The Office of National Statistics set the cat among the pigeons when it determined in late October that English housing associations (known as 'registered providers' – RPs) were to be re-classified as public corporations because of their highly regulated nature.
As a consequence, the total bank borrowing of English RPs is to be added to the UK public sector balance sheet – all £60 billion of it.
That is not something which the Chancellor of the Exchequer is likely to appreciate. The UK Government has immediately committed to passing deregulation measures in order that RPs will again be classed as private, and the detail of these measures is awaited.
Where England goes, will Scotland follow?
The ONS decision, based upon its interpretation of the way in which the relevant provisions of the European System of Accounts (ESA10) apply to the English housing sector, only relates to the English sector. So what is the impact on Scotland and Scottish Registered Social Landlords (RSLs)?
Well, of most relevance to the ONS were the control mechanisms given to the English regulator – the Homes and Communities Agency – by the Housing and Regeneration Act 2008 - which include: control powers of disposals by RPs of their assets; powers to direct how disposal proceeds are used; control powers around restructuring of RPs; and intervention powers in relation to the management of RPs.
All of these control mechanisms apply in Scotland as well, through the Scottish Housing Regulator pursuant to the Housing (Scotland) Act 2010, so it looks likely that Scottish RSL borrowing – about £4.3 billion –will be added to John Swinney's balance sheet – again, not something which either Holyrood or Westminster will relish.
Debate around the application and interpretation of ESA10 is likely to continue for some time – it is also currently a live issue (albeit for different reasons) in the context of public building projects being undertaken using the PPP hub model under the auspices of the Scottish Futures Trust, where the pipeline of projects is on hold pending the hub structure being amended so that transactions will not be classified as public.
In the housing context some commentators have taken the view that, because the Scottish Housing Regulator is expressly stated Housing (Scotland) Act 2010 to be independent of Scottish Ministers and is accountable to the Scottish parliament this sufficiently distinguishes the Scottish RSL regulatory system from the equivalent English system, where the HCA is more obviously a government agency.
However, the determining factor for the purposes of ESA10, is whether a regulatory body is itself subject to 'public sector control', which the Scottish Housing Regulator clearly is on the basis that Scottish Ministers (who themselves are creatures of statute established by the UK parliament) have statutory powers to appoint and remove SHR Board members.
It is difficult, therefore, to identify material differences between the ways in which the HCA and the SHR regulate housing associations, in terms of their respective relevant control powers, in which case there is no reason why the ONS determination should not also apply to Scotland, with the consequence being that Scottish RSL borrowing should be added to the Scottish public sector balance sheet. There are suggestions that the ONS may well now turn its sights on the Scottish housing sector, so a definitive determination on the question may follow.
The prospect of deregulation for Scotland’s housing associations
As a consequence, therefore (and this is the interesting bit), we might anticipate attempts to amend the relevant Scottish legislation, to deregulate RSLs so that they are classified as private organisations for borrowing purposes. The alternative would be for Scottish Government to accept that RSLs are public bodies and potentially to exercise even greater control over them than is the case just now, including in theory imposing borrowing controls, although that direction of travel does not seem likely.
Both in England and Scotland, the respective governments are looking to have the best of both worlds – for housing associations to be recognised as independent private sector organisations raising finance off the public sector balance sheet in order to deliver housing, while exercising very close control over what the organisations can do, particularly with their own assets. Something, therefore, will have to give, although we can expect both the UK and Scottish governments to 'give' as little as possible.
As with any changes to existing systems, people will need to be alert to the consequences of change. Any dilution of the current regulatory regime is likely to cause some nervousness among lenders to the sector, who have traditionally relied on the SHR to identify and manage problems within RSLs, ensuring that lenders never lose out. Indeed, in England the ratings agencies have already indicated that government de-regulation in response to the ONS determination may be seen as “credit-negative”.
Also, depending upon any changes which may be brought in, it may be necessary to revisit the question of whether RSLs are contracting authorities for other purposes, such as the application to RSLs of the Environmental Information (Scotland) Regulations or the public procurement regulations. Currently, RSLs are seen as contracting authorities for procurement purposes, but if the extent to which they are subject to regulatory control is lessened, then conceivably it may become appropriate to classify RSLs – or at least those which have not received significant levels of funding support from Government – as private commercial entities, free to procure works and services as they see fit.
For the moment, the ONS determination has no direct practical or legal impact on Scottish RSLs and the way they operate, including raising private finance, but clearly Scottish Government’s response to the implications of the ONS decision, and any changes to the regulatory regime, will be of interest to all RSLs and many other stakeholders. Watch this space.
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