Where do we go from here?

"Arm's-length management organisations are here to stay," housing minister Tony McNulty told civil servants last year. The figures back him up. It took councils 14 years to transfer 675,000 homes to housing associations – but they transferred 350,000 homes to ALMOs in just three. Since the beginning of the decade, this new way of managing council housing has gone from notion to phenomenon.

The driving force behind this quiet revolution has been the government's insistence that all council housing stock must reach the decent homes standard by 2010. For many councils, this meant transferring stock to a housing association but, with tenant support for transfer far from a foregone conclusion, many others were left scouting around for another way forward.

Enter the ALMO.

So what exactly is an ALMO?
ALMOs are companies set up and owned by local authorities to manage their housing stock. They carry out the duties of a landlord without actually owning any homes. Council staff are transferred to the new organisation and, in the majority of cases, carry on doing the same jobs. The council retains responsibility for things like homelessness strategy, but everything that was funded by the income from tenants' rent – such as repairs and maintenance – can either be taken over by the new company or left in council hands and bought in by it.

In short, an ALMO operates in the same way a managing agent would do in the private sector. The council pays the new organisation a management fee, and money can also be made from selling the ALMO's services to other bodies – for example, local housing associations. ALMOs aren't expected to make a profit, but they must break even.

Rental income alone is rarely enough to bring the stock up to the decent homes standard – if it was, why take the stock out of council control in the first place? – and that's where the serious government money comes in. In the Communities Plan, deputy prime minister John Prescott announced £2bn – to be allocated in four rounds of bids and grants – for ALMOs that achieved two stars or more from the Audit Commission. Councils jumped at the chance of getting this extra investment, and so far 21 councils have set up 26 ALMOs between them. Councils weren't the only arm's-length management enthusiasts – ballots have often revealed overwhelming tenant support for the system. In Carrick, Cornwall, only 89 out of 4000 tenants opposed the move.

It may be bang in line with New Labour dogma, but the public-private compromise that the new organisations represent has thrown up a new set of problems with it. Councils and ALMO managers have begun to ask what the future holds for their new babies once the 2010 deadline is reached. Campaigners are already gearing up to fight what they fear is the ALMOs' slow mutation into housing associations. And others – looking at the short-term nature of the organisations' brief, the limitations and frustrations inherent in their remit and the dwindling numbers of homes owned by councils – are asking: do ALMOs even have a future?

Cry freedoms
"We want a level playing field with housing associations," says Gordon Perry, chairman of the National Federation of ALMOs and chief executive of Kensington and Chelsea's organisation. For Perry, the contradiction inherent in arm's-length management is that although his members shoulder many of the responsibilities of council housing departments and housing associations, they do not get the same freedoms.

Peter Gee, chief executive at Wigan and Leigh Housing, agrees. "We and the government may have the decency standard at the top of our agendas, but tenants want environmental improvements and community safety," he says.

Further to this, the National Federation of ALMOs is calling for the power to build homes with the social housing grant, borrow from the private sector, apply for research and regeneration funds and issue antisocial behaviour orders. Without these powers, the federation argues, its members' ability to serve tenants will be slowly strangled.

The basis for this claim is the fact that council housing stock is being eroded by the right to buy, transfers and demolition programmes. For example, Brent's ALMO, Brent Housing Partnership, took on 10,500 rented units last October after its successful bid in the second round of ALMO funding. Under the mixed approach to stock favoured by Brent council, it may lose up to a quarter of its income if a proposed stock transfer goes through. "It either means overheads go up 25%, we downsize 25% or we find substitute business activity to support keeping our costs down," says Helen Evans, managing director of Brent Housing Partnership.

Ashfield Homes in Nottinghamshire has had a similar experience. Chief executive Ian Dethick is frustrated that only registered social landlords can act as building partners to Ashfield council. As part of a review of housing for elderly tenants, the authority replaced 24 sheltered flats on one estate with 11 two-bedroom bungalows. "Now we have a large-ish council estate with a small number of properties in the middle owned by a housing association miles away," he says. "We want to manage the whole estate."

There are signs that this move might not be far off: Keith Hill, McNulty's replacement, has written to Perry requesting a meeting and the ODPM says it is keeping an open mind.

Also, the Housing Corporation consultation on extending social housing grant to private developers, which ended two weeks ago, took evidence from ALMOs including Ashfield.

Backdoor privatisation?
Some tenants, however, regard any attempts to give ALMOs more power with suspicion. In the coming weeks, Camden will find out whether its third-round bid for £282m has been successful. The Camden branch of Defend Council Housing, a residents' group that opposes any move from local-authority ownership, is hoping the answer will be no.

"The idea of ALMOs getting closer to housing associations by doing the same things is a recipe for privatisation," argues Lesley Fox from Camden Defend Council Housing. "Housing associations have higher rents because they use private sector money, and now that's what they're saying ALMOs are going to do."

"The government thinks that we're going to roll over and die on this one because it sounds better than housing associations, but that's not going to happen. There are a lot of people getting angry," she says.

However, the idea of arm's-length organisations operating identically to housing associations is a misconception. An ALMO has no assets and its only income is the management fee it receives from the council, unless it sells services to other organisations. So the council would receive the grant, and the ALMO would spend it on its behalf.

Prudential private borrowing has also been mooted for three-star ALMOs, but this depends on the financial reforms in the Housing Bill, which might not appear until 2005. At the moment, the amount councils may borrow from government is under tight central control. Prudential borrowing means councils would decide how much debt their revenues could sustain, and may allow private loans. Any changes would apply to all local authority services and the issue of how ALMOs could benefit will be hotly debated.

"The ALMO doesn't own the assets so the council would really be doing the borrowing. The rental income doesn't come into the ALMO, only the management fee," explains David Hall, executive director at Hacas Chapman Hendy. "Arm's-length organisations may be able to borrow in the future, but they need to have a secure income stream and/or some assets to borrow against."

Peter Williams, deputy director at the Council of Mortgage Lenders, doubts the government would object: "ALMOs do have an income stream, and in theory we will lend to anybody as long as there is a facility to be repaid."

Beyond the crystal ball
With so much under consultation and as yet undecided, it's unclear whether ALMOs will be allowed to wither on the vine or whether they will get the freedoms they demand. At the moment, the evidence suggests the organisations will get their way, and power does seem to be trickling towards them. From round three of the ALMO funding allocations, which is due to be announced any day now, ODPM guidelines have been loosened to allow bidders to spend 5% of their funding on "sustainable" works such as lighting and security. Round one and two ALMOs may also be allowed to resubmit spending plans. Whether that would be the beginning of their slow transformation into housing associations – and what Defend Council Housing would do if that was the case –might not be known until the end of the decade.

For now, councils retain control, and ultimately what shape the ALMOs assume is up to them. "Some organisations might be more entrepreneurial, while the councils want to keep them under their wing. There could be all sorts of tension," says Hacas' Hall.

The federation's Perry, however, sees his members acquiring a distinctive role of their own. "ALMOs have a greater understanding of local markets in a time of 'globalisation', where housing associations are getting bigger and bigger and the smaller ones that do meet local needs are being swallowed up," he says.

Although many councils' motivation for going arm's length is the likely failure of stock transfer, if ALMOs do win greater freedoms, the peaceful days of near-unanimous ballots could be over.