Is the price right?

With an ODPM deadline of July 2005 looming, the remaining English council landlords are getting ready to play the stock options stakes. To unlock the extra money their homes need to reach the decent homes standard, they have to decide whether to release the equity in the properties through stock transfer, side-step borrowing restrictions and get extra government money by setting up an arm's-length management organisation or take the path less travelled towards a private finance initiative contract with a housing consortium.

It's a decision not to be taken lightly, and there are a number of tools available to help councils make their choice: consultants, lawyers and consultation with tenants, for instance. But all these things costs money, money that is invested at considerable risk: after all, transfers and ALMOs can be ambushed by "no" ballots, the PFI negotiation process can stall or spin out of control, and all three options can be at risk if there's a change of political control at the council midway through the process.

The sums involved are considerable.

St Helens council, for example, would have lost about £1m of its total transfer bill of £3.25m if a transfer ballot for 14,500 units had returned a "no". Both figures represent a substantial slice of the £29m valuation. "Cost is one of the risk elements of a stock transfer, and councils are very conscious of that," says Jeff Zitron, director of consultant HACAS Chapman Hendy.

Setting up an ALMO is usually cheaper, roughly a third of the rate for a transfer: District of Easington council, for instance, is spending £300,000 on a 10,000-unit ALMO. But whereas transfer set-up costs can eventually be offset against a capital receipt, the costs of an ALMO have to be swallowed whole. "ALMOs tend to be more aware of costs. It's 'real money' for the local authority, and has to be budgeted for," says a lawyer who works on such schemes.

Even though the volume of transfers, ALMOs and PFI deals is increasing, costs are not reducing as one might expect from the doctrine of demand-supply economics. In terms of legal advice, the fact that there's only a handful of firms with specialist expertise has kept fees sky high. Likewise, overstretched specialist housing consultants that are finding it difficult to recruit experienced staff aren't reducing their fees.

Beware of false savings
The bills start mounting as soon as a local authority commissions its stock options appraisal. Although the work can be done in-house, most prefer the objective eye of external consultants and often, external advisers are kept on throughout the process, which can inflate costs to six figures. ODPM guidance issued in July this year also recommends that independent tenant advisers are taken on board from the outset, rather than after a decision is reached.

When it comes to advice, you get what you pay for. Appointing a cut-price firm of lawyers on a transfer, for instance, could leave you with an off-the-shelf legal solution that gives limited room for future manoeuvre on issues such as tenancy agreements or service charges. One lawyer says any firm working for under £70,000 is "buying their way into the market". You should expect to spend £9o,000-150,000 on lawyers for a transfer, £30,000-50,000 for an ALMO.

Stock condition surveys range from the bargain basement to the super de luxe. At the cheaper end of the scale, there's what Ben Denton, director of consultant ABROS, calls a "second-gear survey": when a surveyor drives past the properties for a visual inspection of the exterior. The cost might be tempting – £300,000 for 45,000 units, or £6-7 per property – but the consequences of failing to spot problems can be expensive, especially for a PFI deal. Denton recommends a spend of £150-160 per property for full stock, geotechnical and contamination surveys, "to get you into a bankable position". He says: "If it's PFI, the information has to be perfect. It costs money to get to the point where you know exactly what you need to spend."

One major problem with hiring consultants is that when it comes to writing briefs and negotiating fees, most councils can be unprepared for the cost of an expert service. St Helens council appointed HACAS Chapman Hendy to advise it. "The consultants had been around the block, but we had no direct transfer experience," says Steve Moore, formerly the council's head of housing services and now director of registered social landlord Helena Housing. "There were occasions when they said 'that's an additional cost', and we just had to face it."

Independent tenant advisers don't come cheap either. South Norfolk District Council, which steered its way to a "yes" vote on its stock transfer in July, found that the bill from the firm selected by tenants was "the main surprise element" of the total cost, and was forced to increase its budget midway through the process. Tim Mobbs, the council's corporate director, says the cost of tenant advisers was the single most expensive item of the £325,000 spent on consultants' fees.

Look out for hidden costs
There are also the hidden costs of setting up an ALMO, transfer or PFI. Louise Russell, associate director of management consultant Vantagepoint, points to the costs of diverting managers away from day-to-day service delivery. "People are less aware of issues of change management," she says. "You either need a team of consultants specialising in transfer, or interim staff for management posts." She says councils going for any of the three stock options should budget in extra staff for up to a year, at a cost of £100,000.

It costs money to get to the point where you know exactly what you need to spend 

Ben Denton, Abros

Russell's advice will ring hollow in some town halls, however. At St Helens, for example, the transfer workload was shouldered by a seven-person in-house team without the help of extra workers. "There was a hidden cost of secondment, in terms of work on service development," says Moore. "Duties were shared among other people, but the transfer team included some key players, the more dynamic individuals.

It left less ability to deal with difficulties in day-to-day business."

Since all this expenditure is jeopardised if the message does not get through to tenants, councils' spending on communications and marketing is spiralling. It's often the battle for hearts and minds that presents the toughest challenge for councils and many spend £20,000-50,000 on specialist public relations and communications advisers to formulate press strategies, produce videos and generally give their campaigns a touch of professionalism.

"The message from places that got a no vote is that if people don't understand the message, they won't vote for it," says Matt Cooney, strategic director of housing services at Solihull council, which pursued a transfer last year but has now switched to an ALMO.

At the time, local buses were decked with anti-transfer posters that said: "If you don't know, vote no."

To put their argument to the tenants, councils have mounted travelling exhibitions, set up freephone hotlines and held roadshows with question-and-answer sessions. South Norfolk, for instance, converted a trailer into a mobile exhibition that visited outlying villages and invested £27,000 on a video. Videos are, in fact, an increasingly popular option. "It's about £10,000-20,000 to produce, and then reproduction for every tenant can be expensive. But in value for money terms, I think there's an argument for it," says Solihull's Cooney.

Westminster council spent £67,000 on a video promoting its ALMO, CityWest Homes. Journalist Martin Bashir was hired to talk to tenants and interview the borough's director of housing. He didn't come cheap but "the video was one of the things that gave people the best information," says Lorna Whitehorn, assistant director of corporate services. "Resident feedback said most people had seen it."

Anti-transfer campaigners also add to the council's bill for communications as their message must be countered with publicity. "The no camp gets all the coverage in the local newspaper," says Camden council's housing director, Neil Litherland. "The person sitting at home who likes the idea doesn't get coverage. We've got to intensify our efforts to get information to people."

However, Camden, preparing for a November tenant ballot on its proposed ALMO, will undertake the work in-house and has no plans to stoke the fire of criticism by paying to appoint an external public relations adviser. Anti-transfer groups tend to cast the cost of setting up an ALMO, transfer or PFI in terms of the number of central heating systems it could pay for instead. Defend Council Housing is trying to stymie Camden's ALMO in the same way as it thwarted Birmingham and Southwark's stock transfers and Camden has faced a backlash in the local press for investing in five showflats refurbished to the decent homes standard – an expenditure that housing director Neil Litherland says is "neither here nor there" in the overall scheme of things.

In general, local authorities are caught between pressure to keep costs down – Easington, for example, is the fourth most deprived district in the country – and the logic that says they have to speculate on upfront costs to accumulate the final financial benefits of the ALMO, transfer or PFI. Getting the balance right is clearly a headache for most local authorities, while smaller councils suffer disproportionately because of fixed costs and fewer economies of scale: South Norfolk, with a population of just 100,000, spent £537,000 in pre-ballot costs for its 4500-unit transfer.