Efficiency: Less is more

The issue that would come to define 2004 didn’t cause immediate sensation when it was first reported. A story in February’s Housing Today, headlined “Public sector review could hit housing”, quietly announced that Gershon’s review of civil service spending might mean a shake-up for social housing. But with worse spectres looming, the sector’s attention was focused elsewhere. Economist Kate Barker’s Treasury-sponsored review of housing supply was anxiously awaited and, more alarmingly still, there were fears that the chancellor was planning a spending freeze – the Institute of Public Policy Research warned as much in March.

But the sector soon found itself heaving an almighty sigh of relief. In March, the Barker review concluded that £1.6bn more was needed each year to overcome the housing crisis and the Treasury, it turned out, would play its part – more cash, a lot more, would be forthcoming in the spending review. Amid all the rejoicing, though, one critical caveat was in danger of being overlooked.

Confirming the extra funding in March, a Whitehall source added: “We want to do more in terms of delivering efficiency gains.” The following week the Housing Corporation unveiled its new structure for development funding. Cash would, in future, be given only to a select list of 71 “development partners” – RSLs and consortia with development budgets greater than £10m. Those whose circumstances changed so they no longer met the criteria would face “relegation”.

Housing had won the funding and recognition it had craved for so long – at a cost. From here on, the great god of efficiency would inform all developments.

The watchword became rationalisation – mergers and super-mergers to create a new generation of giant landlords with developing budgets in the tens of millions.

Northern associations were even told that they might face forced mergers, or “shotgun weddings”, to achieve this end.

But scepticism remained about whether rationalisation would have the effect the government desired. Housing Today summed up the fears in April: “Logic and business models across retailing and industry suggest that, in theory, greater rationalisation brings economies of scale, but the debate is muddied by a dearth of meaningful and rigorous data and a mass of contradictory evidence and policies.”

But could economies of scale be possible without full mergers? The idea of “purchasing clubs”, which allow smaller RSLs to reap the savings of bulk-buying goods and services, soon surfaced. And Barbara Thorndick, chief executive of medium-sized RSL West Kent Housing Association, argued that partnerships were the way forward: “If we want to survive, and I guess most of us do, we have to behave differently.”

Steve Harriott, chief executive of St Pancras & Humanist Housing Association (now boss at Amicus), was more circumspect in April: “I would be concerned if we created mega-associations that didn’t have any connection with local communities. Lots of associations are doing really good stuff at local level. The trick is to retain that while tapping into some of the benefits of a bigger association. If it costs a bit more to retain a local focus, I think it’s a price worth paying.” Even so, it seemed St Pancras was hedging its bets – the next week it announced a merger with Griffin.

In May, the Audit Commission unveiled star ratings for RSLs. Their performance could be directly compared with councils.

The ODPM announced a cost-cutting model championed by the Northern Housing Consortium as its submission to the Gershon review and stated that it would be setting targets for efficiency savings “in the hundreds of millions”. Jim Coulter, chief executive of the National Housing Federation, added: “It is likely that the government would look to continue the savings made through the corporation’s new partnering programme, which has made efficiency gains of 8%.

“But the question is, how deliverable would any target the Treasury comes up with really be? It’s not as if everyone has been sitting around being inefficient.”

By June, the corporation was cautioning the sector not to get carried away in the rush to rationalise. Neil Hadden, the corporation’s assistant chief executive for investment and regeneration, said: “Having set a threshold of £10m, a number of associations decided to group together. That’s fine. We will be looking at the added value they bring to the process and how strategic they are.

“Rather than being marriages of convenience, they must bring something strategic to the table.”

Then, chancellor Gordon Brown announced his fourth spending review. Housing was to be allocated £20bn over three years – the largest amount ever – and the Treasury committed the sector to providing 10,000 more social housing completions a year, a rise of more than 50% on the 19,500 expected for 2004. In return for this bonanza, the sector must make efficiency savings of £1.5bn.

With efficiency now the word on everybody’s lips, the focus in August was on how the sector could meet the £1.5bn target and what could be learned from the efficiency experts who had already made a difference to their organisations’ bottom lines. Bulk-buying groups alone could save the sector £400m, it was reported.

Having been given a large carrot, the sector was now shown the stick. Inefficient housing associations faced less funding and more regulation, corporation chief executive Jon Rouse warned. An efficiency league table was to be set up to measure RSLs’ performance.

Deputy prime minister John Prescott backed this up in his speech to the NHF conference in September: RSLs must save £830m a year for the next four years, and the increasing cost of building social housing was labelled “completely unacceptable”.

“I don’t want to play the numbers game,” he warned, “and maintaining quality is vital, but in some areas there are as many as 50 or 70 housing associations – sometimes half a dozen in one street, each with their own offices, their own maintenance, their own management. We really have to ask ourselves, is this the best way to do things?”

In the same month, Paul Boateng, the chief secretary to the Treasury, echoed his theme in Housing Today: “Now we have that commitment of resources by the taxpayer, a £430m increase in direct investment, an expanded private finance initiative programme and an opportunity to plough back into the sector what you gain in efficiencies.”

But something close to a backlash against willy-nilly cost cuts was gathering momentum. The NHF savaged the efficiency index, with Coulter saying:

“The indicator should not proceed in its current form. It does not do what it says on the tin. It should be renamed to make it clear it’s a cost indicator only.” The Council of Mortgage Lenders backed him up, adding: “Risk doesn’t necessarily follow efficiency. You can be efficient but still broke.”

By the beginning of October, Rouse admitted “we got it wrong” on the efficiency index and said it was to be renamed an operating cost index. But by November, councils and housing associations were complaining that, five months after the spending review, they were still in the dark as to how the savings were to be achieved, thanks to a lack of guidance on the subject.

But no matter what arguments rumble on, the Treasury has got the bit between its teeth on efficiency and isn’t planning to let go any time soon – certainly not in the approaching election year.