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Modernising Scotland's Social Housing: A consultation paper

SECTION 3 THE PRUDENTIAL REGIME AND HOUSING CAPITAL FINANCE

Ministers remain of the view that the investment potential released from community ownership through stock transfer is the best way of getting significant new resources into social housing and doing so more quickly than other options. Community ownership also delivers a raft of other benefits, most significantly putting tenants at the centre of the decision making process. Ministers however recognise that for some local authorities transfer is not necessarily the only option in their circumstances. For authorities that have low to moderate debt and rent levels, and investment needs on a manageable scale it could well be sustainable for them to retain their stock and undertake the necessary investment.

Ministers therefore decided that it would be appropriate to offer to authorities something other than a choice between transfer and the status quo and as a result announced their intention to give local authorities additional freedom to borrow within the new prudential regime that has been announced for the rest of local authority capital investment. The change will take effect from April 2004. The statutory basis for the new regime will be the new Local Government in Scotland Act. CIPFA is preparing detailed technical guidance on the operation of the regime. The latest version of this guidance can be found at:- www.cipfa.org.uk/pt/prudential_framework.html

Broad principles

At its heart, what the Prudential Regime means is that in future local authorities will decide for themselves what is an affordable and prudent level of borrowing in their financial circumstances. They will need to assess the sustainability of their income streams and reach a view on what level of debt (both old and new) they can afford to service.

With this greater freedom will come greater responsibility. The Prudential Regime will not offer easy choices for local authorities. Extra borrowing will need to be paid for. In housing, the repayments will be out of rents. Authorities will take full responsibility for their housing debt and must ensure that this remains at manageable and affordable levels and does not place an unsustainable burden on current or future tenants. Ministers will take powers to step in should it appear that local authorities, either in total or individually, are raising borrowing to levels that might be unsustainable. These powers are expected only to be used in last resort circumstances; the primary responsibility to manage their finances will fall to local authorities.

Authorities will be expected to set for themselves their own prudent borrowing limits and to report publicly if they have adhered to these limits, and if not, why not. Authorities’ external auditors will report on authorities’ compliance with the regime. The precise operation of the Prudential Regime continues to be developed with local authorities and CIPFA.

It is important to realise however that the move to a Prudential Regime for housing will not of itself change the fundamental choices that face authorities with significant debt levels, high investment needs and high rents. For them, stock transfer will remain the best option. In other words, those local authorities are very unlikely to find that the Prudential Regime will offer them any additional scope to increase borrowing and therefore investment levels much, if at all, beyond what they can currently afford.

Capital Receipt Set Aside Rules

One specific issue that needs to be addressed as part of the move to the Prudential Regime is the future treatment of capital receipts and the set-aside rules. The current rules require local authorities to set aside 75% of receipts received from the sale of houses under the Right to Buy legislation and 50% of the receipts received from the sale of land and other assets. These rules were introduced in 1997 in order to speed up the reduction of the historically high levels of Scottish housing debt. This has contributed towards a reduction in housing debt of around £800 million between March 1997 and March 2002 and has resulted in a saving of about £80 million a year in interest charges.

However, there might be arguments in favour of dispensing with these rules from April 2004 when the new borrowing regime is introduced. Part of the argument is that under the Prudential Regime, local authorities will be expected to manage all of their debt (general fund and housing) as a single entity and to apply best treasury management procedures to ensure that the best value for money is obtained. It might therefore make sense to bring housing into line with the general fund (where set aside rules no longer apply).

We also expect that the Prudential Regime should have a self-limiting effect by which we mean that if an authority decided not to use receipts to repay debt it would probably reduce its headroom to take on new borrowing. In other words most authorities will be faced with a choice between either using capital receipts to invest or raising new borrowing through the Prudential Regime. This might suggest that for many authorities the abolition of the set aside rules in the context of a Prudential Regime would be fairly neutral in terms of the total quantum of investment capacity.

Points for Discussion

Reporting Arrangements

The section dealing with the development of the new Scottish Standard for Social Housing set out how we will expect local authorities and RSLs to prepare delivery strategies which will also cover how they intend to fund the cost of meeting the standard.

In the context of the operation of the Prudential Regime we will set out in Regulations under the new Local Government Act what information we will require from local authorities regarding their use of the new funding flexibility. We stress, however, that we are not attempting to replicate the approval arrangements that currently exists under the present section 94 controls. Nevertheless, as described above, Ministers do have a legitimate role to play in assuring themselves that total and individual borrowing proposals are sustainable. The detailed technical guidance that CIPFA is preparing is likely to recommend that authorities put in place asset management and business planning arrangements. The information returns that we are suggesting below should fall out of that process.

We will want to keep the reporting to the minimum necessary. At this stage, our view is that we will need local authorities to provide high level figures showing what their future housing capital investment plans are and how these will be funded. The Prudential Regime requirements will establish the minimum reporting requirements. However, given that many local authorities will have taken a longer term view of the financing requirement as part of their stock option appraisals, and given the medium term nature of meeting the new Scottish Social Housing Standard, our preference would be to see these high level returns covering a 30 year projection. The returns should show investment plans each individual year for the first 5 years and then for each subsequent 5 year period the total investment plans in aggregate. For each of the first 5 years individually and then for each of the following 5 year aggregate periods we will ask to see how the total capital investment figure will be funded. The funding should show the amounts coming from:-

• New debt
• Rents
• Receipts
• Other sources

For each period the opening and closing outstanding debt levels should be provided along with the associated servicing costs. An analysis should also be provided of the effects on rents of the proposed investment programme and the proposed borrowing levels.

Local authorities will probably need to have reached a view during the course of late 2003 of how they intend to fund their housing investment proposals using the new flexibility of the Prudential Regime from April 2004. We are therefore proposing to ask local authorities to submit their returns to us in September 2003. We realise that for the first year of the operation of the new regime (2004/05) local authorities will be in transitional mode and may not be in a position to supply the level of information described above. Authorities should provide future projections so far as they can but certainly for the first year of the regime and the 2 subsequent years. The timetable and the extent of the information sought in succeeding years will be reviewed and revised as appropriate following the experience gained in the first year of operation.

Points for Discussion

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