This year's model

For a while last year, arm's-length management faced an uncertain future. As the Communities Plan was pieced together, some within the sector predicted the end of the experiment after less than two years. How wrong they were: the £1.2bn granted for future ALMOs was one of the most eye-catching measures in the housing blueprint.

Today is the deadline for the round three expressions of interest in ALMOs and last week's launch of a trade body – the National Federation of Arm's-Length Management Organisations or NFA – chaired by Gordon Perry, has reinforced the model's importance as a fast, and compared to stock transfer, cost-effective and popular way to meet the decent homes target.

ALMOs are housing management companies set up at arm's length from a council, allowing it extra funding to reach the decency standard while also meeting the government obligation to split landlord and strategic functions. Although created under the Thatcher government in the 1985 Housing Act, ALMOs didn't take off until championed by New Labour. Councils can set up an ALMO and then have it inspected to see if it is good enough to get the all-important government cash, or they can ask for an inspection of their existing service and go for an ALMO . Since 2001, when it became possible to apply for the new status, 21 councils have set up 26 arm's length organisations in two rounds of funding. Some £700m is left for rounds three and four.

The model is popular because it is a more palatable option for tenants traditionally opposed to transfer, because the landlord is ultimately still the council, and because three-star ALMOs can take advantage of prudential borrowing. Homes have been moving to ALMOs more rapidly than to transfer associations: in 14 years of stock transfers, just over 675,500 homes have moved from council control to RSLs; ALMOs have managed more than half that figure in less than three years.

On the downside, supply is unlikely to meet demand – the remaining two rounds of funding are expected to be oversubscribed. Another drawback is that funding is granted specifically to reach the decent homes standard, which brings into question an ALMO's future direction once that target has been met.

The man in charge
These are the challenges faced by Perry, chief executive of Kensington & Chelsea council's tenant management organisation, its own version of an arm's-length organisation, who has been named interim chairman of the NFA (elections are expected next year after a formal constitution has been drawn up). With strong connections in the North-west – he was born in Wigan and was assistant director of housing at Bolton council – Perry says his appointment was a compromise between the South, where the idea of forming the NFA found strong support from London ALMOs, and the North, where people were initially more sceptical.

Perry says any council involved in the next bidding rounds would be "crazy" not to join the seven founding members: Carrick, Wigan, Leeds, Hounslow, Ashfield, Brent and, of course, Kensington & Chelsea. For those yet to be convinced, NFA membership could be invaluable while plans for a mixed approach are developed. An annual subscription costs £950 for organisations that are members of the Housing Quality Network, which administers the NFA, or £1450 for those that aren't.

So, should councils now weighing up their stock options consider ALMOs on a par with transfer? "I think it's inevitable that it is presenting a real challenge to stock transfer, but it isn't a replacement," says Perry. "I think it's a complementary model. It's more attractive to authorities that, for a variety of reasons, face problems that are not so severe as to warrant support, at a political level in the council or from tenants, for the no-turning-back option of stock transfer."

The ALMO option does have limitations, as Perry acknowledges, such as a restriction to working within one local authority. "I think ALMOs can play a part in a mix of options," he says, "but with large authorities when you've got very severe problems – the need for demolition, the need for new build – ALMO clearly isn't the way."

He also admits that the scope for regeneration work is too narrow: only 5% of each bid can be earmarked for spending on sustainability. "For authorities with significant regeneration needs, 5% of the bid is not enough, so there need to be complementary mechanisms. If there is something like the market renewal fund available, then fine – it doesn't have to be stock transfer."

It’s inevitable that ALMOs are presenting a real challenge to stock transfer, but it isn’t a replacement. It’s a complementary model

Gordon Perry, interim chairman, national federation of almos

Arm's-length might also appear unattractive to sponsoring councils when they come to consider the long-term prospects for service level agreements – financially valuable contracts under which they supply, for example, IT or legal support to ALMOs. Guidance from the Audit Commission issued on 24 March, in the wake of the first round of inspections, has stressed the need for ALMOs to demonstrate their independence from parent councils. As a result, service contracts might not be renewed by ALMOs keen to assert their distinct status. Does Perry think that councils who depend on the income generated by these contracts could be in for a shock?

"There are some real tensions, and many ALMOs have already hit them. But ALMOs can't just withdraw income, they have to be fair and give long periods of notice. Some councils will have got the message, for others it might come as an almighty shock. The warning has been made clear: if you are a council who thinks ALMO is an easy, no-change option that keeps the council in control, then you are wrong."

So if arm's-length management is not a catch-all solution, where can those councils that have already set up an ALMO, or are considering doing so, expect it to take them? Is the option merely a way of fattening the calf in preparation for full stock transfer?

Definitely not, says Perry. "There is no slippery slope to transfer," he says. "For most ALMOs it won't be something they need to consider for the next five or 10 years and goodness knows what might have happened to government policy by then."

Perry insists that tenants should have full confidence in the model. Far from being the threat to democratic control portrayed by pro-council housing campaigners, he believes the arm's-length systems provides far greater accountability than direct council control. Tenants have to be balloted or consulted in some way before an ALMO is set up.

ALMO boards generally have six councillors, six tenant representatives and six independent members, usually local professionals such as accountants or lawyers. The model is "nothing but good for tenants", Perry says. "They put tenants on the same level as councillors or appointed board members. Decisions about housing investment are made by one person in most authorities – the director of housing. Nobody can tell me that's better than having a board made up of equal shares of tenants, councillors and independents."

But there is another problem – it can be tough to convince council staff to move to an arm's-length organisation, even with the protection offered by TUPE agreements. "Some staff are politically opposed to the loss of council control," admits Perry. "But most get fed up of saying 'no'. Seeing the improvement that can be made to providing decent homes convinces them of the benefits of ALMO."

The NFA is preparing to lobby government to have ALMOs put on a "level playing field with housing associations". It is seeking, among other things, a greater role in regeneration, the ability to apply for antisocial behaviour orders and access to borrowing powers.