FINANCIAL ASPECTS
Substantial difficulties have been encountered in obtaining the necessary data to perform an in-depth financial analysis of the proposal for a whole-stock transfer. Given the original brief, as an absolute minimum, the following were required: -
a) Glasgow Council's Housing Revenue Account
b) Glasgow Council's Housing Capital Account
c) the Annual Report of Glasgow Council
d) the Housing Revenue and Capital budgets
e) a copy of the Feasibility Study conducted by HACAS plus all supplementary data.

These data were verbally requested from the Chief Executive's office, Housing Department, and the Planning Group of Glasgow City Council. This was refused on the basis that the Council does not supply data based on verbal requests. A written request was sent at the end of September. On 12th October, the Director of Housing replied, refusing to provide any information.

All of the data, apart from the Capital Account and Budget, and supplementary data to the HACAS Study have been obtained from other sources.

Housing Revenue Account
The HRA 1998/99 shows that the Council has an excess of Income over Expenditure of £17.4m (c.f. 1997/98 which showed a deficit of £2.8m).

The total cost attributable to the HRA was £225.8m. By far the most important element of cost was debt finance at £106.5m (47.2%).

Highlights of the HRA 98/99 are: -
97/98 % 98/99 % %increase on 97/98
Total Income £238.5m 100% £243.3m 100% 2%
of which:-
Rent 214.9m 90.1% 219.7m 90.3% 2.2%
Sales 10.7m 4.5% 11.5m 4.7% 7.5%

97/98 % 98/99 % %increase on 97/98
T. Expenditure £241.3m 100% £225.8m 100% (6.4%)
of which:-
Finance Costs 129.9m 53.8% 106.5m 47.2% (18%)
Repairs 47.8m 19.8% 45.9m 20.3% ( 4%)
Lost Rents 10.8m 4.5% 12.8m 5.7% 18.5%

It is clear from the HRA alone that the potential for the Council raising, internally, sufficient funds to finance either substantial capital improvements or major maintenance works, is non-existent. Further borrowing, under the status quo, could not be serviced except with substantial rent increases.
Capital receipts from house sales are relatively small and even if all proceeds could be used to finance capital improvements, the net effect would be negligible.


Housing Revenue Account Budget 1999/2000
Limited information is available on the current budget, reflecting only broad categories of cost and a single line total for income. Excluding finance costs, the HRA budget indicates income and expenditure broadly in line with 98/99 out-turn and predicts an excess of income of £136.4m. This will be sufficient to service debt and provide a modest excess of income over expenditure. Net results from the first four months of the current year do not suggest any significant variances.

Feasibility Study by HACAS
On commissioning this project, UNISON and others were aware of only one financial study into the proposed stock transfer: that conducted by HACAS. We analysed that feasibility study as required, but now recognise that it has been overtaken by subsequent events. However, we would argue that the basic approach used by HACAS will be adopted by Ernst & Young in their study sponsored by the Scottish Executive. Thus the analysis here in the main will be applicable to this new study also. Without access to it, of course, we are unable to comment with any degree of certainty. That must await any publication of that report.
In the feasibility study by HACAS, claims and statements are made without the necessary back-up data. It is therefore very difficult to assess the viability of much of the Report. Nonetheless, enough information is given, at times, to identify possible weaknesses in the proposal. What follows is, therefore, more of a list of questions than a formal analysis and these are identified under four broad areas: -
1. Initial Valuation
2. Capital Expenditure
3. Rents
4. Other

1. Initial Valuation
The report makes clear that the transfer valuation is an important element in providing future funders with an acceptable basis on which to base a lending decision. In arriving at the valuation, two issues arise: -

a) the valuation is based on a core stock of 75,000 houses after demolition of some 15,000 houses (S.16.5). Although 8,000 houses scheduled for demolition are included in the initial transfer, they currently have a negative valuation and would continue to do so even if improvements were made. There is no intention to improve these houses but demolish them.
S.6.1 indicates that the likely demand for new landlord houses would be in the range 74,000 - 87,000. With the new landlord only having 75,000, the Study is clearly assuming demand to be at the very bottom of this range. S7.6 and 7.7 make clear that there is no intention of new houses being started. The question remains, then, what happens if actual demand is higher than the lower end of the estimated range.

b) The initial valuation is also based on an assumed management cost per unit of £330. There is no justification for this figure given (as has also been pointed out in a number of trade articles).

The current Scottish Homes' figure used in similar transfers is £380-£430, clearly in excess of the figure used in the Study. This is compounded by S17.6 which states the £330 has been uplifted by 2.5% for "each of the next two years". Discounting back to present values, this suggests a present value of £314 (c.f. SH's figure of £380-£430). This figure must be seen, in absence of supporting data, as being highly questionable. S17.6 also states that this figure "is the Council's current cost per unit". As such it is based on current stock (97,510 units). When the total cost is divided by the predicted number of units (75,000), this gives a unit cost of £427.46 uplifted or £406.86 at present values. These figures are much more in line with SH's figures. This difference could add another £8m per annum on to the administration budget and have a significant negative impact on the initial transfer valuation. If, as S22.3 indicates, funders will have concerns about the strength of the cash flow, an additional £8m annual costs could only heighten those concerns.

2. Capital Expenditure
Additional capital expenditure on the transferred housing stock is critical in the proposal. S.7.2. indicates a commitment to spend £1.285 billion over a ten-year period, front-loaded (per S.7.3) in the first 6 years. It is worth noting that the total anticipated capital expenditure is the equivalent of 12 years current finance charges to the Council's HRA. Thus, if the Council could be relieved of this burden, the whole programme could be self-financed by the council almost within the same timescale as outlined in the proposal.

S.7.4 gives a list of aims for this projected capital costs but there is no analysis of costings which show how realistic £1.285 billion is.
There is no indication whether or not the £1.285 billion anticipated expenditure includes VAT. On the assumption that it does, and that all work is contracted outside of a Council DLO, the VAT element within that expenditure is in the order of £190 million. If this work was carried out by a DLO, there would be no VAT on labour. The total VAT element would therefore be in the order of £80 million (assuming that labour costs are slightly more than 50% of total costs). Just over £100m could be saved by the Council carrying out the work itself. Taking into account VAT, the 12 years referred to in the first paragraph of this section is reduced to 11 years.

Further, as long as an enterprise legally separate from a housing trust or association is used to deliver the capital programme, then this VAT element and any multiplier effects will be lost to the Scottish economy as a whole, as such tax receipts accrue direct to the Westminster Treasury. In their new pronouncements, it is apparent that the Scottish Executive is planning to transfer the housing stock to community based housing associations as soon as is practicably possible, if not directly on transfer from the Council. This will mean not only the loss of the economies of scale enjoyed by the DLO (see Section 7), but also that VAT will have to be incurred, raising costs and leading to a financial loss to Scotland.

3. Rent
The current average rent in Glasgow is £45 per week - a level which is constantly stated as being very high (e.g. S.8.2). There are a number of contradictory signals made within the Study: -

S.8.4 "The Council and the new landlord would share the aim of housing being provided at affordable and stable rents".

S.8.4 "... rent increases above RPI are unrealistic. However an increase of £3 per week when the package of works ... has been completed is assumed". (It is important to note that the study recognises that one of the reasons for this increase in rents is to maximise the transfer valuation).

S.16.5 "a rent increase of 6% in 2000/01 and of 6% in 2001/02 for all tenants before transfer (a proposal which, it has been suggested, is required to encourage the private sector to invest in public stock).

In summary, the Study suggests that rent increases above RPI are unrealistic principally because of the current excessively high rents. Yet, the study also recommends average rents should be raised from £45 to £53.56 (after improvements) compared to an RPI raise over 2 years to £46.17 (taking the current RPI) i.e. a real terms increase of 16%. An explanation for such a large real terms increase in rents could be a desire to ensure minimum fall in revenue as result of planned, non-replaced demolitions. S22.3 also indicates that rent levels (and by extension total rent revenues) is a key issue which funders will consider when assessing cash flows.
Whether the stock is transferred to one complete trust, or sold onto a range of community based housing associations - immediately or otherwise, the same reasoning will apply.

4. Other Points
The initial valuations are extremely sensitive to relatively small changes in assumption (S.16.7). A number of examples are given but no probabilities. It is very unclear how likely, or otherwise, any of these potentialities are and, hence, how likely the final valuation is.

The figures and model used in calculating the initial valuations are unknown. There is no way, therefore, of assessing the veracity of the disclosed values.
The Initial Options Appraisal (July 1998) indicates current voids running at 5.2%. When applied to the existing stock levels, this means that some 92,000 units are non-void. Some 82% of Glasgow's tenants are in receipt of Housing Benefit i.e. for about 75,400 units. Given that the target core stock is only 75,000, the Study must be making a large number of assumptions about the number of tenants who, in the future, will be in receipt of Housing Benefit - either that, or it is assuming that all future tenants will receive

Housing Benefit.
Speculation over the future of housing benefit ('Housing Benefit: Time for reform', P Kemp, Joseph Rowntree Foundation, June 1998; inter alia) raises further doubts over the price that funders will exact from the Council for the housing stock. As housing benefit is so critical to the present and future income stream, any moves towards imposing a limit on benefit payable would call into question the ability of many current tenants to afford the planned higher rents. In these circumstances, there would be a threat to the income of the housing associations putting in jeopardy the repayments to the financial institutions and/or the promised capital improvements to each house in the city.

There is an underlying assumption that funding of £800 million is obtainable. S.22.2 suggests that the option being recommended would be more expensive than other options outlined. It remains questionable whether even the "cheaper" options would be as cheap as borrowings from the PWLB. A number of issues are highlighted over which lenders will need re-assured: -
- valuations
- cash flows
- viability of business plan
- sensitivities of cash flows
- difference between valuation (as security) and loan required

The data required to consider these points are not available but, as indicated earlier, there is considerable scope for concern.

SUMMARY
1. The Council is so severely burdened with debt that the status quo does not permit the level of investment required.

2. The detailed financial underpinning of the HACAS preferred proposal has not been made available, nor has there been access to the assumptions, workings or reports of subsequent studies.

3. The core stock to be carried is at the lower end of predicted housing demand.

4. The estimated management cost per unit is very low and, at best, needs robust confirmatory evidence.

5. There is no evidence to justify the anticipated capital costs.

6. The effect of VAT is to increase total costs by more than £100m through contracting work, with this sum lost to the Scottish economy.

7. Although claims are made that rent increases above RPI are unacceptable, the proposal envisages an increase of 16% in real terms between now and completion of phase one improvements.

8. Initial valuations are very sensitive to minor changes. No probabilities are considered.

9. No valuation model is given.

10. The proportion of current tenants on Housing Benefit is not addressed. If the absolute number does not change, this implies all tenants will be on Housing Benefit. Possible changes to Housing Benefit would adversely affect the income flows to the tenants, the housing trust/associations and so raise questions over the costs of financing the transfer.

11. The number of uncertainties surrounding funding is very large.

12. The political nature of this proposal is briefly recognised in S.2.3. If the Government took over the current debt then existing finance charges debited to the HRA would be sufficient to fund the whole proposal over virtually the same timescale without the need for large rent rises.


STATUTORY RESPONSIBILITIES
Homelessness
Regardless of changes to the ownership and management of the housing stock, the Council will continue to have a statutory duty to assess people who present themselves as homeless and a duty to secure accommodation for those who qualify. While this accommodation could be provided by a new housing trust or CBOs, on an agency basis, there are a number of considerations to be taken into account. First, existing experience suggests there are difficulties in ensuring each and every housing association fulfils its commitment to take on their share of the homeless. Higher costs, problems for the families and the individuals involved, and the creation of dump estates can all follow. Second, the control of public expenditure would require formal agreements between the Council and a housing trust/CBOs so that short leases and hostel spaces were used, in preference to expensive B&B accommodation.

More generally, the Council would want to have an ongoing agreement with the new institutions to ensure that allocation policies and nomination practices were in place that did not discriminate against disadvantaged groups, areas or communities. However, any housing body set up with charitable status would militate against a representational structure and would work against the Council as Members having either present or prospective special rights (e.g. in relation to nominations/allocations policy) regardless of changes in the external environment (e.g. changes to the public sector borrowing regulations).

Monitoring the activities of a new housing institution would continue to be a Glasgow City Council responsibility, while ensuring the above agreements were enforced would consume further resources. Along with the costs of the transfer itself, which would run into many millions, the additional costs of this exercise would fall on the council taxpayer.

In drawing attention to the record levels of homeless in Scotland, Shelter '... also warned that proposals to transfer council housing to the private sector could have serious implications for the homeless' (Shelter, press release, 7/12/1999).

Housing Benefit
Over 75% of the rental income from Glasgow tenants, and 82% of council house tenants themselves, are dependent on housing benefit so that this element in the funding of current social housing is critical. Indeed, over the last decade or so it has replaced other forms of housing subsidy and so served to obscure the decline in investment in social housing. By extension, any change or threat of change to this system could have profound impacts on the transfer value of the City's housing stock, on the future financing of the proposed investment, on rents, the distribution of population, etc. Recent years have seen a number of examinations of the development of housing benefit, including the influential Joseph Rowntree Foundation study 'Housing Benefit: time for reform' (JRF, June 1998).

This argued that housing benefit is a major contributor to the poverty trap, withdrawing benefits as income rises. This is contrary to Government objectives of making sure 'work pays'. It is also claimed that there has been upward pressure on rents as there are no incentives to seek cheaper accommodation, to negotiate lower rents or to move to smaller accommodation. A number of possible reforms have been proposed to improve the efficiency of the system, and to distinguish more clearly the housing policy objectives from the social security policy objectives.

The Government's determination to contain the costs of the welfare state, and housing benefit in particular, is in conflict with its desire to improve work incentives. Coupled with the stock transfer, and without further reforms of the housing benefit regulations, the planned increase in social housing rents in Glasgow will increase the numbers on housing benefit and so those in this poverty trap.

Summary
1. The record numbers of homeless people will not be helped by the wholesale transfer of the City's housing stock.

2. Changes to the ownership of stock will increase the costs of supporting the homeless and make the management of their rights more complex and difficult to achieve.

3. Housing benefit has become the active source of much housing subsidy and investment.

4. Any changes or threats of changes to this benefit will increase the effective interest rates faced by a transferred housing stock.

5. It will also deepen the poverty trap created by this benefit which tries and fails to meet two conflicting objectives simultaneously.