Lessons for housing policy from experiments in private finance, intermediaries and guarantees - Dr Julie Lawson, Hon. Assoc. Professor RMIT ...
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Lessons for housing policy from
experiments in private finance,
intermediaries and guarantees
Dr Julie Lawson, Hon. Assoc. Professor
RMIT University Australia – julie.lawson@rmit.edu.au
National Housing Conference
Canada, Ottawa, November 21-22Lesson 1 - Cost of capital influences operating costs
1
For profit or not for profit
affects providers’ tax status.
NFP organisations
Taxes 2
Rents may be determined
reinvestment surpluses in by market conditions (1),
Surplus /Profit 3
cost of provision (2) or a
their mission.
defined share of household
Private sector, government,
income (3)
landlords and tenants may Invested Rent
require and extract differing equity assistance -
returns from invested equity.
operating
Financing costs reduced when subsidy
efficiency improved via reliable
revenues, NFP intermediary Debt finance Level of assistance
and backed by a government costs influenced by policies on
guarantee allocation, depth and
. duration of rent payment
Regulation, including standards subsidy to tenant or
and cost benchmarks, enforce operating subsidy to
appropriate performance and landlord
may reduce financing risks and Construction
costs and operating
costs
Rent paid by
Dedicated land banking,
planning and valuation tenant Influenced by basis for
instruments ensure sites are setting rent above,
available and use for Land costs indexing rents over time
affordable and social Freehold or and household eligibility
housing via conditionaltitle leasehold policy and allocation
transfer,lease arrangements practice
and land trusts .
Costs of Operating
‘Supply’ Revenue from
‘Demand’
Adapted from Lawson, Pawson et al, 2018Operations
Scenario 1:
$500
PFI requires large operating subsidy and
$450 housing allowance Operating Costs
$400 $137 K
Operating Subsidy
$350 Development $266 K
Interest
$300 $83 K
$250
$200 Construction
CRA Payments
$59 K
$150 $180 K Debt Debt
$262 K $262 K
$100 Rental Income
Land $157 K
$50
$82 K
$-
Costs Funding Costs Revenue
$500
$450 Operations
$400
$350 Development Scenario 5:
$300 Capital grant + bond aggregator requires
no operating subsidy or housing
$250 Debt $15 K
allowance
$200 Construction
$150 $180 K
Capital Grant
$100 $247 K Operating Costs Rental Income
$137 K $157 K
$50 Land
$82 K Interest $5 K
$- Debt $15 K
Costs Funding Costs RevenueLesson 2: finance just one part
Land banking - Land
value capture-
Planning
contributons -Land
leasing - Land tax
Capital gains sharing Conditional equity
agreements with investment from
equity investors – government, tenant
building and or landlord, private
revolving value investors
Social
Housing
Promotion
Rent subsidies for
Efficient financing -
tenants - Rent
Intermediaries -
guarantees to
Guarantee - Caps on
landlord - Revenue
loan cost - Interest
gap payments to
rate subsidies
landlord/investor
Tax concessions
channel investment
towards providers
and tenants
Adapted from Lawson, Pawson et al, 2018Lesson 3: Ensure financing is efficient 1. Need for transparent assessment of alternative financing costs and implications for subsidy 2. A financial intermediary to pool borrowing demands and offer specialist credit assessment for the sector. 3. Properly structured and conditional government guarantee 4. Good regulation – mission, risk, reinvestment.
Intermediaries and guarantee schemes
Guarantee Scheme Intermediary Targeting Fin. Impact Default rate
Dutch Guarantee Fund Social Housing (WSW) Independent Yes 1-1.5% below 0%
backed by the sector, a fund and central and local foundation going market rates
Dutch governments (1983) for similar
mortgages
Swiss Bond Issuing Co-operative for Limited Profit Co-operative Yes Small margin 0% since 2003
Housing (EGW) backed by the Swiss Federal above government
Government (1991) borrowing costs
UK Affordable and Private Rented Housing Non-profit Yes Provides 30 year 0% based on
Guarantee Schemes, backed by UK government corporation finance at small lengthy THFC
(2013-2015) margin above experience,
government guarantee
borrowing costs introduced 2013
French Mutual Fund for Guarantees of Social Publicly owned Yes Market only exists 0% since 2008,
Housing (CGLLS), backed by the French corporation with guarantee has been higher
government (2001) 0.04%
Irish Housing Finance Agency backed by the Irish Publicly owned Yes Very limited 0% for LAH, new
government (1982 LAs/2012 VHBs) company market without for VHBs
guarantee
Scottish government’s National Housing Trust, Publicly owned Yes NA 0% new
backed by the Scottish government (2010) Trust
US Risk Sharing Scheme between Housing Finance Publicly owned Yes Diverse NA
Authorities and HUD, backed by Federal Housing corporations
Administration insurance
National Housing Finance Investment Publicly owned Yes 1.5% below going NA
Corporation (2018) first bond issue 2019 corporation market rate of
similar mortgages
Updated from Lawson, 2013Efficient really?
Lesson 4: PPP/PFI is no free lunch
• UK experience of PFI has proven costly and inflexible with long term
obligations under customised PPPs and PFIs contracts (NAO, 2018)
• Returns must be paid to various debtors and equity investors and often
over decades costing £199 billion by 2040
• There are contingent liabilities to government arising from project risk
• Transaction costs of the financing arrangement,
• Cost of delay associated with a particular financing vehicle,
• Costs of administering revenue, which need to be included in cost benefit
analysis,
• When using consolidated revenue, the opportunity costs of these funds
not being able to be used for other programs, and
• When funded from tax exempt bonds, the cost of the forgone tax
revenue. All this limits the capacity of government to invest in assets and
services
• UK PFI 1 and PFI 2 was abolished October 2018 (HM Treasury, 2018)Improve transparency costs • Improving decision-makers’ access to the terms of private finance deals. • Ensure direct comparisons between the performances of similar projects with different financing choices. • Reviewing budget-setting process to create greater flexibility to exploit the government’s collective advantage in financing • Taking steps to achieve further savings from operational private finance contracts and consider the benefits of greater flexibility in future contracts. • Reviewing the long-term consequences, including the impact on departmental balance sheets and consumer bills (NAO, 2015: 10).
Recent Australian developments 1. Under provision of both private and public investment and limited, reliance on costly short term bank finance (Lawson, Berry et al, 2014) 2. Establishment of NHFIC bond aggregator with government guarantee in 2018 to improve financing conditions following international research and national consultation 3. Still requires public co-investment to deliver social housing at affordable rents to low income households (AHWG, 2017) 4. AHURI establishes cost to government of needs based funding gap over 20 years across 88 different markets (Lawson, Pawson, van den Nouwelant and Troy, Hamilton 2018)
Lowering the cost of private investment – the only game in town? Of course not! In the absence of stable long term public investment, accessing long term lower cost private finance for social has been a continuing challenge for many governments – including Canadian ones. Variations of mission orienated finance are worthy of further investigation...as in Austria, France, Finland, Singapore, China...and now the UK, New Zealand, Canada, Australia This can also create real value and drive innovation Lawson, Pawson et al 2018, Mazzucato and Penna, 2015.
References
• AHWG (Affordable Housing Working Group) (2017) Supporting the implementation of an affordable housing
bond aggregator , Report to the Heads of Treasuries, Council on Federal Financial Relations, Canberra; Australian
Government, https://static.treasury.gov.au/uploads/sites/1/2017/09/170921-AHWG-final-for-publication.pdf
• Lawson, J., Pawson, H., Troy, L., van den Nouwelant, R. and Hamilton, C. (2018) Social housing as
infrastructure: an investment pathway, AHURI Final Report, Australian Housing and Urban Research Institute
Limited, Melbourne
• Lawson, J, Gilmour, T and Milligan, V (2010) International measures to channel investment towards affordable
rental housing, RMIT, Australian Housing and Urban Research Institute, Melbourne
• Lawson, J. (2013) The use of guarantees in affordable housing investment—a selective international review,
AHURI Positioning Paper no.156, Australian Housing and Urban Research Institute, Melbourne,
https://www.ahuri.edu.au/__data/assets/pdf_file/0025/2887/AHURI_Positioning_Paper_No156_The-use-of-
guarantees-in-affordable-housing-investment-a-selective-international-review.pdf
• Lawson, J., Berry, M., Hamilton, C. and Pawson, H. (2014) Enhancing affordable rental housing investment via an
intermediary and guarantee, AHURI Final Report No. 220, Australian Housing and Urban Research Institute
Limited, Melbourne, https://www.ahuri.edu.au/research/final-reports/220.
• Mazzucato, M (2018) The Value of Everything: making and taking in the global economy, Public Affairs, New York
• NAO 2018 PFI and PF2 Report by the Comptroller and Auditor General, National Audit Office, Her Majesty’s
Treasury https://www.nao.org.uk/report/pfi-and-pf2/You can also read
