Be prepared

One vital factor is that the government will review the policy in 2005, and include a study of its financial implications both for individual housing associations and the sector as a whole.

The Chartered Institute of Housing believes it is important to get the scope of this review determined at the outset. It has worked with consultancy Indepen on how housing associations should contribute, what it means for them, and how the Housing Corporation should best manage it.

Indepen has extensive experience with regulators and regulated businesses in the privatised utility sector.

Housing associations and utilities are not strictly comparable. Associations are much greater in number and more diverse in structure, and their regulator has a different constitution and motives. But Indepen believes that a comparison of the two sectors is useful.

The report assumes that while the DTLR will set the terms of reference for the 2005 review, the corporation will specify, collect and analyse the information needed to make it credible. It must specify in good time the models it will use and what information it will require on revenue, costs, assets and performance.

Since the report was written, the DTLR has issued guidelines designed to remove some of the ambiguities around the review.

However, the question of what will happen if housing associations are not compliant by 2005 remains, given that the corporation has no statutory power to control their rent levels.

Indepen concluded that the review should contain three elements.

The first was that it should evaluate the extent of associations' compliance in submitting their proposals for rent restructuring to achieve the targets specified in the government's formula by 2012.

The report does not propose any extension beyond that set out by the corporation in October 2001. However, it does favour an analysis in 2005 of the corporation's grounds for granting compliance extensions, in order to determine how consistent it has been in applying this policy.

Secondly, the widely varying circumstances mean that the impact of government policy on individual associations is hard to predict and the review should examine the intended and unintended implications.

One area of concern to associations, for example, is the degree to which rent restructuring will trigger changes in the level of repair and maintenance expenditure, the direction of new investment, diversification and mergers, and their response to regeneration initiatives.

The report calls for changes to the formula, if necessary, to lessen undesirable consequences and encourage desirable ones.

Lastly, the review should evaluate whether the RPI plus 0.5 per cent control mechanism is appropriate after 2005.

The report questions whether this review should be a one-off, or whether it should herald subsequent reviews of the 'RPI plus X' control process, using adjustments to the 'X', in much the same way as occurs with the regulated utilities.

In order for this review, and any successors, to be effective, detailed modelling of income and cost drivers will be essential, as will the definition of appropriate levels of service for residents, and of housing stock condition.

The corporation's ability to judge the financial viability of housing associations is central to the review.

In the social housing sector, other things being equal, viability is closely related to efficiency. Utility regulators have done much useful work on this.

The report does not suggest a wholesale transfer of utility regulation methods into social housing, but it does indicate a pressing need to improve the quality of data on basic cost and service level measures. This would ensure that it becomes possible for the corporation, lenders and associations to employ benchmarking and compare efficiency.

Benchmarking between associations could be much more focused, and the review's credibility would increase, were information on cost and performance available separately for functions such as asset development, asset ownership, service provision and asset management.

It would then be possible to compare the cost and other factors involved in each activity across associations. This would represent a change in the information regime.

Indepen suggests that this is worth consideration, given that the number of associations is large enough to permit sound comparisons.

Incentives for efficient operation and investment are a fundamental part of utility regulation, where the price cap formula encourages efficiency by providing the incentive to reduce costs in order to increase profits.

The absence of the profit motive in social housing weakens the incentives for achieving efficiency, although the financial pressure of rent restrictions may well provide such an incentive for some weaker associations. Rent restructuring aims to encourage more market-like outcomes and ultimately to allow reform of the housing benefit system.

It remains to be seen if the DTLR will be justified in claiming that the overall impact of rent restructuring on the sector will be neutral in revenue terms.

It will be particularly interesting to evaluate the impact of the rent cap and the corporation's statement that there will be no pressure on financially sound associations to raise rents to target levels.

The report points out that utility regulators require between 18 months and two years to complete a price review, even though none has more than a few dozen businesses to regulate and they have the advantage of an established framework and several years of previous data.

Self-certification by housing associations, together with sampling approaches where possible, would make the corporation's workload in gathering and analysing data more manageable.

The review is only three short years away. There is no time to be lost in concluding what information is needed, so that housing associations can begin to gather the data.