Building compromise
0Local government is invariably about compromise. What customers need, what members want and what heads of different services are looking to achieve are nearly always difficulty to reconcile, if not downright incompatible.
In strategic finance, one of our key functions is to find the sweet spots in which you’re able
to develop sound business plans that keep everyone close to happy. I like to think we’ve found one of those recently at South Oxfordshire District Council.
Lending to housing associations is a growing trend. Our friends in Warrington, for example, have been in the press recently discussing the £90m of finance they’re providing to local housing groups with PWLB borrowing. As we do in local authorities, we’ve watched with interest what colleagues are doing around the country and put our spin on a similar project.
Council and housing association relationships aren’t always the easiest, particularly when the association’s stock once belonged to the council who profited from its sale. But we see the relationship as an important one. The demand for social housing requires the two of us to work together constructively so, when we discussed borrowing with Soha Housing Ltd, and the terms offered by the banks, we saw an opportunity to strengthen that relationship.
Late last year we agreed a £15m loan over 20 years to Soha at a rate that was attractive enough to keep our treasurers happy and cheap enough for Soha to look beyond bank finance. A key part of the negotiation for our members was ensuring that firstly, the loan would go towards social housing and secondly, at least three quarters of the developments would be built within the council’s borders.
Providing we could assure members that the investment was secure enough, they were happy to proceed on the grounds that residents who needed it would be provided with affordable housing and we would play a part in delivering it.
So the question was… how secure is the loan? Well, Soha will receive the full amount of the loan when they have registered charges against a sufficient value of property that they already own, which exceeds the value of the loan.
Housing associations have quite strict valuation criteria and we’ve sought to ensure that the So we get a list of residential properties the association owns, a list of corresponding values adhering to their strict valuation guidelines and we can see that collectively those values are in excess of the loan value. The council has a charge over those properties in the highly unlikely event of default.
Housing associations are typically subject to very stringent loan terms and despite the many criteria that can trigger bank intervention, there have been very few examples of housing associations going bust or defaulting on repayments. We’ve seen a few close calls in recent years but typically bigger housing association players step in and take on the loans.
No loan or investment is without risk but all things considered we were happy with the level of security offered for the size of the return.
At the same time, with the interest rate and loan terms being preferential, we decided this wouldn’t be classed as a treasury investment. Our treasury strategy stipulates that a market rate must be obtained for investments and by making the loan competitive to Soha, dipping under the market rate, we had to treat the loan as capital expenditure.
Still, when you consider that many of our treasury investments are only secured against the quality of the counterparties we place our money with, measured by credit ratings, we all know from the lessons of 2008 how flimsy that can turn out to be. So, while the rate determines where the loan sits on the balance sheet, in my view, the security of the investment is as good, if not better, than many of our typical treasury positions.
If treasury had been left to manage the money, we think they probably could have found a use for the £15m over 20 years that would have yielded a greater return for the council (albeit less secure). Similarly, if the head of housing services had been given a cheque for £15m to come up with something new and creative, would he have rushed to lend the money to a housing association? Probably not.
But this is where the compromise comes in: and thankfully, we’ve got treasurers and housing officers who see the bigger picture and can look beyond their own functions in the organisation. We’re not just individual profit centres or competing departments – we have a role in society and in providing positive outcomes for residents. I think the Soha loan does that and it’s not without additional benefits to the council and its various stakeholders.
We’re all looking over our shoulders to some extent, but particularly at the more wealthy councils, to demonstrate community benefit from utilising council balances. While we won’t become a bank, we do see an opportunity with this type of project to regenerate, recycle funds and invest in a way that doesn’t raise the ire of DCLG. We also want to show residents that we’re doing good stuff with their money and part of our deal with Soha is that we get equal billing on any new developments. That’s important for our brand and for the public’s perception of us as an active force for development, housing and regeneration in their area.
Last but not least, this is a piece of business that has required strategic finance, treasury, our housing service, the local housing association and our elected members to see the sense in a compromise that works for residents, provides competitive funding to a valued partner and makes sense on the council’s balance sheet. Everyone was required to cede a little but everyone got something in return.
Steve Bishop is strategic director for South Oxfordshire and Vale of White Horse District Councils. This article was originally published in Issue 2 of Room151 Quarterly magazine.