Its not about the money

When the Housing Corporation published its efficiency index in August, the responses were swift and loud but could easily have been dismissed by any casual observer as predictable. Associations ranked low on the index protested and those ranked high were enthusiastic. More significantly, the National Housing Federation and the Chartered Institute of Housing both recognised the momentum and merit of the efficiency agenda, but felt the index was technically flawed and, with its focus on costs without regard to outputs, had little to do with efficiency.

Commendably, Jon Rouse took on board the criticisms, renaming it the operating costs index and proposing a number of changes to the calculations. We also have the benefit of an evaluation of the first index results by the Centre for Urban and Rregional Studies at the University of Birmingham, which, while heavy going (what are “heteroscedacity problems”?) observes that a number of key cost determinants are omitted – age, location and type of stock – because data is not readily available.

So, after all the heat of the argument, what light will a revised index shed on housing association performance? Well because of the limitation that the CURS refers to, it is clear individual spending targets will remain an erratic measure of what an association must spend.

Interestingly the top 10 associations – those that underspent their target most – had an average target spend 72% higher than the bottom 10 (£3889 per unit compared with £2257). Actual operating costs varied much less between top and bottom, so the difference in ranking was much more to do with the formula that creates the spending targets, which as we’ve seen is fundamentally flawed, than actual spend. So a table league, while good knockabout fun, is of no real value.

At its worst it creates real reputational risk as Liverpool Housing Trust found out when the local paper identified us as “one of the worst performing associations”, despite three regional business excellence awards, the best regional inspection result so date and pioneering work on value-based management. And even after the proposed changes, the calculation of operating costs creates perverse incentives to improve results.

For example, capitalising expenditure rather than more prudently charging to revenue is “good”. Generally, expensive activity such as dealing with difficult client groups or demanding neighbourhoods is bad; reduce your costs and improve your performance indicators by getting out of them into lower cost alternatives. If you’re really serious about lower operating costs, defer spending to create bigger surpluses; transfer them to reserves and spend the money next year from reserves – it won’t show in your operating costs !

But the most serious flaw in the index is its assumption that spending less overall is better. At LHT we have made big efficiency savings to increase outputs, but we take an alternative view. As social businesses our objective is not to maximise the difference between income and expenditure, but to achieve maximum social result while maintaining financial health.

So what type of table would provide a fair comparison of landlords? Well sorry Jon, there isn’t one. Our job is complex and underfunded. We can measure management, repair and procurement costs. We can show that we embrace the efficiency agenda by delivering yearly improvements. But don’t expect us to pocket the cost savings. Our mission is to deliver more from the cash at our disposal.