Many of the RSLs agreeing with the proposed funding criteria caveated their responses around a number of issues. Qualifications included:

• disagreement with the principles of lead developers;
• the need to develop a transparent appraisal system;
• concerns over the level of financial information that will be available at this stage; and
• problems associated with land ownership or acquisition.

7.21 Those RSLs stating their opposition were generally opposed to the principle of competition for subsidy. In addition there were concerns over whether pre-qualifying RSLs could demonstrate 'deliverability' over a multi-year programme.

"It is difficult to see how an RSL can embark on a process to acquire sites for a proportion of a proposed programme ahead of funding being available". (Cube Housing Association)

"The main flaw of the proposed funding criteria is the expectation that an RSL must be able to confirm the total subsidy required. In order to do so, each project would need to be taken to cost plan stage (at least), before a RSL could submit proposals. This is extremely wasteful, inefficient and simply not practical". (Williamsburgh Housing Association)

Question 19

Do you agree with our proposed approach to development of an assessment framework?

Table 7.4: Responses to Q19 by Stakeholder Group

7.22 Just under two-thirds of respondents answered this question with three-fifths broadly agreeing with the proposed approach to the development of an assessment framework.

7.23 Twenty local authorities indicated their support for the proposals in contrast to RSLs which broadly disagreed with the proposals. In particular, local authorities generally welcomed the assessment framework being progressed jointly with COSLA and the SFHA. A number suggested that the role of local authorities required to be clarified.

"…we agree that it is very important that local authorities are able to contribute to the assessment of proposals….it is essential that the roles and responsibilities of local authority and Scottish Government staff are clarified and that there is transparency around the decision making process". (Renfrewshire Council)

7.24 CIH Scotland suggested that the Scottish Government should consider the appropriateness of including others with a key interest in developing the framework.

"This may include lenders or representatives of lenders, representatives of private builders and tenants' bodies. The Scottish Government may also wish to consider if there is a role for an impartial, cross-sector voice on any group that considers the framework in more detail". ( CIH Scotland)

7.25 Of the 26 RSLs indicating their broad support, the importance of transparency and objectivity was highlighted by many.

"…essential that it is fully transparent and that there is an appeals procedure". (Port of Leith Housing Association)

7.26 One (Hillcrest Housing Association) suggested it might be appropriate to involve the Scottish Housing Regulator. A number raised the issue of the relative weightings that would be given to price and quality criteria.

"The issue of quality versus quantity requires to be addressed. We broadly agree with the assessment proposals outlined and welcome the introduction of a transparent framework to assess funding bids. The requirement to meet and exceed subsidy targets is a given and we are keen to see other criteria introduced which will look at additional benefits such as wider community regeneration outputs and innovation in relation to environmental sustainability, etc." (Home Scotland)

7.27 The seven local authorities that were not supportive of the approach to the assessment framework raised issues concerning the role of councils in the assessment process.

"…local authorities must be central to the process". (South Ayrshire Council)

"Projects are already prioritised within the SHIPs prepared by local authorities, so would it not be more logical to allocate subsidy to projects which meet the funding criteria on the basis of SHIP prioritisation?" (Angus Council)

7.28 Scottish Borders Council and the Borders Housing Network suggested that competition cannot guarantee the best results.

"In our situation inappropriate competition could lead to the appointment of a developer with no experience of working with the local construction industry, little understanding of the local Borders situation, with no history of working with the local authority, and little likelihood of support from local non-developing associations". (Scottish Borders Council / Borders Housing Network)

7.29 I-Flair suggested that the framework was too focused on 'price'.

"Whilst we are in agreement with the need to demonstrate efficiency, we are opposed to such an assessment which will encourage cost cutting, to the detriment of the eventual occupants of the houses; encourage larger schemes at lower unit costs, to the detriment of communities where the need is for a more small scale and sensitive approach; deter innovation in design, risk taking and community involvement…" (I-Flair)

7.30 The Glasgow and West of Scotland Forum of Housing Associations raised concerns about the future ownership and management of new housing.

"It is not enough to 'specify' who the future owner and manager of the stock will be, without providing much more information about how the process of transfer would be expected to work in contractual and financial terms". ( GWSFHA)

Question 20

How might we enhance the involvement of local authorities, RSLs and other stakeholders in the assessment of proposals?

7.31 The SFHA and a number of respondents - particularly RSLs - declined to answer this question as they were opposed to the underlying principles of competition. Many of the other respondents raised the need for clear and transparent procedures to be established with "full consultation on the assessment criteria and the assessment framework before it is finalised" (West Lothian Council). Making a link between the LHS, SHIP, Regional Prospectus and funding assessment proposals was reiterated by many.

7.32 A number of local authorities and some RSLs suggested that local authorities should be involved in the assessment process.

"Local authorities should be fully involved in the whole assessment process". (The Moray Council)

"We expect local authorities to be fully involved in the appraisal of all proposals." (Argyll and Bute Council)

7.33 City of Edinburgh Council highlighted the use it made of an Assessment Panel to assess applications from RSLs for Preferred Partner status.

7.34 North Ayrshire Council suggested the involvement of an independent assessor to "triangulate" assessments undertaken by Scottish and local government representatives.

7.35 South Lanarkshire Council and the Association for Public Service Excellence proposed a collaborative approach involving local authorities in the preparation of Regional Prospectuses.

7.36 Other respondents suggested the involvement of RSLs, tenant representatives, equalities groups and private developers in the assessment process.

"Consultations with individual local authorities, RSLs and tenant and community organisations should take place as part of the assessment process". ( TPAS Scotland)

7.37 However, the challenge of balancing transparent commissioning procedures with potential conflicts of interest was highlighted by a number of respondents. CIH Scotland felt it would be difficult to bring RSLs further into the assessment process and they would, in effect, be contractors. I-Flair raised concerns over the involvement of local authorities for a number of reasons.

"Firstly, where local authorities themselves are building houses, they will not be impartial in their choice of other developers; secondly where local authorities have been active in the promotion and development of consortia - and we favour such an involvement - they will be pre-disposed towards the consortium at the expense of others. Thirdly, it is unclear how local authorities will decide priorities between their individual areas". (I-Flair)

7.38 Not all respondents favoured an inclusive approach to the assessment of proposals. Bield Housing Association raised concerns over the potential for increased delays in the development process. They argued that local authorities and others are involved in shaping the LHS and SHIP documents, and it is up to the Scottish Government to manage the programme efficiently.

"It would be somewhat ironic if in trying to make development more efficient by reducing the number of developing RSLs the process became more complicated by introducing more bodies to the appraisal process". (Bield Housing Association)

7.39 This view was reinforced by others.

"We already have SHIPs, Local Housing Strategies and there is also the planning system. These proposals add Regional Prospectuses, HAG Competition and Consortium Agreements. It would appear that these should give sufficient opportunities for engagement in the process without adding yet more bureaucracy". (Fyne Homes)

Question 21

Do you agree with our proposed approach to the appointment and management of Lead Developers?

Table 7.5: Responses to Q21 by Stakeholder Group

7.40 Overall nearly three-quarters of respondents expressed a view, with a majority broadly disagreeing.

7.41 Seventeen local authorities were broadly supportive of the proposed approach to the appointment and management of Lead Developers, with some caveats.

7.42 Angus Council queried the logic of appointing more than one lead developer in each region. Whilst they recognised that the merit of the approach in terms of avoiding the creation of regional monopolies, they suggested that this would reduce the scope for economies of scale.

7.43 Orkney Islands Council suggested that lead developers will find little in the way of competition when seeking re-appointment after five years. Glasgow City Council felt that the requirement to provide 'fully costed' project proposals for the first 12 to 24 months was unrealistic. West Lothian Council highlighted the importance of performance monitoring.

7.44 Five of the nine authorities that were not supportive of the proposals suggested that there was a need for more detailed information on the appointment of Lead Developers. Three councils felt that the proposals took insufficient cognisance of the role of local authorities.

7.45 Dumfries and Galloway Council and North Lanarkshire Council both felt that the consultation document did not provide the evidence base for Lead Developers to be introduced.

"It is not clear why [the goal of delivering the majority of the Investment Programme through Lead developers] has been set, other than to transfer administrative costs away from the Scottish Government to the consortium members, as at no point does the documents evidence volume savings during the construction phase as a result of this proposal". (Dumfries and Galloway Council)

7.46 South Lanarkshire Council raised concerns that appointing Lead Developers "to deliver large scale programmes with the risk that this may be on the basis of short term contracts" would introduce risk and uncertainty resulting in loss of experience and expertise in the sector.

7.47 CIH Scotland suggested that the appointment of the Lead Developer should be tied into the consortium process. Each consortium should apply for pre-approval rather than individual RSLs and then agree which RSL in the consortium should be lead developer.

" CIH suggests that this is best practice in partnership working, which the consortia process should be. The links, degree of trust, sharing of information and financial viability/ business planning and governance between the consortium partners is crucial and it is these relationships and agreements that the Scottish Government and its local authority partners should be concerned with, rather than the status of individual RSLs." ( CIH Scotland)

7.48 A considerably greater proportion of RSLs than local authorities disagreed with the proposals - although the proportion broadly agreeing increased with larger urban and stock transfer organisations.

7.49 A large number of those indicating their disagreement once again cited the level of risk a Lead Developer would be expected to take and many were sceptical that the proposal would result in the benefits envisaged. A number suggested that it would result in reduced choice as RSLs lost skills and expertise.

"It would be preferable to have a partnership based approach with the sharing of risk and allowing RSLs to bring their particular area of expertise to the partnership and allow continuous improvement from sharing knowledge and skills within the partnership". (Arklet Housing Association)

7.50 The Rural and Island Housing Association Forum felt that the expectations being placed on Lead developers were unrealistic. Their concerns related to a range of issues including TUPE, charitable status, VAT, EU procurement and long term financial planning.

"We have doubts that any significant benefits will arise from the competition element of the proposals, particularly in rural areas. In the longer term there is likely to be a threat to diversity of providers, as the organisations unsuccessful in the first round, will have de-skilled". ( RIHAF)

7.51 Of those RSLs generally supporting the proposed approach issues relating to the length of the lead developer contract were raised by a number of RSLs. Grampian Housing Association was concerned that the proposed five year time limit was too short' given the time it would take to become fully functional. Irvine Housing Association, on the other hand, suggested that if renewal of Lead Developers only takes place every five years it would be difficult for RSLs to make competitive bids against existing developers resulting in a lack of incentive to improve procurement functions.

7.52 Castlerock Edinvar indicated that whilst an agreement setting out how consortia will operate should be relatively straightforward, agreement covering the transfer of housing and the treatment of risk will be significantly more complicated. This view was echoed by Home Scotland who suggested the new proposals might take some time to deliver.

"The document raises significant questions regarding issues such as risk for Lead Developers and the relationship with consortium members, legal responsibilities, funding roles, etc. and for this reason we would envisage these proposals being phased in over a more gradual period". (Home Scotland)

Question 22

a. Do you agree with the overall approach to grant agreements for Lead Developers as set out here?

Table 7.6: Responses to Q22a by Stakeholder Group

7.53 Around three-fifths of respondents expressed a view. A very small majority of respondents answering this question welcomed the principle of streamlining the administration of grant agreements by linking subsidy to agreed outcomes and outputs. Many of those who indicated their disagreement based this on streamlining only being proposed for lead developers.

"Longer term planning agreements are universally agreed to be one of the most important factors in realising the potential for greater efficiency in the planning and delivery of investment programmes". ( GWSFHA)

" CIH would prefer to see grant agreements being made with a consortium rather than an individual RSL..." ( CIH Scotland)

7.54 A number of those indicating their support raised specific issues. Argyll and Bute Council (and others) pointed to the need for clear guidelines on monitoring the payment of grant against outputs and outcomes. Highland Council highlighted the need for quick interventions if Lead Developers did not meet their targets. Whilst Inverclyde Council supported the view that a Lead Developer would receive reduced funding in such circumstances, they recognised this could have an adverse impact on non-developing members of the consortium.

7.55 Renfrewshire Council welcomed the objective of a more streamlined approach but suggested the proposed changes could lead to an increased burden of administration within Lead Developer organisations. This view was reinforced by Scottish Borders Council.

"There is a substantial risk of creating an increased burden of financial risk and administration within Lead Developer RSLs which would counter the advantages of streamlining". (Scottish Borders Council / Borders Housing Network)

7.56 Both City of Edinburgh and Glasgow City Councils welcomed the opportunity to work with the Scottish Government and SFHA to develop a revised grant agreement.

7.57 Fife Housing Partnership highlighted that streamlined arrangements were already successfully in place in Fife. However, Castlerock Edinvar suggested that:

"a fundamental overhaul of the current grant administration system is required that will allow flexibility within the system to enable Lead Developers to procure new homes in the most efficient manner whilst taking account of the risks and rewards of being a Lead Developer". (Castlerock Edinvar)

7.58 This was amplified by the Link Group which queried whether individual projects would still require assessment and be subject to specific grant approvals.

"If this is to be the case it is unlikely that 'streamlining' will be of great value, other than to have in place a grant planning target over a specified time period". (Link Group)

b. What do you suggest we could alter to make grant payments more streamlined?

7.59 Local authority respondents made a number of suggestions including longer term commitments to future funding and a tranche based grant payment system which is broadly what is reflected in the proposals. The importance of a robust performance framework was recognised by a number of respondents.

7.60 Not surprisingly RSLs provided a greater range of opinions. A number suggested that streamlining of the project assessment / appraisal process was a greater priority than grant payment. Many proposed that longer term programmes were the priority. Others agreed with the reduction in the level of scrutiny associated with grant payments that was implicit within these proposals.

"…the grant payment system could be designed to become similar to a loan drawdown facility". (Link Group)

"Maximum level of grant set based upon detailed costs, with total flexibility on how that grant is used". (Horizon Housing Association)

"…one payment at acquisition and one payment at start on site". (Castlerock Edinvar)

"Associations would benefit greatly from long term funding and a much lighter approach to monitoring, there is a strong case to be made for a much more streamlined approach, with draw down against programme agreements and milestones rather than there being detailed analysis on a scheme by scheme basis". ( SFHA)

7.61 Grampian Housing Association highlighted the Devanha model where there is fixed grant allocation for three or more years. Fife Housing Partnership indicated that regular programme meetings involving the Scottish Government, Fife Council and RSLs to monitor key performance indicators had led to a reduction in project approval times. Aberdeenshire Housing Partnership recommended that a review of the approaches being developed across Scotland should be undertaken to identify best practice and areas for improvement.

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