Coming soon: the sequels to housing association reclassification

Originally posted on October 30 on Inside Edge 2, my blog for Inside Housing

Few blockbuster franchises stop at just two films and the reclassification of housing associations in England as public sector will be no different.

The implications from Friday’s decision by the Office for National Statistics (dubbed Judgment Day II: the Reckoning by Pete Apps in his blog yesterday) are multiplying by the hour and are far too numerous for one blog. But here are some quick thoughts on the decision itself – and on possible sequels to come.

So what does it mean? First, and most seriously for George Osborne, it will add £60 billion of previously private sector housing association debt to the public sector balance sheet. The ONS decision says that this is likely to happen just in time for Budget 2016. Whoops! No wonder the chancellor sounded so relaxed/resigned about the prospect when questioned in a House of Lords committee last month (see my blog here).

Second, it means housing association debt is now the same as council housing debt. That would seem to undermine at a stroke the rationale for stock transfer and the reason for favouring associations over councils as recipients of government grant. Associations could potentially face the same Treasury controls over their borrowing as local authorities. All that angst over The Deal was (apparently) a waste of time.

Third, if associations are public sector for accounting purposes, surely it must eventually mean they will be for Freedom of Information decisions too? Or not, if what I’m seeing on Twitter is correct.

But look a little closer at the decision and it’s not hard to see plotlines for potential sequels. While many people assume this is all about the extension of the Right to Buy, the decision is actually based on provisions of the (Labour) Housing and Regeneration Act 2008. The ONS refers specifically to government consent powers via the HCA of disposal of social housing assets, voluntary winding-up, dissolution and restructuring of registered providers, and their management (in particular HCA powers to appoint officers and managers). These points:

‘indicate government control under ESA 2010 [the European System of Accounts] control indicators for “provisions of enabling instruments”/”special regulations”, while point 5 is also evidence of control relating to the “appointment of officers”/”government control of the appointment and removal of key personnel” control indicators. As a result PRPs should be re-classified in the public sector’.

It’s worth stressing that this decision only applies to England. It also covers all housing associations registered with the HCA, including for-profit providers, but not those who are not registered. A full list of organisations affected is available on this ONS spreadsheet.

The big question is of course what happens next. Here are the potential plotlines for Judgment Day III.

First, Osborne and housing associations could simply suck it up. The chances of there being any grant in the spending review look slim to none. The Tories think associations are inefficient and hate social housing. As John Perry’s excellent primer on reclassification points out, Network Rail and its £34bn of debt were reclassified as public sector as recently as last year and the government is conducting an options review. So what’s the big deal?

Second, and this is the one already signaled by the government, forget sucking it up by try to get the decision overturned. It can argue that this decision is based on legislation introduced by the last Labour government and that reclassification is only temporary. The response from the DCLG to Inside Housing indicates as much:

‘This statistical matter relates to an historical legislative change, made by a previous government, which came into effect over eight years ago and makes no difference at all to the way housing associations run themselves and imposes no new controls or rules.’

John Perry also highlights the precedent of further education colleges being treated as private then public then private again.

So that’s the premise for the next bit of the franchise. What happens next?

First, and this is the case made by CIH, Osborne could decide that now is the time to review the UK’s accounting rules, adopt those used in most of the rest of Europe and treat both housing associations and council housing as public corporations. Terrie Alafat of the CIH says:

‘We would argue that both housing associations and council housing are affected by government accounting rules that don’t apply in the rest of Europe. CIH believes the government should now review these rules, which will help to ensure a new framework that maintains housing association independence as well as safeguarding the interests of tenants, the use of public money and the interests of funders.’

This would take all social housing debt off the central government balance sheet. It seems a blindingly obvious move, it could be presented as modernisation, it would allow councils the same freedoms as associations and it could mean more social housing. The Death Star could be destroyed. If only.

Second, a new regime will make housing associations even more private sector and deregulated than before. Looked at in this context, The Deal looks very different – not so much a way to stop reclassification as a way to get re-reclassification. As David Orr puts it in the NHF’s response:

‘We therefore welcome the Government’s commitment to take the necessary steps through deregulatory measures in the Housing Bill to address the issues raised in this decision. Our deal on a voluntary Right to Buy is an example of how the sector and Government can work together to strengthen the independence of housing associations.’

The ‘gun to the head’ voluntary agreement on the right to buy and elements of the Housing Bill like Pay to Stay look like more government interference that would make associations more public sector not less (the Office for Budget Responsibility warned as much after the Budget). However, the elements of The Deal that seemed to have nothing to do with the right to buy now make much more sense. For example, the freedoms to convert and sell off social housing stock proposed in Chapter 3 directly address one of the key points raised by the ONS.

Housing associations looking to a more independent future now have a perfect rationale for their case (and the biggest ones hold most of the debt). Deregistration could be one increasingly attractive option.

However, others may have a different agenda. Right-wing think tanks will press their arguments for privatisation or ‘free’ housing associations with even more vigour. Will a Conservative Party that does not believe in social housing and sees housing associations in their current form as inefficient and statist let an opportunity go begging?  This time private sector status will really mean private. Judgment Day III could turn out to be The Empire Strikes Back.