The hidden dangers of value for money measurement

We are blessed in the housing sector with a sensible and pragmatic regulator. The change in Value for Money approach and a movement away from the increasingly verbose and heavily spun Value for Money Self-Assessments is a welcome and eminently sensible move. However, it is not without its own significant dangers. I am sure the current round of consultation will be refined and therefore it would be premature to reach too many conclusions, however the following are amongst the inherent questions and concerns.

Are individual business plans ambitious enough?

I had previously understood that it is not within the regulator’s locus to consider if an association is fully utilising its capacity to build more homes. This latest draft seems to mark a notable change in emphasis. Setting aside the issue of vires, the draft regulations appear to mark a re-interpretation of their role in that they will not just assess whether an association is delivering on its own plans but also if those plans are sufficiently ambitious. Amongst the consultation paper’s objectives are “the provision of social housing sufficient to meet reasonable demands” and “to ensure that value for money is obtained from public investment and social housing”. Associations have resisted in the past being seen as the delivery arm of the government, and indeed deregulation is intended to give greater independence. As a sector I think we should welcome the change but remember who is driving the corporate car and what its optimal performance looks like.

Are we comparing apples with apples?

Let’s take the example of operating margins. I thought the article (Social Housing July 2017) on Sanctuary’s different range of activities and their divisional performance margins was very interesting. It showed affordable housing at 56 per cent, supported living at 3.4 per cent and care at 170 per cent. All of these activities can be considered social housing. Clearly that range is not a measure of efficiency against each of those activities as, amongst other things, it ignores the amount of capital committed against each activity. From my own organisation’s point of view, we made an operating margin on our development for sale activity last year of 25 per cent. If we had switched those properties to affordable housing, operating margins would actually have increased, but the financial wellbeing of the organisation would have deteriorated. Homes with affordable rents will naturally demonstrate higher operating margins than those on social rent, and for those who have developed their business plans based on non-capital intensive contracts, such as the provision of maintenance service will see their headline operating margin eroded.

In addition, there are an enormous number of decisions embedded deep in the accounting policies and treatments of different organisations which will have a direct impact on the headline figures. Different mixes of activity, geography, history, capitalisation policies, allocations of costs, and attitudes to rent and affordability make comparison inherently dangerous to do with just a few metrics. Such variations may be explained in the narrative but given human nature the provision and inevitable comparison of each of the different indexes will see a dash for people to present their figures in a manner which is most favourable to their own organisation. Ensuring that consistency, comparability and transparency for value for money becomes more difficult however tightly definitions are drafted.

Beware the law of unintended consequences

There is a danger that in order to demonstrate their corporate virility, organisations will seek to maximise the key indicators being used by the HCA and abandon activity that appears less profitable. Given we are all in ethically based businesses, you might imagine that is unlikely however the education sector suggests something rather different. Here we have seen some schools consciously and systematically excluding poor performing students in order that their headline indicators can appear better and the individual reputation of heads greater. The inclusion of the measure of EBITDA - MRI is slightly troubling. Setting aside the natural annual fluctuations in investment programmes anything which, in the current post-Grenfell climate, discourages investment in existing properties, should be treated with caution.

Measurement will inevitably, if regrettably, change behaviour.

Overall, these are sensible proposals and I hope they will reduce the regulatory burden although there remains a worry that evidencing everything will mean they will not. As a sector, we will need to ensure we are sufficiently financially literate and insightful to look beyond the headline figures and seek to understand exactly what’s going on within individual businesses. I have certainly seen examples where senior professionals refer to, for example, operating margins as being one and the same as a measure of the efficiency of their organisation, which it most certainly is not.

Ian McDermott is chief executive of Aldwyck Housing Group