The fourth way

At the moment the government calls the shots but from April, when the Local Government Act comes into force, prudential borrowing will give councils the power to borrow as much as they can afford to repay.

At first glance, this seems like it will allow local authorities to bring their homes up to scratch without setting up a transfer or arm's-length management organisation – indeed, anti-transfer campaigners have seized on it as an alternative to the government's preferred stock options. It will make possible big projects that need a large upfront investment, the kind of schemes that are hindered by the current system.

But for housing departments, prudential borrowing may not be all good news.

The system will work well for projects that make money – a traffic toll system or leisure centre, for instance, where the cash earned will pay the loan's costs. It can also work for projects that save money in the long term. Efficiency savings provided by a new IT system could be used to pay off the loan taken out to install it, for example ("Is prudential borrowing for you?", left).

But councils borrowing to improve housing may not be able to raise enough money to repay the debt because rent rises are capped and councils that keep their stock do not get extra subsidy.

Neil Litherland, director of housing at Camden council, says: "We estimate that to borrow prudentially the same amount that we would get for setting up an ALMO, £280m, it would cost every tenant in Camden £13 a week. We would never be able to add £13 onto the rent."

Some councils, though, would be able to save enough money, according to David Thompson, housing consultant at the Local Government Association. "There's right to buy income and savings from best value reviews, all of which have an impact on the housing revenue account, so we're not sure we can say that savings to pay off borrowing cannot be made," he says.

However, even local authorities that have the money to repay say alternative funding methods will bring them more cash. Barnet council in north London could be a candidate for prudential borrowing because of its healthy housing revenue account. It could raise £40m over 25 years with prudential borrowing. However, its regeneration scheme would rake in more than £1bn, by working with a housing association that will build homes for private sale on unused land to fund the demolition and rebuilding of social housing. In addition, its ALMO has been awarded £89m of government cash over six years.

Giving with one hand
The Local Government Act takes away even as it gives. While offering debt-free councils the possibility of prudential borrowing, it also stipulates that they will have to hand back 75% of the capital receipts yielded by right to buy sales, thereby losing some of the cash that could have used for loan repayments.

But all is not lost for prudential borrowing. For some debt-free councils, the system offers a way to replace the money lost when they hand over their capital receipts. Paul Wenham, finance director at Waverley council, which is debt-free and still has its housing stock, says prudential borrowing will be considered along with PFI, ALMO and stock transfer when the council looks at the future of its homes. He says: "We used to get £3.2m from capital receipts to spend on new affordable housing and decent homes. We will be able to spend £800,000 when the pooling of capital receipts comes in. The only alternative is to borrow."

Prudential borrowing would give ALMOs the capacity to borrow for regeneration work

John Perry, CIH

Anti-transfer campaigners are very interested in this option. Mark Weeks, national coordinator for Defend Council Housing, believes councils could borrow against their major repairs allowance, because the allowance can be carried over for more than one year to fund the loan.

He says the government's policy document The Way Forward for Housing Capital Finance implies that this is possible. Weeks plans to campaign on the issue in the New Year, starting with a parliamentary briefing for MPs.

Prudential borrowing could also bring real benefits to top-performing ALMOs.

A government consultation is expected to recommend that some debt from three-star ALMOs should be offloaded onto the Treasury, giving them the headroom to borrow more money.

Another option is to set aside a prudential borrowing pot especially for ALMOs – but this would only work if they could make savings in their budgets to repay the debt. The paper on this was due out a year ago but is currently lost in the political long grass – some say the ODPM is more interested in decent homes.

Currently, the vast majority of ALMOs' cash is directed to meeting the decent homes target. Once this is met, they will get the normal level of funding for council housing. In this context, the extra boost offered by prudential loans would allow ALMOs to do community and environmental work that is not an option for them at present. "It would happen after they achieve the decent homes standard, and would give them capacity in their rents to borrow for further regeneration work," says John Perry, policy adviser for the Chartered Institute of Housing.

The first three-star ALMOs – CityWest Homes in Westminster, Ashfield Homes in Nottingham and Derby Homes – met the ODPM to discuss the issue at the end of November: the meetings are set to continue. Nigel Brooke, chief executive of CityWest Homes, says: "Freedoms and flexibilities could create a level playing field, so it doesn't matter whether you are a housing association or an ALMO, you get some freedom to borrow, especially for work that is not part of the decent homes standard. Westminster has a homelessness problem and we would like the ability to help the council with that."

But such freedoms are a long way off.

The ODPM is still talking to the Treasury about the new freedoms for ALMOs and there is still no date for the paper's publication.