Scottish Government

2 Social landlords' housebuilding capacity: key stakeholder perspectives and case study evidence

Key points

• Among local authorities charging rents at the lower end of the national rent distribution there is increased awareness that a strategy of active 'rent convergence' (i.e. rent increases set to bring local charges into line with national averages) could provide the headroom necessary to expand debt-funded housebuilding.
• While the historic tendency for social landlords' management expenditure to rise well ahead of inflation has effectively limited the scope for debt-funded housing investment, most case study landlords believed it realistic to project future management costs as rising at slower rates than in the past.
• Although availability of conventional RSL loan financing remains good, increased margins and reductions in term length on offer are stimulating interest in other forms of financing, including bonds and local authority lending.
• While new municipal housebuilding has so far mainly involved council-owned land, the future plans of some authorities envisage the need for substantial site acquisition. Potential challenges will include overcoming the lack of co-operation from other public sector landowners and making more effective use of s.75 landuse planning powers.
• Most local authorities developing new council housing have opted to do so via an in-house route; only a few have chosen to outsource delivery to RSLs, with even fewer expecting to use such a model in future rounds of housebuilding.

Chapter scope and structure

2.1. This chapter draws on all of the qualitative fieldwork undertaken in the course of the research. It therefore includes evidence from contacts with key stakeholders and policymakers as well as from case study work (for further details see Chapter 1). The six case study organisations are referred to as LA1, LA2, RSL1, RSL2 etc. In addition, in section 2.5, it draws on telephone interviews with local authorities which have involved RSLs in the delivery of new council housing.

2.2. First, the chapter discusses the scope for boosting housebuilding investment capacity through taking on additional debt and the critically interrelated issue of rent policy. This section also discusses the potential for operational efficiencies to contribute towards additional 'headroom' to facilitate greater debt-funded housing investment. Reviewing the current lending environment, the second main section focuses on the RSL arena. Here we summarise research participant perspectives on both conventional sources of RSL finance and on proposed new models and approaches. In the third main section we explore issues around land supply for new social housebuilding, including the effectiveness of Affordable Housing (Landuse Planning) Policies. The final main section of the chapter looks at the ways that housing associations are collaborating with (some) local authorities in the development of new council housing.

Debt capacity and rent policy

Council rents

2.3. Critical to social landlords' capacity to expand housing investment by taking on more debt is rent policy. This was confirmed by all three case study RSLs who emphasized that the main limiting factor for expanded borrowing was repayment capacity (i.e. annual revenue surplus) rather than loan security (i.e. the extent of 'unencumbered' assets). However, given that, as a rule, Scottish housing association rents already tend to be higher than council rents (see Table 1.6) the main focus here is on the municipal sector.

2.4. All three case study local authorities had recently become increasingly conscious that, with current rents lying in the lower half of the national distribution (and well below those of local RSLs), there could be scope for an active policy of 'levelling up' towards the national average to provide headroom for increased borrowing. While the issue had been formally raised with Elected Members and tenants only in one council, this was imminent in another.

2.5. Industry stakeholders pointed out that higher rents are easier to justify when the associated additional investment is required to improve property condition - e.g. in relation to prudential borrowing to fund SHQS works. They confirmed that councils are nowadays much more aware of rent relativities with other social landlords than was historically true. Consequently it was believed that there was now more inclination to accept larger increases among authorities at the lower end of the national distribution. The traditional Elected Member belief that keeping rents low is a crucial electoral priority is now said to be much less strongly in evidence than in the past. Also, partly because of the need to make greater use of the private rented sector in relation to homelessness, councils' awareness of private sector rent levels has increased.

2.6. Some councils with rents demonstrably below the national average have reportedly found tenants at least acquiescent to an explicit strategy of higher rents to fund new council housebuilding. With strong cross-party backing within the authority and tenant support, LA2 had instituted a policy of annual rent increases of RPI+5 for a run of years. In combination with other measures this had provided headroom to take on substantial loan debt to underpin housing investment. In LA3 it had been estimated that convergence with local RSL rents would generate an additional £1.8M p.a. in revenue. With the intention that such additional income could support expanded borrowing to invest, a proposal to replace the existing rent increase policy of CPI+1 with CPI+2 was about to be formally considered. Nevertheless, industry stakeholders cited another authority where recent proposals for further increases in rents already well above the national norm had proved controversial.

2.7. With the ethic of HRA business planning becoming more established for local authorities the notion of projecting future rent increases based on a formula such as RPI+1 has become more familiar to councils. The legal requirement to consult on and determine rent increases on an annual basis is therefore considered expensive and problematic. A general problem for local authorities is that arguing for significant rent rises is politically difficult within the context of an ongoing Council Tax freeze. A related concern among senior housing managers in LA1 was the risk that perceptions of the housing revenue account as particularly strong by comparison with the General Fund, may lead to additional demands on the HRA to contribute towards corporate priorities ¹³.

2.8. Two of the case study local authorities had amended their rent policy to place a 25% premium on the charge for newly built homes. This is seen as relatively uncontroversial in that high rates of energy efficiency should make the properties relatively cheap to run. Higher rents for new homes were also justified by some authorities with reference to the rents charged by local RSLs for newly built homes.

2.9. For their part, policymakers generally accepted that local RSL rents could reasonably be regarded as a relevant benchmark for modelling the impact of higher council rents on borrowing capacity although it could be argued that there is a need to take account of typical quality differences between houses in the two sub-sectors (existing stock rather than newly built homes). Policymakers were more divided on the appropriateness of treating English local authority rents as a relevant benchmark for Scottish council housing. Scepticism on this point was allied with a wider concern about central government approval for a strategy of higher council rents which could damage work incentives for the proportion of current/aspiring social renters in or able to access employment. Relevant to these considerations are figures on recent trends in rents and affordability in Scottish social housing as set out in Tables 1.4 and 1.5 (see Chapter 1).

RSL rents

2.10. None of the case study RSLs was enthusiastic about the possibility of expanding debt capacity via rent increases for mainstream tenants at rates above those currently projected. It was, however, acknowledged by all three associations that in operating standard rent policies across their entire housing stock, relativities with market rents could vary significantly from locality to locality.

2.11. RSL1 also noted that higher rents would be acceptable within the context of homes developed for a more affluent client group. Hence, the association had been exploring the prospects for initiating development for mid-market rent ( MMR) and had commissioned market research and financial modelling on MMR viability - assuming financing underpinned by government grant. However, while this suggested that such schemes would be viable only within certain localised urban areas, other RSLs looking to initiate MMR development take a more optimistic view.

2.12. Other issues needing to be factored into consideration of MMR business planning include the costs associated with providing white goods, as well as the relatively high rates of void loss and bad debts associated with the higher 'churn' by comparison with the norm for social rented housing. As a charity, RSL1 also recognised that to become active in this new field it would need to restructure via establishment of a trading subsidiary which would be subject to European procurement regulations and where associated borrowing would probably attract higher lender margins than for mainstream social housing development.

Efficiency considerations

2.13. While rent levels are a crucial factor influencing borrowing capacity, so are operating costs. The historic tendency for social landlords' management expenditure to rise at rates well ahead of inflation has effectively limited the scope for debt-funded housing investment. Most case study landlords believed it realistic to project future management costs as rising at slower rates than in the past. For the local authorities, this was partly argued on the basis that forthcoming additions to the stock would be managed by the existing staffing establishment. In one council confidence that HRA staffing economies were achievable was supported by reference to a recent council-wide exercise said to have resulted in a 20% reduction in staff costs.

2.14. In another case study local authority there was seen to be scope for significant efficiency savings through integrating housing management service delivery across all social landlords operating in the locality. This could involve the Council (for a fee) providing a range of landlord services on behalf of local RSLs as well as for its own stock. Such a collaborative model could encompass functions such as HR and payroll, finance and IT, procurement, Care and Repair Services, customer services (call centre) as well as aspects of housing management delivery. By eliminating duplication (e.g. multiple housing offices within a given geographical area) this was seen as having the potential to generate appreciable financial benefits to all parties.

2.15. Related to this line of thinking, RSL lenders argued that further consolidation of housing association sector would be beneficial both in enabling realisation of scale economies and in making better use of assets currently held by smaller landlords ¹⁴. As they saw it, central government should be providing greater encouragement for such restructuring. More generally, lenders believed that progress towards enhanced RSL efficiency (e.g. via benchmarking clubs) had been limited.

2.16. Lender interviewees emphasized that their credit and risk committees take great comfort from having a regulator supervise the sector and noted that in the absence of an effective regulatory presence, the 'cost of money' would increase, terms would tighten and lending appetite would be reduced. However, there was a concern that - as they saw it - both the regulatory arm of Communities Scotland and its successor body, the Scottish Housing Regulator, had been 'too passive' and had consequently made no significant impact in enhancing sector efficiency via consolidation. It was, however, acknowledged that the perceived lack of regulatory 'bite' of recent years should be remedied through the statutory underpinning being provided for the SHR by the current housing bill. Many RSLs would, of course, contend that lender views here prioritise economic efficiency considerations at the expense of the community empowerment value of smaller scale, locally controlled landlord models.

The current lending market and new financing models

Conventional loan finance

2.17. Of key significance in terms of RSL housebuilding capacity are the policies, perceptions and attitudes of lending bodies. Considering the broader impacts of the credit crunch, there have been concerns that RSLs could be negatively affected in relation to the cost and terms of financing available post-2007. RSL1 reported that its recent engagement with the market had revealed that, while rates remain relatively affordable, margins sought by lenders had increased substantially (from as low as 30 BP to 150-165 BP), and that some lenders were now willing to lend only on 7-10 year terms rather than the traditional 25 years. This latter issue was important because of the impact on refinancing risk (an eventuality needing to be factored in every 7-10 years rather than every 30 years). At the same time, loan conditions and security requirements remained virtually unchanged on pre-2007 norms.

2.18. All lenders interviewed for the research signalled that their appetite to lend in Scotland remained strong (although it is understood that another institution with a substantial existing loan book is less enthusiastic). Some participants suggested they might move to shorter-term loans with a lower cost and with a re-financing/repricing option at the end of the term and/or that longer-term loans would become more expensive. They recognised this introduced a re-financing risk for associations but lenders were under a degree of pressure regarding the use of the currently more limited finance available. Moreover, the backbook of loans made at very low margins and for 30 year terms were not profitable given the cost of capital. Lenders thus needed to achieve higher returns to reflect this and to secure the funding they required. Competition dictated whether lenders could achieve what they wanted.

2.19. The general view of the sector was positive in terms of lending despite a range of weaknesses and limitations. However the annual funding requirement was relatively low at present (£250m) and this meant competition remained quite strong (although no Scottish-based association had yet followed English counterparts in making use of the bond market). New entrants were generally limited because the costs of starting up in terms of building skills, knowledge and profile were quite high as were the on-going requirements.

2.20. Typical loan terms in Scotland, as reported, were not dissimilar to England, with Asset cover - EUVSH (Existing Use Value Social Housing) 100-125%; MVT (Market Value subject to Tenancies) at 125-150%, interest cover - 100-110% ¹⁵. However, covenants were tightening with more demanding requirements on management accounts and business plans. Ultimately, the increasingly onerous terms now being incorporated within loan agreements could reduce associations' willingness to borrow, thus constraining housebuilding activity. Moreover, if RSLs are going to be pushed to deliver more output for less grant then lenders will expect to see boards and management being commensurately strengthened. They will also want any decisions on debt capacity to take full account of existing unfunded liabilities such as SHQS and the SHPS pension scheme.

New financing models

2.21. Partly reflecting concern about the re-pricing pressures borrowers had experienced during the credit crunch many Scottish RSLs have been exploring alternatives to conventional loan finance. In practice, obtaining such funds can be problematic because, as acknowledged by lenders, Scottish loan agreements tend to be quite tightly drawn with respect to protecting existing lender interests. Covenants may require the borrower to seek permission from existing lenders when the borrower sought to use another funder - hence, raising a re-pricing risk for RSLs. Thus, one association seeking to access European Investment Bank ( EIB) funds was recently prevented from doing so due to the intervention of an existing lender.

2.22. Bonds: Although none of the case study RSLs had yet investigated this in detail, all saw some potential attractions in bond financing for the future. Rather than being preferable in terms of lower margins, bonds were seen to be attractive as compared with conventional financing in terms of being 'simpler to deal with'. It was, however, recognised that obtaining bond finance would require collaboration with other associations (even for these RSLs which were relatively large in the Scottish context).

2.23. While a 2009 presentation by The Housing Finance Corporation ( THFC) covering bond finance had attracted 8-10 RSLs, the equivalent 2010 event had been attended by some 80 associations. The higher level of attendance this year seems to reflect the sector's growing interest in new forms of funding but, since other forms of financing were also covered, it cannot be said with certainty that this reflects growing interest in bond finance. As perceived by RSL3 a negative aspect of the bond model is that funds must be drawn down at the start and that the association is unlikely to get much return on these if circumstances are similar to the present. RSL3 believed that such financing might, therefore, be more attractive to smaller RSLs with smaller programmes which could enable such funds to be drawn down and committed with less delay.

2.24. East Lothian model: All the case study associations were familiar to some extent with the recent agreement whereby East Lothian Housing Association is drawing on a £25M loan facility provided by East Lothian Council ¹⁶. In effect, ELC funding is being treated as a form of private finance which, given the range of options available at the time (2009) provided ELHA with the most attractive package. Hence, as ELHA sees it, this is a business arrangement, not a favour or help or aid from the Council.

2.25. The rate attached to the ELC loan is similar to what could have been secured from a conventional lender. There is a 10 point margin to the Council over Public Works Loan Board rates. The advantages for ELHA are the certainty of long-term fixed rates, as well as more attractive terms than would be offered by a conventional lender in terms of arrangement fees and non-utilisation charges. As the association sees it, this translates into a large loan with relatively little risk attached, making it possible for ELHA to reduce the 'risk margin' attached to borrowing costs. Consequently, as reported by the association, ' ELHA's development capacity is increased by about 20 to 30% (as a result of reduced assumptions and greater certainty over future borrowing costs)' ¹⁷.

2.26. Importantly from the accounting viewpoint, the loan is provided via the Council's General Fund, not via Housing Revenue Account prudential borrowing. From the Council's perspective, the arrangement does not affect its overall financial resources ¹⁸. Also potentially significant in terms of its applicability elsewhere, is that since it does not involve HRA financing, it is equally relevant to post-stock transfer authorities where no HRA remains extant.

2.27. Two of our case study RSLs saw the East Lothian model as potentially attractive, given the scope to borrow on relatively favourable terms. RSL3 had had preliminary discussions with a partner local authority on the possible replication of the model. However, RSL1 believed that there was a danger of compromising the relationship with your lender if the lender is a local authority, since a council has other interests in development.

2.28. National Housing Trust: Launched by the Scottish Futures Trust in late 2009, the NHT is a vehicle to facilitate the delivery of homes for mid market rents and to stimulate housebuilding ¹⁹. Of the three case study RSLs, only RSL1 had explored participation in this scheme, having offered itself as both a contributor of sites (on a very limited scale) and as a manager on behalf of developers/ SPVs established under the NHT model. However, all case study RSLs saw the model as problematic in its structural complexity, programme timescales and the requirement to dispose of properties in the medium term. Interviewees also stressed perceived risks underlying the scheme such as future reduction in local housing allowance or the acquisition of inferior quality properties. Rather than owning properties developed or acquired under the scheme, the property management role could be more attractive to RSLs.

2.29. Pension fund investment: Two case study RSLs were interested in the possibility of pension funds investing directly in affordable housing. As in some of the other 'alternative financing' models, likely size of the stake involved was seen as necessitating a consortium approach and it was suggested that there could be a role for the SFHA in lobbying for and supporting such an initiative.

2.30. There was particular discussion of encouraging investment from the SFHA's own pension fund ²⁰ as this could benefit associations and provide a secure source of above-inflation income for the fund. If this was able to help sustain the pension fund this would be an additional benefit to associations as the current funding gap exposes associations to risk. While there are potential concerns about such an arrangement relating to the trust's duty to maximise income from investments it was believed that the possibility should be pursued if these concerns can be addressed.

2.31. Other: One additional vehicle with the potential (in certain instances) to facilitate access to additional investment resources is local authority housing stock transfer or 'asset realisation' ²¹. For a low debt authority with a 'positive value' housing portfolio which would command a transfer value in excess of outstanding HRA loan debt, such a transaction could be achieved at little cost to the public purse and could enable the 're-financing' of the portfolio to fund new social housebuilding.

2.32. Policymakers and industry stakeholders advised at the outset that the research need not consider the potential role of stock transfer within this context because this was no longer regarded as a significant issue. However, with the recent announcement of Highland Council plans for affordable housebuilding funded via - a novel form of - stock transfer ²² this appears mistaken (albeit that the Highland scenario appears to relate to higher rents rather than asset realization, as such). Similarly, West Dunbartonshire Council is also, reportedly, continuing to develop stock transfer proposals (although these are motivated by the Council's need to access funding for SHQS works to existing stock, rather than to finance new housebuilding). Moreover, the belief that the transfer option has been permanently ruled out by all stock-retaining local authorities was belied by case study discussions. Indeed, for a number of councils unencumbered by substantial debt, any future restriction in the scope for prudential borrowing might well bring stock transfer back into contention as the most effective means of re-financing social housing in their locality.

Land availability and the use of s.75 to procure affordable housing

Sites for development of new council housing

2.33. Most of the new council housing schemes being developed under the Scottish Government programme are proceeding on council-owned sites. Given the necessity for speedy procurement to meet Scottish Government timescales, the ability draw on existing landbanks was seen as a necessity by many case study interviewees. It was, however, recognised that this model militates against mixed tenure developments which would generally call for considerable negotiation and co-ordination among collaborating agencies.

2.34. Case study evidence demonstrated that lots already in Housing Revenue Account ownership and being developed for new council housing have included vacant 'backland' within existing estate boundaries or sites liberated through demolition of obsolete blocks. Utilisation of such land helps to limit scheme costs because they can be contributed at nil value. Although councils accept that this incurs opportunity costs, it is argued that locational and accessibility factors mean many such sites would be unattractive to private developers. Because many are relatively small in size they are liable to give rise to relatively high construction costs.

2.35. Some of the larger council housebuilding developments are utilising land held under General Fund accounts - such as disused schools or care homes. For sites of this kind, market prices are often expected. In one recent instance in LA1, for example, land costs of £700K (or £22.5K per dwelling) are therefore being factored into scheme costs. Privately owned sites are also being utilised in certain cases. The inclusion of such schemes within the national council housebuilding programme sets it apart from the equivalent programme being implemented by the Homes and Communities Agency in England where there is a requirement for construction on local authority-owned land contributed at nil consideration ²³.

2.36. In two of the three case study local authorities significant amounts of developable council-owned land remained available for future municipal housebuilding. However, while many local authorities will have held substantial HRA landholdings in the past, much of this resource has been used for RSL new development over the past 10-15 years (including under schemes associated with the local authority-sponsored RSLs established under the New Housing Partnerships programme). In many areas, RSL building programmes have for many years relied largely on formerly council-owned land.

2.37. As a result of such factors, LA2 saw it as inevitable that the onward progress of its ambitious council housebuilding programme would require site acquisition. As in LA1 it was found frustrating that other public sector landowners - particularly the NHS - tended to be unsympathetic to approaches on this subject. It was felt that this might be an area where stronger co-ordination across central government could yield dividends.

2.38. With its own landbank near exhaustion and other public sector bodies reluctant to negotiate on land disposals, the LA2 programme was seen as being highly dependent on acquisition of private sector sites (via s.75 powers - see below) within the context of large, developer-led, mixed tenure schemes. However, this model has reportedly been hard hit by the housing market downturn as developers have opted to hold back on progressing such projects. Housebuilding has also been 'gummed up' partly by developers trying to extricate themselves from land deals already in progress at the start of the downturn. At the same time, some developers have continued to hold options for purchase of sites from existing owners apparently content to sit out the recession in the expectation of a recovery in land values. For LA2, therefore, site availability rather than fundability was seen as the major limiting factor in progressing housebuilding.

Affordable housing procurement and infrastructure investment via the Landuse Planning system

2.39. The past few years have seen growing numbers of Scottish local authorities adopting Affordable Housing Policies which utilise powers under Section 75 of the Town and Country Planning (Scotland) Act of 1997. Here, developers are required to contribute to the production of affordable housing through planning agreements negotiated as part of the land development process ²⁴. Recently published Scottish Government statistics indicate that homes procured via developer contributions accounted for a third of all local authority planning permissions for affordable homes approved in 2008/09. Half of these 'developer contribution' homes were designated for social rent (as opposed to intermediate tenure or low cost sale) ²⁵. However, research undertaken just prior to the current housing market downturn suggested that the use of s.75 powers in AHP implementation had proved highly problematic ²⁶.

2.40. While all of the case study local authorities had adopted AHPs, discussions with case study councils and RSLs revealed highly contrasting experiences as regards policy implementation. In one local authority, the policy was seen as having been quite successful, while in the other two the gains secured had been disappointing. Only one of the case study RSLs had been involved in any significant number of s.75 schemes, and none considered the device to have been particularly beneficial in terms of site procurement or in facilitating scheme level cross-subsidy for affordable housing development.

2.41. Under the AHP adopted by LA3 in 2005 developers had been generally expected to work to a 25% affordable housing quota (subject to a site size threshold of five dwellings). Where the affordable housing quota is to be met via subsidised housing provided by an RSL, developers were expected to provide land to the RSL at 'affordable housing value' (not open market value). Another novel feature of the policy (since 2007) was the 'affordable housing credits' system. This encouraged developers to provide affordable housing units in advance because in doing so they earn credits which could be set against their affordable housing commitments in other parts of the same housing market area.

2.42. LA3 saw its AHP as having been accepted by most developers active in the locality and most of the RSL development programme was now being delivered under the policy. However, experience elsewhere was less positive. LA1 had encountered vigorous developer and landowner opposition, with the effective assistance of expert planning lawyers. Some developers were reportedly insistent on a negotiating bottom line that 'we must make a profit on every affordable unit'. Such opposition had been successful to the extent that the provisional 25% affordable housing quota introduced in 2005 had been struck down by the Planning Inspector presiding over a subsequent Local Plan enquiry who ruled that the housing need evidence underpinning such a figure was unconvincing. Instead, a much lower quota was substituted.

2.43. In LA3, developer reaction to the council's AHP had been more varied. Generally, larger national firms had been found to adopt a more 'reasonable' stance than some locally based actors. The minimal numbers of affordable homes so far delivered under the policy was seen as partly reflecting unfortunate timing. While the AHP was introduced in 2003, until the formal adoption of the Local Plan in 2008, its application was limited to 'windfall sites'. Only within the context of a depressed housing market with little development activity has the policy applied to all schemes of more than five dwellings.

2.44. RSL1 saw procurement of affordable housing via s.75 as having been somewhat compromised by a lack of assertiveness on the part of some local authorities, with some AHPs being fatally weakened by inclusion of policy loopholes. In common with other parties it was also believed that prospects for any substantial procurement of affordable housing via s.75 rest on the renewal of boom conditions rather than merely a return to 'market normality'. Only in these circumstances will private developers be willing to embark on large schemes which could yield numerically significant affordable housing completions.

2.45. Far from being a boon from the affordable housing development perspective, requirements imposed via s.75 were seen by a number of research participants as more often a headache because of their use to secure 'infrastructure' contributions. RSL1 reported having to factor into its development costs, (non- HAG-eligible) contributions towards service costs including education, trams and even graveyards. However, in LA3 the Education Department had agreed to waive education contributions for affordable housing schemes on the basis that most RSL tenant families with school-age children will be moving short distances such that the children will already have been attending local schools (and therefore do not constitute an additional obligation).

2.46. More generally, there was concern that the need for infrastructure investment means that larger, developer-led schemes can, in any case, be taken forward only as a large-scale 'package'. In the absence of a strong market where developers are confident of being able to sell hundreds of properties within a short period it is considered that they will be unlikely to contemplate funding the infrastructure needed to enable a large scheme to proceed.

Collaboration between local authorities and RSLs in development of new council housing

2.47. As noted in Chapter 1, a specific objective of the research was to explore collaboration on development services between local authorities and RSLs within the context of new council housebuilding. While it is almost two decades since the end of large-scale municipal housing development, some 70,000 homes have been constructed by housing associations since 1990. It might, therefore, have been expected that the recent revival of council housebuilding would have led to many local authorities seeking to draw on RSL expertise in establishing and delivering their development programmes. In practice, this does not appear to have happened. In only six of the 23 authorities receiving Scottish Government housebuilding grant have such collaborations, in fact, been established. Moreover, there is no apparent relationship between local authority size and the utilisation of RSLs in this role.

2.48. The remainder of this section is based on telephone interviews with five of the six local authorities identified by the Scottish Government as having involved RSLs in this way.

The outsourcing decision

2.49. The main factors seen as prompting outsourcing of development functions to RSLs were:

• Lack of appropriate in-house skills and experience
• Scottish Government grant programme delivery timescales
• Existing strong working relationships with local RSLs
• Confidence in RSL development expertise, including familiarity with Scottish Government financial frameworks, benchmarks and value for money expectations
• Scope to adopt existing RSL design guide incorporating Housing for Varying Needs and Secured by Design standards
• Existence of RSL framework agreements with building contractor and design professionals.

2.50. In one local authority the outsourcing decision had been reached via a structured options appraisal process and the RSL delivery agent chosen under a competitive tendering exercise. In the others, the policy had been determined and implemented less formally. While some authorities had 'sounded out' a range of RSLs, others had considered that there was an 'obvious choice' - possibly following from the outcome of a prior 'preferred developer' selection process. In these instances, the Council simply negotiated fees and other arrangements with a single supplier.

2.51. Generally, there was a clear preference for working with locally-based RSLs, ideally having existing framework agreements with locally-based contractors. While such arrangements arrived at entirely informally might not have maximised value for money, they were seen as building on trust-based relationships and, in this way, maximising local authority control.

2.52. In one instance, the decision to involve an RSL had come about serendipitously through incorporating a development already subject to 'off the shelf purchase' negotiations involving a housing association. The homes concerned will, therefore, be incorporated within the local council housing portfolio rather than having been taken into RSL ownership.

Models of collaboration

2.53. Most instances of local authority/ RSL collaboration within this context have involved RSL input into a range of procurement processes including:

• Development and monitoring of Project Plan
• Scheme design briefs
• Determination of procurement route; contractor appraisal and selection
• Working with preferred contractor on design and cost plan, and in helping secure consents
• Project management during the construction period
• Budget monitoring and financial planning/projections

2.54. As a rule, collaborating local authorities have retained a legal client role as regards the selected housebuilder, though builders are generally expected to operate under supervision of RSL development staff and the RSL's clerk of works. In some cases design teams have also been contracted directly by the Council (with RSL advice possibly influencing member selection), but this has not been universal.

2.55. In one authority, the provider RSL's design guide was subject to modification to reflect Council priorities - e.g. component specification to fit with the Council's existing maintenance framework, inclusion of higher insulation standards and solar hot water panels.

Looking to the future

2.56. In looking to how future rounds of council housebuilding might be delivered, how were recent experiences of collaboration viewed in terms of effectiveness and efficiency? All of the local authorities which had utilised RSLs saw this as an effective way of responding to the opportunity presented by the Scottish Government grant funding programme. Given the ability to make use of tried and tested development procedures and established expertise, most authorities also considered such collaboration to be beneficial from an efficiency perspective. It was, however, accepted that such an approach involves some costs over and above those associated with simple in-house delivery. One authority, for example, pointed out that the partner RSL's need to ensure that procurement choices fitted with the Council's Standing Orders had slowed down the development process.

2.57. As to the future, most of the local authority interviewees reported that outsourcing delivery for initial rounds of grant-funded development was now seen as playing a 'capacity-building' role, such that the function could be taken back in-house in future. Nevertheless, while this outcome was seen as likely by most interviewees it was not a certainty. And in one authority, it was considered certain that (any) future rounds of council housebuilding would continue to utilise the model where delivery was contracted out to the preferred partner RSL.

Variant model for post-transfer local authorities

2.58. While not as yet seen in Scotland, there have been instances in England where post-stock transfer local authorities have received government grant funding for council housebuilding to be procured collaboratively with RSLs. Three such authorities, in particular, have received funding allocations from the HCA - Bradford, Hartlepool and Wirral. In the Hartlepool case, for example, this has involved the Council providing sites at nil consideration, with the transfer landlord (Housing Hartlepool) acting as the Council's delivery agent and making use of existing framework agreements with housebuilding contractors. The local authority also contributes to scheme costs via (General Fund) prudential borrowing. The completed properties will be managed by Housing Hartlepool. However, because they will remain in Council ownership, tenants will enjoy secure (rather than Assured) tenancies ²⁷ and the authorities concerned will need to re-establish Housing Revenue Accounts for book-keeping purposes.

2.59. The model described above is therefore seen as potentially useful in providing a vehicle for post-transfer local authorities to contribute to social housebuilding through the contribution of surplus land and the designation of prudential borrowing capacity.