Blog 30th August 2017

Blog 30th August 2017

In this week’s blog, I write about Grenfell Tower, Major Repairs budgets and Local Authority Housing Finance.

Last month it was claimed that the ‘Grenfell refurbishment budget was limited by the borrowing cap’. Kensington & Chelsea Borough Council’s borrowing cap of £221million left the Council with only £11.4millon of headroom in 2014 and the Council took the decision not to use this borrowing capacity to fund maintenance. At that time, the Council calculated a need to spend £100million on maintenance while its resources totalled £70million leaving a shortfall of £30million.

The council planned to meet the gap through property sales and increasing rents but was forced to operate on a tight budget. The budget for the refurbishment of Grenfell Tower was set at £9.7million. The refurbishment that also included funding the construction of nine ‘hidden homes’ around the tower, was paid for largely through £6million raised from asset sales with the balance of £3.7million coming from council funds.

‘Inside Housing’ reports that two contractors declined to carry out the work because the budget was insufficient and has concluded that:

“(The Council) had saving money at the absolute forefront of its mind when it considered and approved the refurbishment.”

A report from the council in July 2013 concludes as follows:

“The refurbishment of Grenfell Tower is a large and complex project… Particular focus has been required to ensure that the project representing [sic] value for money.”

‘Inside Housing’ concludes that:

“Thanks to stringent government rules on council borrowing, Grenfell's refurbishment was financed mostly through the receipts from the basement sales, and given to the contractor which could do it at the cheapest price. And, acting under this financial pressure, when the decision was made over which material to use to clad the building, the residents’ preference for fire retardant zinc cladding was ignored, and the council opted to save £300,000 and install cladding which later proved to be highly flammable on the outside of the building.

“A relentless focus on value for money in procurement in social housing has been linked to problems before, particularly in the context of repairs and maintenance. Privately, contractors operating in the sector complain of a race to the bottom – where rivals effectively underbid in open procurement knowing it is the only way to secure work. This can lead to huge financial pressure and can mean under-resourcing and a pressure to cut corners during the work.”

There are two things that concern me here.

First, there appears to be a total misconception about what ‘value for money’ is about. It is NOT about doing things as cheaply as possible and this is confirmed by looking at the Kensington & Chelsea Tenant Management Organisation’s own definition of ‘value for money’ which is as follows:

“The correct balance between Economy, Efficiency and Effectiveness. Value for Money at Kensington and Chelsea Tenant Management Organisation is considered by the Tenant Management Organisation to be high when there is an optimum balance between all three, with relatively low costs, high productivity and successful outcomes in terms of service delivery to residents.”

And even the ‘economy’ element is NOT about procuring goods & services as cheaply as possible. It is about procuring goods & services in such a way that the ratio between value and cost is maximised. It is about procuring good quality goods & services at a competitive price. It is NOT about procuring goods & services that are not fit for purpose because they are cheap.

Second, the financial argument seems to be based on a false analysis. The argument appears to be that if the borrowing cap did not exist or if it was higher, the Council would have been able to set a higher budget for the refurbishment and the fire safety measures may have been more effective. However, the self-financing settlement introduced by the Department for Communities & Local Government in 2012, never envisaged that major repairs would be paid for through borrowing because the financial model was supposed to include sufficient revenue resources to fund an adequate provision for major repairs. The financial settlement was based on a cash-flow model in which the provision for major repairs was set 29% above the level of the major repairs allowance that had been part of the housing subsidy system. At the time, this arrangement was welcomed by the Chartered Institute of Housing, the Chartered Institute of Public Finance & Accountancy and many in the sector as it was seen as having ‘locked in’ sufficient resources for major repairs.

However, the government’s own report, commissioned from the Building Research Establishment, had calculated that the increase in the provision for major repairs when compared with the previous major repairs allowance should have been 43% rather than the 29% increase that was made. This meant that, major repairs have always been under-funded in the self-financing settlement by £187million a year at 2012 prices. Then, the Welfare Reform & Work Act 2016 provided that from 2016 to 2019 there would be four successive years of 1% rent reductions that had not been provided for in the self-financing settlement. This reduced Councils’ resources by £2.6billion over the four years. It is these decisions, rather than the imposition of the borrowing cap, that has reduced the resources available to fund major repairs.

Councils should commission robust stock condition surveys and use these to inform their asset management plans and business plans. This should enable them to identify well in advance the expenditure that is required on major repairs and the resources available. Furthermore, if economies are required these should not be at the expense of fundamental aspects of asset management such as fire safety. I am not aware of any council that complained prior to the Grenfell Tower fire that they had insufficient resources to meet their fire safety obligations.

My conclusions are that:

• While the borrowing cap is an unnecessary constraint the real reasons why councils may have difficulty in funding major repairs adequately are the failure of the government to provide adequately for major repairs in the self-financing settlement in 2012 followed by the decision to legislate to reduce council rents in 2016. I think there is a need for government and local authorities to re-visit the self-financing settlement to ensure that it contains sufficient resources for essential major repairs.
• In putting together and managing asset management plans and capital programmes, councils should follow the principles of value for money and should ensure that adequate provision is made for fundamental aspects of asset management such as fire safety.
• I do not think that constraints on resources should absolve any Council from its responsibility to ensure that proper precautions are taken to protect tenants from fire.
• This is not just an issue for local authorities. Housing associations do not have to operate with the self-financing system or the borrowing cap, but are affected by the rent reductions and are under the same obligations to carry out necessary major repairs and to ensure fire safety.

Our next seminar is on ‘All You Want to Know about Local Authority Housing Finance’ and will be held in London on 27th September 2017. It is proving popular, but there are still a few places available. For more information or to make a booking, please click HERE