NAO on the New Homes Bonus

The National Audit Office recently published a 42-page report on New Homes Bonus and has called for an “urgent and essential” review of the scheme so that the Department of Communities and Local Government can understand the “substantial financial risks to local authorities”. NAO director for the study, Angela Hands, and audit manager for the study Andrew Whittingham talked to Room 151.

Room 151: One of the main questions you wanted to get the answer to with your report was “is the New Homes Bonus Scheme well designed to achieve its objectives?” Is it?

Andrew Whittingham: We were complimentary about much of the design. Certainly when we went out and spoke with local authorities they were complimentary about the design in that it was easy for them to understand and to explain to their communities. There were other elements we were positive about that the Department had worked on during the consultation, for example that the payments were based on average council tax levels across the country rather than locally.

So generally we were positive about the design but we didn’t find much evidence that it was having much impact at the moment.

Angela Hands: The sense that we got was that where it was having most impact was in areas that would have been having quite a lot of building anyway. It was supporting councils in those areas in the kind of infrastructure and resourcing that they need; discussions with developers, identifying the right sites, consultation with communities, getting through the planning and all of that sort of thing, those areas were the kind of things that the money was being used for. That was a relatively small proportion of the money and how it was being used though.

Room 151: In the report you talk about local authorities that have difficulty with housebuilding and the fact that in these areas authorities are “more likely to spend any bonus on maintaining statutory services”. Can you talk to us about that?

AH: Where we’re coming from is that in the kind of authorities I was just talking about there is a strong incentive to keep some of the money back and spend it on the areas we just discussed. In other authorities though, that incentive is not there and many of them talked about the fact that they couldn’t afford to put money into that kind of expenditure to any great extent. They knew that the market in their area wasn’t going to be receptive to substantial new housing anyway.

Having accepted that the conditions were not right for them to spend the money in those areas, they might as well spend the money on maintaining statutory services.

Quite a lot of the finance directors in particular that we spoke to were making it clear that they were trying their best to spend this money on discretionary services rather than on core budgets that they could see could store up potential problems for them in the future – they were trying to spend it on services that would have to be reduced anyway.

There were two advantages to them doing that: firstly, they were spending on a service that could be reduced later if they ran out of money and the secondly,  it was more visible to communities that they were retaining their services and not reducing them.

AW: It is important to say that we didn’t survey local authorities for this study so we can’t make any quantitative statements about the proportions of local authorities using the bonus to maintain statutory services and those that are using it on housing-related services.

Room 151: Our readership would be interested to know what sort of proportion of councils are using the Bonus for frontline services.

AH: Our general sense was that a lot of the money, a very large amount, is being spent on statutory services, but that is not from an across the board survey. Because the focus of the report is on the Department, not on local authorities. We didn’t get too deep into what they are doing with the money because it wasn’t the focus of what we looked at.

Room 151: Can you tell us about the arithmetical error the Department made in calculating the projected number of new homes?

AW: Overall we didn’t think the modeling was realistic. We make the point that it was based on unrealistic assumptions. Furthermore, we found an arithmetical error in the modeling. If the Department are going to model these initiatives and ministers are then going to use the output from these models to state how many homes are likely to be built they have got to be realistic. To have an error such as the one we found which reduces the number by about a third means that the quality of the modeling is not good enough.

AH: We state in the report that the whole model wasn’t a realistic model, it wasn’t based on any evidence of the behaviour that local authorities would follow when this bonus came in. It was based on the Department’s idea of what local authorities would do and not any more than that.

AW: Absolutely. We didn’t have any evidence that they had gone out and talked to local authorities in different circumstances and asked them how they would respond to the bonus. We were not impressed with the model.

Room 151: You found shortcomings in the design of the survey on New Homes Bonus that the Department conducted. What were they?

AW: The main thing was they had not added up the responses correctly so in fact in their report on the outcome of the survey, all the percentages of those in favour and not in favour were wrong. It is a very similar point to the arithmetical error: if they had properly quality-assured their work they would have realised that they were not adding things up correctly.

Room 151: What is the main recommendation to have come from this report?

AH: They should have been trying to set the monitoring up right from the start. What you would expect is that they do the modeling properly and use the results of the modeling to work with local government. That is really important. Working with local government they should then try to see if what they predicted in the first instance is actually what happens. There hasn’t been anything done on that. They decided right from the beginning to start doing the monitoring in the third year. They based that on its being a very long term programme and of course houses take a great deal of time to get built.

Our argument, though, is that that doesn’t stop you monitoring right from the beginning what starts to happen. There are lots of indicators you need to review if you are doing a scheme like this, not just whether or not the houses get built. There are things like planning data, they could be talking to local authorities about the numbers of approaches they’re getting from developers, talking to developers themselves. It surprised us that there was virtually nothing like that going on.

AW: Given the New Homes Bonus is designed to change behaviour, and not just of people within local authority but its developers and its communities too, we were surprised that they haven’t done anything to look at whether that is actually happening.

AH: There was no dialogue that we could see between local government and the Department on this.

AW: And as well as monitoring the impact of the bonus (we obviously talk about the financial implications of the bonus because of the redistribution of core funding) we’re also saying, there is another reason why the Department should be monitoring right from the beginning and not just looking at whether the new homes are getting built, but what is the change that will ultimately lead to new homes and what is the wider financial impact of the scheme.

AH: And using that to help start to think about the impact of the changes in council tax localisation and business rates, these are all incentive-based schemes and there is a tendency in government to only evaluate and review things that look pretty concrete. They don’t seem to recognise yet that they need to look at how incentives play out. If government wants to use incentive-based funding they need to start developing ways of looking at it. Incentive-based funding is not predictable.

Room 151: They particularly need to get it right if they’re going to fund it from core funding.

AH: Well yes, it’s the unpredictability of it and the fact that you need to predict at the beginning and then review your predictions on a regular basis. They just haven’t been doing that. The Department said to us, how would you have done it?

I said I would have looked at my modeling and chosen maybe ten councils to work in depth with. Get a spread of different types of councils and do some detailed work with them. The Department said, oh, yes.

AW: They are doing an annual survey and have done two but that is not enough.

AH: Although we have criticized the survey we’re glad they’ve done it.

AW: Authorities don’t have to respond and they can be anonymous but the thing of most concern is that from one survey to the next the response rate dropped by half. That’s not good and if that is the trend it is a monitoring regime which is getting worse.

AH: The way the Government worked with troubled families showed a very different way of working with local government and that sort of way would be helpful on all programmes, not just the one we are talking about now.

Room 151: Is the next news we can expect on NHB the 2013/14 review?

AH: A Public Accounts Committee on it is very likely to happen, they’re likely to be interested in having a hearing and I think that the Department will want to wait for that. We know they are doing work now because they’ve talked to us about it but they will also want to know the outcome of any hearing before a review. They are beginning to do some of the review work now from what I have gathered.