Three's company

The deputy prime minister's "blue skies" consultation paper on capital finance said the option would give three-star arm's-length management organisations maximum management freedom and certainty; this "freed" ALMO has been referred to as a quasi-registered social landlord, a super-ALMO and a local authority corporation.

Given the expected ALMO corporate form – a company limited by guarantee – I shall refer to it as a local authority housing company.

But what's in debt restructuring for the council or the tenants? As the consultation paper reads, not a lot.

Once freed, the HRA would take on economic risks – cost inflation and interest rate increases. This compares badly with the current position, where the HRA subsidy varies to match interest rates.

It would be a brave council that took up debt restructuring without other inducements. Suggestions include a higher standard for both improvements to homes and investment in regeneration, and the option for new build in the HRA.

How it would work
Before letting the local authority housing company go free, the government would want to leave it with enough income to deliver its business plan, to continue to provide a high-quality service and to service its debts. The key question would be whether there was enough money to fund all these activities.

Debt restructuring could help to produce a broadly balanced business plan. If the company's rent income was more than enough to deliver services and pay loans, the HRA debt would be increased. This would reduce the company's net income so as to leave enough to service new borrowing. If the income was too small, debt would be decreased until there was just enough to pay off new loans.

This process of restructuring or adjusting the debt is just like developing a business plan for a registered social landlord and a transfer price, with the price analogous to the restructured debt. This is because the transfer price is calculated as the value of the rent left after allowing for investment, management, maintenance and risks.

The housing revenue account business plan works – and it delivers better value for money than the national transfer business plan

However, unlike RSLs, councils do not have the ability to set rents higher than policy/target levels and still rank for full housing benefit. The government has also ruled out local authorities pledging their assets against borrowing.

Without these ways to assure lenders that they will get their money back, the local authority housing company would have to fall back on the creditworthiness of the council. This could include recourse to general fund assets and the capacity to raise council tax as well as rents – not breaching the housing revenue account ring fence, but demolishing it.

If these issues can be overcome, is it feasible? I worked with the Association of London Government to find out and, using national data, we built an HRA business plan for England. It included enough investment to deliver decent and safe homes and estates, and secured financial sustainability through healthy budgets for management, maintenance and renewal.

It does work – paying back borrowing within 30 years, keeping within current Treasury subsidy levels and providing the funds to replace right to buy stock at levels suggested by recent research.

What's more, it delivers better value for money than the national transfer business plan, built using parallel assumptions.

Inevitably, public sector borrowing is hit more under the HRA business plan, but the cost to the taxpayer is substantially lower than that of transfer, as long as costs are well managed.

So what does the future of council housing look like? The minority of councils that can deliver the decent homes standard within major repairs allowance and housing investment programme resources might continue to run landlord services in the traditional way. However, they will come under pressure to separate strategic from landlord functions. The majority of councils that need extra investment will have to choose between ALMO or transfer (the private finance initiative was always a relatively small part of the overall solution).

For those that secure ALMO status and the extra cash on offer, that's fine. For the really good performers, there's also the local authority housing company option – freedom from public expenditure controls but within the public sector.